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Sept. 19 — The Consumer Financial Protection Bureau has been eyeing potential changes to overdraft protection programs since its early days, but isn't likely to announce oversight plans anytime soon.
Despite years examining the issue, observers said that it's not clear the CFPB has reached a conclusion about how to best tackle changes to overdraft protection programs. Fees for non-sufficient funds and overdrafts generated $11.1 billion in revenue for banks with more than $1 billion in assets in 2015, according to call report data submitted to regulators.
The watchdog agency continues to collect data about overdraft usage and debate possible rules even as it's moved forward with outlines or proposals on payday lending, prepaid cards, mandatory arbitration and debt collection.
“Overdraft is not going away as an issue—it remains a bureau priority,” Quyen Truong, a partner at Stroock & Stroock & Lavan LLP, who previously served as assistant director and deputy general counsel at the CFPB, told Bloomberg BNA. “It's in line, but there are a lot of very big, very controversial rulemakings ahead of it in that line that have to be resolved.”
An overdraft rule could include anything from enhanced disclosures to limiting the number of overdraft charges consumers are able to rack up in a period of time, but how tough the agency will come down on the practice is still up in the air.
“I don't think there's a consensus within the agency on the approach that they should take,” said Camden Fine, president and chief executive of the Independent Community Bankers of America.
Fine added that the issue of overdraft protection is particularly tricky because it's a product that consumers often like—and even requested of banks, historically.
“The general public demanded that the banks offer this type of service and finally banks embraced it and started offering it, but it was all driven by the general public,” he said. “So this is different than a lot of other products and rules that the CFPB has had to deal with.”
At the same time, consumer advocates continue to urge the agency to press forward, citing concerns about what happens when customers rely on overdraft too heavily.
“Whatever good overdraft does, at some point it stops being a convenience and it starts being something that's either harmful to consumers or turns into credit—and where that line is, people are still debating,” said Nick Bourke, director of research on payday and small-dollar loans at The Pew Charitable Trusts.
Industry experts said it's likely that the agency's work on other provisions related to consumer banking and short-term liquidity, such as the payday rule, may be complicating efforts on overdraft.
“There is a sense at CFPB that some customers, some users of overdraft, use it in ways similar to payday loans—short-term loans to get them through to their next pay period, to make up a gap in the pay period,” said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods.
There's concern that contracting the use of different products could leave some consumers without access to cash when they need it most.
“I believe that gives the CFPB reason to pause because there's a large chunk of the U.S. population that could be left without any available options for short-term liquidity,” said David Pommerehn, senior counsel and vice president at the Consumer Bankers Association.
Another challenge the agency faces is simply a problem of bandwidth. While the bureau typically has teams dedicated to the writing of different rules, the large number of ongoing projects has been taxing for its Research, Markets and Regulations division.
“They have a lot of major rulemakings on their plate,” said Fine.
The agency released an outline of a debt collection proposal in July, which is now sitting before a small business review panel— a process that could potentially slow down action on overdraft. By law, the CFPB is required to submit any rule that could significantly impact a substantial number of smaller entities to the panel, which is comprised of representatives from the consumer agency, the Small Business Administration and the Office of Management and Budget's Office of Information and Regulatory Affairs. It's expected that an overdraft rule would need to be reviewed by the panel, which meets with small businesses that offer feedback about the potential economic impacts of the rule.
The CFPB submitted its debt collection proposal to the panel at the end of July, meaning it's unlikely that any more proposals will be put before the panel until the fall or winter. Regulators have indicated that they are drafting a second part of the debt collection rule to be separately reviewed by the panel. If they submit that proposal directly after the first panel is completed, any language on overdraft would likely be pushed into next year, even if the agency has a proposal ready. The review process takes up to two months to be completed after the panel is convened.
On top of that, it can take months for regulators to release a formal proposal following the small business review— in the case of the payday rule, the CFPB waited a full year to release the proposal after the conclusion of the panel.
Given the agency's competing priorities, a certain amount of triage may be a strategic decision.
