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Community Banks and Overdrafts — Time for Reconsideration?

Bank consumer overdraft fees (together with nonsufficient funds (NSF) fees and returned check fees) have long been a target of attacks by consumer advocacy groups and progressive politicians who claim that such fees are disproportionately levied on the most vulnerable consumers. The Obama-era Consumer Financial Protection Bureau (CFPB) initiated efforts to regulate overdraft programs, which were shelved during the Trump administration, and legislation to restrict overdraft fees has regularly been proposed and considered by Congress, but not enacted.

2022, however, may be the year that the US financial regulatory agencies finally move to impose formal restrictions on banks’ overdraft fee programs. In particular, the CFPB, increasingly assertive in President Biden’s second year in office, has clearly signaled its intent to take action in this area:

  • Rohit Chopra, the director of the CFPB, has spoken out on numerous occasions — in public appearances, opinion pieces, and blog posts — regarding the imperative of reining in so-called junk fees charged by banks and other financial companies.

  • On January 26, 2022, the CFPB published a request for public comment targeting “exploitative junk fees,” including overdraft and NSF fees. The CFPB stated that the goal of its information request was to assist the agency’s plan to “craft rules, issue industry guidance, and focus supervision and enforcement resources,” with the goals of reducing excessive fees and eliminating illegal practices.

The attack on overdraft fee programs has been echoed by other administration officials as well as by allied politicians. Acting Comptroller of the Currency Michael Hsu has called traditional bank overdraft programs “a significant part” of a “regressive system” that penalizes the poor and has stated that “banks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers.” On March 31, 2022, the House Financial Services Subcommittee held a hearing on possible government intervention to restrict overdraft programs, clearly showing coordination by the committee majority with the Biden administration’s initiatives. In March 2022, a group of US Senate Democrats (including Banking Committee Chairman Sherrod Brown) sent letters to seven large banks urging them to abolish or significantly reduce overdraft and other fees, and in early April, New York Attorney General Letitia James, in recent letters signed by numerous other state attorneys general, asked the country’s four largest banks to eliminate consumer overdraft fees altogether by summer 2022.

Adding to the chorus of Biden administration and other political voices critical of overdraft fees has been a steady stream of announcements over the past year by many large banks regarding plans to eliminate or greatly restrict their overdraft and related fees. In January 2022 alone, five of the country’s largest banks announced the planned elimination of NSF fees and certain overdraft charges. These announcements add weight to the CFPB’s attacks on overdraft fee programs and will inevitably result in additional pressure on other large banks to follow suit.

The bottom line is that federal regulation of this area may finally be on the horizon, if not imminent, although it is anyone’s guess what form regulatory action will take. The initial targets of any action taken by the CFPB — whether formal rulemaking, statements of policy, or increased enforcement activity — are likely to be banking companies that have total assets in excess of $10 billion and that are thus subject to direct supervision by the CFPB. However, whatever new policy is implemented by the CFPB in this area will inevitably be applied by the three principal federal banking agencies to financial institutions of all sizes, and community banks should prepare themselves for increased examination scrutiny of their overdraft fee programs and the potential for enforcement actions.

Accordingly, community banks — especially those heavily reliant on overdraft fee income — should review their overdraft programs, ensure that they are compliant with existing regulations and best practices, and consider changes to respond to possible regulatory concerns. While it is impossible to react effectively to a regulatory regime that has not been proposed, much less implemented, reports and statements by the CFPB and other banking agencies provide some guidance. First, the CFPB has indicated that it will demand transparent and fully disclosed pricing of overdraft solutions that allow consumers to make an informed choice. In addition, Acting Comptroller Hsu stated in a December 2021 speech — in which he notably did not call for banks to eliminate overdraft fees — that the OCC had identified several features of bank overdraft programs that could be modified or recalibrated to help achieve the goal of improving the financial health of vulnerable consumers. He stated that these changes included:

  • Requiring consumer opt-in to the overdraft program.

  • Providing a grace period before charging an overdraft fee.

  • Allowing negative balances without triggering an overdraft fee.

  • Offering consumers balance-related alerts.

  • Providing consumers with access to real-time balance information.

  • Linking a consumer’s checking account to another account for overdraft protection.

  • Collecting overdraft or NSF fees from a consumer’s next deposit only after other items have been posted or cleared.

  • Not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented.

Finally, community banks should closely monitor CFPB and other bank regulators’ overdraft fee initiatives, through state and national bankers associations and otherwise, and continue to explore potential methods of managing their overdraft programs in line with stated and possible future regulatory concerns.

© 2022 Jones Walker LLPNational Law Review, Volume XII, Number 118

About this Author

Daniel H. Burd, Jones Walker, Banking Industry Lawyer, Financial Regulation Attorney

Daniel Burd is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Washington, D.C. office. Mr. Burd's practice focuses on regulatory matters for financial institutions. He previously served as a staff attorney for the Federal Reserve Board ("FRB") Legal Division in Washington, D.C. 

Mr. Burd received his A.B. degree from Stanford University, his M.A. from the University of California, Los Angeles, and his J.D. degree from The University of Chicago Law School. He is a member of the District of...