CFPB proposes to apply Reg Z requirements to overdraft protection at large, midsize banks

In a backdoor move to impose a de facto price cap on overdraft fees, the CFPB today proposed to apply requirements of Regulations Z to overdraft fees at banks and credit unions with more than $10 billion in assets. The proposal would also require banks to calculate and disclose an annual percentage rate on each overdraft fee.

The CFPB noted that overdraft fees have, since the passage of the Truth in Lending Act in the 1960s, been excepted from Reg Z’s definition of finance charges. Under this proposal, Regulation Z would apply to overdraft protection services provided by banks and credit unions with assets over $10 billion, unless the overdraft services are “provided at or below costs and losses as a true courtesy to consumers.” The proposal envisions two ways of determining cost: allowing covered institutions to calculate their own costs and losses using the bureau’s proposed standards, or by relying on a benchmark fee set by the bureau. (The CFPB asked for comment on $3, $6, $7 or $14 as proposed benchmarks.)

The bureau also proposed to amend Regulation E to prohibit compulsory use of preauthorized electronic fund transfers for repayment of transactions paid into overdraft by institutions covered by the proposal that charge overdraft fees above a certain threshold.

ABA President and CEO Rob Nichols slammed the proposal as the CFPB’s “latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate,” noting that the proposal “would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it.”

The proposal was issued without the CFPB first assessing the economic impact of the proposal on community banks and credit unions, as the CFPB is required to do under the Dodd-Frank Act. On Jan. 3, ABA urged the CFPB to undertake this statutorily required Small Business Regulatory Enforcement Fairness Act review before issuing the proposal.

The proposal also did not address ABA/Morning Consult survey data showing that most Americans appreciate and value bank overdraft programs. Nearly 9 in 10 find their bank’s overdraft protection valuable, and nearly 8 in 10 consumers who have paid an overdraft fee in the previous year were glad their overdraft was covered rather than having their payment declined or returned.

Nichols added that the bureau “has no legal authority to subject overdraft services offered by any financial institution to Regulation Z, much less impose a price cap on the provision of these services to consumers.”

While the proposal does not cover financial institutions with assets of $10 billion or less, the bureau warned that it “plans to monitor the market’s response to this rule before determining whether to alter the regulatory framework for financial institutions with assets less than or equal to $10 billion.” Comments on the proposed rule are due April 1.