“What the CFPB has chosen to do is to get some ideas out there on overdraft, but in reality they're much more concerned about payday, arbitration and installment lending, areas where it's the wild west and there are no federal rules of the road,” said Brandon Barford, a partner at Beacon Policy Advisors.
Many of the areas where the agency is pursuing new rules, such as with payday loans and debt collection, are also parts of the market that had previously lacked federal oversight— perhaps inspiring a greater sense of urgency. Overdraft, meanwhile, has a long history with bank regulators.
“For issues where the rule-makings have moved forward already, the rules involve what the bureau perceives to be really big problems that the current legal framework doesn't address that much or where the framework has developed in a different direction than what the bureau wants. So they want to address those first,” said Truong. “You do have an existing set of requirements related to overdraft that the bureau has been able to rely on to take supervision and enforcement actions to address the major problems that they perceive.“
For now, the agency remains focused on collecting additional data.
“The Bureau is engaged in pre-rule making activities to consider potential regulation of overdraft services on checking accounts,” the agency said in its spring rulemaking agenda published in May. “The CFPB is continuing to engage in additional research and has begun consumer testing initiatives relating to the opt-in process.”
A bureau spokesman declined to comment further.
Last September, the CFPB requested approval from the Office of Management and Budget to conduct a national online survey of 8,000 consumers to study overdraft disclosures, which could help to inform any future actions.
“The CFPB has been very methodical and diligent in terms of making sure that whenever it gets into a new area it has adequate data,” said Kevin Petrasic, a banking partner at White & Case. “That is a labor-intensive process.”
The agency may be assembling data from other avenues as well. The Consumer Bankers Association and the American Bankers Association sent a letter to OIRA in July charging that the agency had misused the “generic clearance” process for collecting qualitative information about consumer experiences and financial education to obtain information for its pending overdraft rule. The agency used the OMB process in February 2014 to seek approval for conducting a survey on how people who frequently use overdraft understand the product.
“Clearly, the Overdraft Decision-making Survey will inform the Bureau's rulemaking on overdraft services,” the trade groups said in their letter. “This is precisely the type of collection that should have been submitted through the standard clearance process, where the public would have been given an opportunity to provide comment to improve the survey's utility.”
The groups also warned that the agency could move forward with its rulemaking before completing the September 2015 survey about disclosures, which it initiated through the standard process.
“The Bureau's latest Regulatory Agenda indicates that it will move forward with its rulemaking on overdraft services prior to, or without, completing the process to obtain OIRA's approval to conduct this survey,” the associations said.
Observers said it's possible the agency could release another study related to overdraft practices later this year, building on the earlier work it's conducted. The CFPB launched a “broad inquiry” into bank overdraft protection programs in February 2012, with subsequent reports published in June 2013 and July 2014.
The 2014 report found, for example, the overdraft and non-sufficient funds fees accounted for 75 percent of total checking account fees for those who have opted into the service, adding up to more than $250 per year on average. Moreover, the major of fees were generated by a minority of bank consumers: just 8 percent of customers paid 75 percent of the fees.
The drum beat on overdraft picked up again earlier this year, with the release of a February report based on overdraft fee data pulled from bank call reports. Richard Cordray, the agency's director, also penned a letter in February to 25 of the largest retail banks, urging them to adopt and market lower-risk accounts that do not allow for overdraft charges for consumers that might otherwise be unbanked. Taken together, the actions suggest “increased scrutiny of bank overdraft practices,” according to a March advisory issued by law firm Arnold & Porter.
At the same time, the bureau is relying on other tools at its disposal, including going after any specific practices that it deems unfair, deceptive or abusive. The CFPB fined Spanish Santander Bank $10 million in July for deceptive marketing of its overdraft products by a bank vendor. That sends a signal to the broader industry.
“The CFPB does have an enforcement arm, which allows them to enforce UDAAP provisions on a particular institution, putting others on notice about what they perceive as harmful behavior,” Pommerehn said.
But those in favor of tougher rules are still waiting for more action.
“Every year that the CFPB waits to address overdraft problems, that is billions of dollars a year that people are paying,” said Pew's Bourke.
To contact the editor responsible for this story: Mike Ferullo at firstname.lastname@example.org
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