Overdraft Rules Get Go-Slow Approach at Consumer Bureau
The Consumer Financial Protection Bureau, which last year began exploring whether to tighten rules on checking overdraft fees, has decided against quick action after hearing from smaller U.S. banks that rely on the revenue.
The bureau announced Feb. 22, 2012, that it was collecting data on overdraft practices and would complete the inquiry by the end of 2012. Nine large banks including Bank of America Corp., U.S. Bancorp (USB) and Regions Financial Corp. (RF) are providing information, said four people briefed on the inquiry.
This month, the consumer bureau’s director, Richard Cordray, said no decisions have been made about possible new rules. He said that “over the next couple of years” the agency will continue to work on the matter.
“If and when we act on this issue there will be plenty of advance discussion,” Cordray told credit unions during a Feb. 5 conference call. “There will be opportunities if we do decide to propose rules.”
Cordray noted on the call that the bureau “got an earful from a number of you and many others on the issue of overdraft” when it began seeking public comment a year ago.
Camden Fine, president of the Independent Community Bankers of America, said revenue from overdraft fees represents 3 percent to 15 percent of total income for institutions in his association.
Fine said he has pointed out to Cordray that some smaller banks depend “in substantial degree” on the fees, much more so than large financial firms. Wells Fargo & Co., for example, took in $4.3 billion in 2011 from fees including overdrafts, about 1 percent of the bank’s net revenue that year, financial disclosures show.
“There are more than a few community banks that would really be hurt by restrictive regulation,” Fine said in an interview. “The gross dollars go to megabanks, but those are a tiny percentage of their balance sheet.”
Cordray told the credit unions the bureau is considering whether oversight of overdraft fees is hurt by conflicting rules from different federal regulators. The bureau, which absorbed the consumer finance duties of the Federal Reserve, may also decide to revisit a 2010 Fed rule requiring that customers opt- in to the fees before banks can charge them, said a person briefed on the matter who spoke on condition of anonymity.
Michelle Person, a spokeswoman for the agency, said the bureau’s report on overdraft practices will be released after the staff finishes analyzing the bank data it has collected. “The bureau’s oversight and monitoring of the market are ongoing,” she said.
Overdrafts occur when consumers spend or withdraw more money than is available in their checking accounts, whether through the use of debit cards, checks, ATM withdrawals or direct debits.
For a fee, banks will honor the transaction for customers who have opted-in to what the banks call overdraft protection. Large banks charge an average $35 per overdraft, compared with $25 at community banks and credit unions, according to Moebs Services, a Lake Bluff, Illinois-based research firm.
In 2011, bank customers paid $31.6 billion in overdraft fees, down from $33.1 billion in 2010, according to Moebs. About 15 million Americans overdraw their accounts 10 or more times a year, the firm said.
The issue is a political dilemma for the consumer bureau because two constituencies important to the agency are on opposite sides.
Consumer groups -- the same ones who pushed hard for the agency’s creation -- want tougher overdraft rules, saying that banks don’t make their policies clear and that fees hit hardest at people least able to afford them.
Community banks, which have pressed the bureau for exemptions from rules, say stricter policies could choke off a key stream of revenue. Their position resonates because the banks and credit unions have been courted by Corday and other officials as a counterweight to Wall Street.
At a conference in Washington yesterday, Senator Elizabeth Warren urged credit unions to “use your clout” to get Cordray confirmed for a full five-year term as director. Senate Republicans have vowed to block confirmation of anyone to the post unless Democrats approve structural changes to the agency, which Warren helped set up.
“Do what you can to tell your senators and those who will listen that it’s time to move on, time to stop re-litigating settled decisions, and time to confirm a director,” said Warren, a Massachusetts Democrat.
The bureau’s outreach to small institutions helps explain why one of its top officials accepted an invitation from Matthew Williams, the president and chairman of Gothenburg State Bank in Nebraska, to visit in August and take a closer look at how local institutions handle overdrafts.
Williams showed David Silberman, the agency’s associate director for research, markets and regulations, that the bank doesn’t charge fees if overdrafts are for $10 or less or if customers haven’t overdrawn in the previous six months. Senior bank officers meet each morning to discuss customers’ use of overdrafts, Williams said.
Regulators “have to recognize that there is a difference as to how community banks use overdrafts and serve their customers versus a large bank,” Williams, who is serving as chairman of the American Bankers Association, said in an interview.
While banking executives say many customers prefer paying a fee to having their transactions declined at the point of sale, there’s no consensus on how many people are choosing overdraft services under the 2010 Fed rule. Moebs estimated the opt-in rate at 77 percent; the Consumer Bankers Association found it was 17 percent. The Center for Responsible Lending, a North Carolina-based consumer group, found a rate of about 33 percent.
Consumer groups say the Fed rule didn’t go far enough and that banks are luring customers through deceptive marketing. “Overdrafts are rife with predatory features: they are high priced, short-term and repaid directly from customers’ accounts,” said Rebecca Borne, a researcher with the North Carolina group. “None of that has changed.”
In the Feb. 5 call with credit unions, Cordray said the Fed’s opt-in rule was one of the “inconsistent approaches” to overdrafts by banking regulators. The Federal Deposit Insurance Corp. issued guidelines in 2010 and the Office of the Comptroller of the Currency, which supervises banks with national charters such as Wells Fargo and JPMorgan Chase & Co., proposed its own guidance that same year. It has not been finalized, OCC spokesman Bill Grassano said in an e-mail.
Robert Kottler, executive vice president and director of retail and small business at Lafayette, Louisiana-based Iberiabank Corp. (IBKC), said the uncertainty over the consumer bureau’s intention and timing has led it to shelve plans for changes to its overdraft programs.
He said the bank has considered two models, one that would limit the number of times customers can overdraw, and another that would base that limit on factors such as a customer’s monthly income and how long he or she has had the account.
“We’re holding off on that because we don’t want to go down a path if regulations are likely to affect it,” Kottler said in an interview on Jan. 15.
To contact the reporter on this story: Carter Dougherty in Washington at email@example.com