The financial services industry and Republicans have launched coordinated efforts to nullify the Consumer Financial Protection Bureau’s (CFPB) rule on overdraft fees. Meanwhile, bills introduced in the House and Senate proposing to repeal the overdraft rule have received strong support expressed by many of the same organizations.
The CFPB finalized the overdraft rule in December last year, framing it as a means of closing a “loophole” in Truth in Lending Act (TILA) regulations by reclassifying overdraft services as credit products subject to TILA disclosure requirements. It is set to apply to banks and credit unions with more than $10 billion in total assets in the U.S. market.
Trade groups representing banks and credit unions filed suit in the District Court for the Southern District of Mississippi, asserting the rule exceeds the bureau’s statutory authority and will negatively impact millions of consumers, while consumer advocates have argued the opposite to be true.
“The rule is flawed for several reasons,” the trades argued. “Most fundamentally, it exceeds the CFPB’s regulatory authority under TILA. Nothing in TILA suggests that overdraft services are ‘credit,’ a term defined by the statute as ‘the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.’ Since 1969, discretionary overdraft programs have not been considered ‘credit’ under TILA because customers have no ‘right’ to overdraw their accounts, i.e., no right to ‘incur a debt,’ and no ‘right’ to retain the funds the financial institution covered, i.e., no right to ‘defer payment of debt.’”
Senate Banking Committee Chair Tim Scott (R-S.C.) and House Financial Services Committee Chair French Hill (R-Ark.) received letters from some of the largest trade organizations in the country asserting the importance passing their respective resolutions proposing to invoke the Congressional Review Act to invalidate the controversial rule.
“If not invalidated, former Director (Rohit) Chopra’s final rule will effectively bring an end to overdraft services for consumers who have few, if any, other options for meeting short-term liquidity needs, all to advance the prior administration’s political campaign against ‘junk fees,’” the trades wrote.
Consumer advocacy groups have argued the rule will save Americans millions of dollars. Earlier this month, Americans for Financial Reform (AFR) delivered 100,000 letters to representatives to protect the rule and published a fact sheet citing data supporting the merits of the rule.
“Closing this paper-check era loophole not only saves households hundreds of dollars in excessive overdraft fees each year,” AFR Senior Policy Counsel Christine Chen Zinner said in a statement, “this proposal will help reduce the number of people who become underbanked and unbanked due to overdraft fees. Many very large financial institutions have already done away with these fees – it’s time to level the playing field for everyone.”
Numerous other organizations at the state and national level also have expressed support for the rule, including several representing the Latino community, the LGBTQ community, and people with disabilities, in addition to those focused more broadly on the impact of overdraft fees on working class households.
“A $35 overdraft junk fee threatens to exhaust scarce funds needed by struggling households to pay for groceries and gas. These fees, often coming as a surprise, push too many hard-working Americans out of the banking system,” Consumer Federation of America (CFA) Financial Services Director Adam Rust said in a statement. “Reversing the overdraft rule will make it harder for many people to make ends meet. A vote against the overdraft rule is a decision to prioritize Wall Street’s profits above the needs of people living paycheck to paycheck. CFA calls on Congress to reject this bill. Instead of making life better for big banks, our elected officials should pursue an agenda serving the needs of everyday Americans.”
However, according to financial industry advocates, the rule ignores the market realities of bank-led innovations that have resulted in billions in consumer savings over the last several years.
“Before the CFPB released its overdraft proposal, many financial institutions had proactively made changes to their overdraft programs to reflect competitive developments within the industry,” the trades wrote. “These innovations include sending low balance alerts, imposing a de minimis threshold triggering an overdraft fee, capping total fees that the bank may charge per day, and providing overdraft ‘grace periods’ during which a customer can make a deposit and avoid a fee.”
Industry leaders cited the CFPB’s own data indicating a $5 billion reduction in overdraft fees between 2019 and 2022, attributing the nearly 50 percent drop since the pandemic to innovations led by financial services institutions. More recently, institutions have announced overdraft program changes expected to save consumers more than $3.5 billion per year from 2021 through 2025, $18.3 billion in total.
Financial trade groups represented in the lawsuit and in the letters to congressional leaders include the American Bankers Association, America’s Credit Unions and the Consumer Bankers Association. The Bank Policy Institute also endorsed the letters to Congress but is not named in the lawsuit referenced in this article.