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1) Feb 23 [FRN] -- The Consumer Financial Protection Bureau (CFPB) proposes to amend Regulations E and Z to update regulatory exceptions for overdraft credit provided by very large financial institutions, thereby ensuring that extensions of overdraft credit adhere to consumer protections required of similarly situated products, unless the overdraft fee is a small amount that only recovers applicable costs and losses. The proposal would allow consumers to better comparison shop across credit products and provide substantive protections that apply to other consumer credit. Comments must be received on or before April 1, 2024.

FRN: https://www.federalregister.gov/d/2024-01095 [57 pages]

2) Jan 17 [press release] -- The Consumer Financial Protection Bureau (CFPB) today proposed a rule  to rein in excessive overdraft fees charged by the nation’s biggest financial institutions. The proposal would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws. For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually. Under the proposal, large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data. . . .

The proposed rule would apply to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country. These institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days.

Approximately 23 million households pay overdraft fees in any given year. The CFPB estimates that this rule may save consumers $3.5 billion or more in fees per year. The potential savings would translate to $150 for households that pay overdraft fees.

In 1968, Congress enacted the Truth in Lending Act. In 1969, the Federal Reserve Board wrote rules to implement the new law, which generally required lenders to clearly disclose the cost of credit to a borrower. At the time, many families received and sent checks through the mail, and had little certainty about when their deposits and withdrawals would clear. When a bank clears a check and the consumer doesn’t have funds in the account, the bank is issuing a loan to cover the difference. The Federal Reserve Board created an exemption to Truth in Lending protections if the bank was honoring a check when their depositor “inadvertently” overdrew their account. At the time, this was used infrequently and there was a modest cost. It was not a major profit driver.

However, in the 1990s and early 2000s, with the rise of debit cards, institutions began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions. Annual overdraft fee revenue in 2019 was an estimated $12.6 billion. And, in 2022, Wells Fargo and JPMorgan Chase led the way – accounting for one-third of overdraft revenue reported by banks over $1 billion.

Recent policy changes at some banks have lowered overdraft fee revenue to about $9 billion per year. The policy changes followed enforcement and supervisory efforts by the CFPB to root out illegal overdraft practices, such as charging fees to consumers who had enough money in their account to cover the transaction at the time the bank authorized it.

The proposed rule would require very large financial institutions to treat overdraft loans like credit cards and other loans as well as to provide clear disclosures and other protections. Many banks and credit unions already provide lines of credit tied to a checking account or debit card when the consumer overdraws. The proposal provides clear rules of the road to ensure consistency and clarity.

The CFPB also is proposing to limit the longstanding exemption to overdraft practices that are offered as a convenience, rather than as a profit driver. The proposed rule would allow financial institutions to charge a fee in line with their costs or in accordance with an established benchmark. The CFPB has proposed benchmarks of $3, $6, $7, or $14 and is seeking comment on the appropriate amount.

The proposed overdraft rule is part of a continued effort by the CFPB to rein in junk fees and spur competition in the consumer financial product marketplace. . . .

Fact sheet: https://files.consumerfinance.gov/f/documents/cfpb_overdraft-credit-very-large-financial-institutions_fact-sheet_2024-01.pdf
Proposed rule: https://files.consumerfinance.gov/f/documents/cfpb_overdraft-credit-very-large-financial-institutions_proposed-rule_2024-01.pdf
Unofficial redline of proposed rule: https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_overdraft-credit-very-large-financial-institutions_2024-01.pdf
Research report: Overdraft and NSF Practices at Very Large Financial Institutions https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf
Press release: https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-close-bank-overdraft-loophole-that-costs-americans-billions-each-year-in-junk-fees/

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