Ed's Blog

As CFPB Reviews Overdraft Rules, UK Regulator Makes Pro-Consumer Changes

By Ed Mierzwinski
Senior Director, Federal Consumer Program

We've commented twice (group comment and our own, adding our recent report on Campus Banking Practices to the record) in a CFPB ten-year regulatory review of the Overdraft Rule established by the pre-CFPB regulators in 2010. The overdraft rule was a response to massive increases in overdraft fee collection triggered largely by small transactions on debit cards. In the late '90s, the banks, in the rollout of debit cards to replace "plain-old" ATM cards, had changed the default switch on the cards to allow, not deny, overdrafts. Hmm.

The 2010 rule prohibits overdraft fees on debit and ATM transactions unless you opt-in to fee-based "standard overdraft protection," but if you do opt in, the protection fees average over $32 per overdraft. CFPB has even accused some banks of deceptive marketing of the service to encourage opting-in. We urged CFPB not to weaken the opt-in rule, which protects consumers against the $38 dollar cup of coffee ($3 for the Joe; $35 for the fee). Our key request goes further: We asked the CFPB to flat-out ban overdraft fees on debit and ATM transactions.

The UK's Financial Conduct Authority agrees. It has announced sweeping changes to address what it calls its own "dysfunctional" overdraft market. FCA is banning fixed fee overdraft programs (similar to the US "standard overdraft protection"); instead, it is requiring UK banks to treat overdrafts as small loans subject to reasonable interest rates. Some US banks do still offer this historical service, generally referred to as "traditional" overdraft protection.

David Lazarus of the Los Angeles Times concurs. A recent column is titled: "Enough is enough. Let’s abolish overdraft fees."

"Bank fees have gotten way out of hand — so much so that they now account for more than a third of revenue for an industry that once made its cash almost exclusively by lending money to customers. And the worst of the worst are overdraft fees. They’re little more than cash grabs, serving no purpose but to fatten bankers’ already bulging pockets."

He then goes on to note that Discover's online bank has eliminated most penalty fees so why can't others? We've long supported Rep. Carolyn Maloney's (NY) Overdraft Protection Act. It would eliminate some of the worst overdraft fee practices. The CFPB could enact it by rule. What's stopping them?

(For those interested in a deeper dive on these issues, Corey Stone, a former senior CFPB official, has posted a thoughtful comment for the record.)

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