Protecting Overdraft Protection

In the final days of his tenure, CFPB Director Rohit Chopra issued a final rule that goes well beyond the agency’s statutory authority. It declares overdraft services offered by banks and credit unions with more than $10 billion in assets to be “credit” regulated by the Truth in Lending Act (TILA) and Regulation Z unless the overdraft fee is below a $5 price cap or below the institution’s “breakeven” costs to operate its overdraft program.

Director Chopra’s final rule would apply TILA and Reg. Z to overdraft despite the fact that TILA’s definition of “credit” unquestionably precludes this interpretation. In addition, the final rule goes far beyond mandating disclosure – TILA’s purpose – and would instead impose substantive restrictions on bank overdraft services, to the detriment of the millions of consumers that elect to use it to cover unexpected expenses.

If not invalidated, Director Chopra’s rule would lead banks to restrict, if not eliminate, access to overdraft, harming those consumers who have few, if any, other options for meeting short-term liquidity needs. The rule would do so even though analyses show that the average transaction that overdraws the customer’s account is between $200 and $400. Not surprisingly, survey after survey show that consumers appreciate and value their institution’s overdraft program and are glad that their institution covered their overdraft payment, rather than returned or declined the payment.

The rule purports to apply only to banks and credit unions with more than $10 billion in assets, but if the rule takes effect, all depository institutions – and their customers – will be impacted. Large banks will be forced to lower their overdraft fee to the benchmark fee of $5 or to discontinue or restrict access to overdraft services. If a large bank reduces its overdraft fee to $5, the neighboring community bank will feel compelled to do the same or risk losing its customers to the large bank. Community banks have limited product lines and fewer sources of revenue to offset reduced overdraft fee income; therefore, the overdraft rule may lead to greater consolidation in the banking industry.

We urge bankers to ask your lawmakers to preserve overdraft protections for consumers by cosponsoring S.J. Res. 18 and H.J. Res. 59, a congressional resolution of disapproval that would nullify the CFPB’s rule. Click here to contact your Member(s) of Congress.