AFTER YEARS OF SPECULATION, IT LOOKS LIKE 2024 MAY BE THE YEAR OF OVERDRAFT PROGRAM REGULATORY ACTION BY THE CFPB

Since the creation of the Consumer Financial Protection Bureau (CFPB) following the financial crisis of 2008-2010, there has been much speculation – largely fueled by public comments of CFPB officials – that the Bureau is planning to propose major regulation curtailing and restricting overdraft programs at America’s financial institutions.

That speculation was driven by former CFPB Director Richard Cordray during the Obama administration who was very outspoken in his statements that overdraft programs were predatory and needed to be reined in by regulation. However, despite his strong support, every time it seemed the CFPB was getting close to putting an actual proposed regulation out for comment, they postponed the action.

The postponement, according to reports, stemmed from even the CFPB having some concerns about what the ultimate impact would be on consumers from a draconian regulation that essentially forced financial institutions to discontinue their overdraft programs where they honored for a fee debits and checks up to an established limit and to return to the pre-overdraft days in which they denied debits and returned NSF checks for a fee that was often doubled at the merchant that received the check with insufficient funds.

The CFPB rightly recognized that denying consumers the option of an overdraft program that they, in writing, voluntarily opted into might drive many of those same consumers to payday lenders and check cashing outlets that the CFPB feels even more strongly are predatory.

So, despite the speeches and speculation, no significant regulatory action took place under the Cordray directorship other than some guidance designed to show that the CFPB was watching the issue closely.

Under the Trump administration, Kathy Kraninger headed the CFPB and took a much more restricted approach to new regulation. Overdraft regulation did not get as much attention, either in her speeches or her agenda as she sought to bring about what many called a “kinder, gentler” CFPB, in the Kraninger years.

When newly elected President Biden appointed Rohit Chopra as the CFPB Director, the issue ratcheted up again. Additional guidance was issued, and overdraft regulation was spoken about as if it were a certainty.

The result was a sizable number, but far from a majority, of financial institutions – including some credit unions – revised their overdraft programs to make them more consumer friendly. They advertised the elimination of overdraft fees despite the fine print that essentially left many of those fees in place in other forms or with restrictions as to how soon the overdraft must be cleared.

Some industry officials hoped that the voluntary action of some financial institutions might deter CFPB from proceeding with a regulation on overdrafts.

That was never likely because CFPB wanted to be the agency that forced all financial institutions to revise or eliminate their overdraft programs, not the agency that scared a handful of them into cutting them back somewhat.

In fact, CFPB Director Chopra made it clear shortly after assuming the position in the fall of 2021 that he intended to follow through with overdraft regulation.

Yet, despite the ongoing comments, nothing happened from a regulatory perspective at CFPB.

Many felt that perhaps the same concerns that had slowed down Cordray might be coming into play with Chopra. After all, a lot of consumers prefer overdraft privilege programs to having their debits denied when they try to buy groceries or their checks returned when they try to pay their rent.

And, of course, the payday lenders and check cashers are still in business even though the CFPB has tried to regulate them away. Therefore, the elimination of overdraft programs has the very likely unintended consequence of driving more consumers to those alternative lenders.

The CFPB was viewed as having cried “wolf” on overdraft regulation for so long that most financial institutions just decided to make no changes on their own and to wait for the regulation that may or may not ever come.

It was actually a good strategy based upon the last fifteen years of “all talk, no action” on overdraft regulation. After all, why give up the revenue and enrage members who like the program by changing terms or eliminating it when no financial institution really knew if there would be a CFPB regulation and what it would require.

Financial institutions – including most of our credit union clients – elected not to bid against themselves by trying to guess what a new CFPB overdraft rule would require.

Who wants to send out a new set of disclosures only to have to send out a second revised set of disclosures after the regulation is finalized, if it ever is.

Well, it appears that CFPB may be looking to actually approve a regulation in 2024. Director Chopra has indicated that he would like to have an overdraft regulation on the books by the end of the year.

Although we’ve heard this before, there seems to be a feeling that CFPB wants to actually approve something while President Biden is in office and Director Chopra is heading the Bureau.

If President Biden is re-elected this year, Chopra will undoubtedly continue at CFPB and the pressure will be off the need to finalize the rule in 2024.

However, if President Biden is not re-elected, then it is fairly certain that Director Chopra will be removed by a Republican president and a new Republican director may be considerably less interested in an overdraft regulation or at least may want to see the regulation be less restrictive. Because he wants to be the one to bring about some type of overdraft regulation while he is still in office, Director Chopra wants the final rule in place in 2024 in the event President Biden is not re-elected and his days become numbered at CFPB.

No one knows who is going to be elected President in 2024. But because the CFPB does not know either and the polls indicate a very close election regardless of who wins, the CFPB cannot wait until November to propose an overdraft rule if they hope to get it finalized before inauguration day, January 20, 2025.

A comment period itself would likely take ninety days – sixty days at the least. This issue will generate tens of thousands of comment letters, each of which must be evaluated and acknowledged in the final rule.

To have any reasonable chance at a 2024 overdraft regulation, the CFPB will have to either propose a rule by spring or attempt to get the rule finalized without a comment period.

Disregarding the Administrative Procedures Act requirements for rulemaking and attempting to finalize a rule without a comment period would make the final rule subject to immediate challenge and perhaps either a delay in implementation or an outright declaration that it is null and void by the courts.

Therefore, it looks like we should be watching for a possible overdraft rule to be proposed between now and April 2024. If not proposed by then, it would likely be safe to assume that no final rule would come until 2025 and could be impacted by the 2024 election results.

What should you do? Be watching, as will we, to see if a proposed rule comes forth from CFPB. Then, if it does, prepare to comment and evaluate how your credit union would comply if the rule is finalized as proposed.

Most proposed rules change little as a result of the comment period. So whatever is proposed will likely be close to what is finalized by CFPB.

If no proposed rule comes, it is unlikely you will see one until 2025 or even later. In other words, if they don’t move quickly you can assume you have just heard “wolf” again and your overdraft program is safe for the next two years or more.

America’s Credit Unions (the trade association formerly known as CUNA and NAFCU) have reached out to CFPB and encouraged them not to bypass the Administrative Procedures Act and the comment period in a hasty effort to get a final rule before some artificial deadline – which end of year would be.

A word of consultative advice you can take or disregard from your partners here at Dollar Associates. Despite what I read from some supposed experts who say credit unions should start revamping their overdraft programs now in preparation for the likelihood of a CFPB rule this year, the fact that the odds have increased somewhat that there might actually be some regulatory action by CFPB this time makes an even stronger case not to try to guess what they are going to do and begin tinkering with your overdraft program.

Once the regulation is proposed, there will be time to run the numbers then and see what an impact the rule will have on your members and your income statement. There will be an impact on both without question.

But why start taking the hit to your income statement until you know what the rule is going to require. Trying to guess and making changes that may or may not be required in the CFPB proposed rule if and when it comes could result in you, as stated before, bidding against yourself.

Any significant changes require notices to members that, if you have to replace them with additional notices after a rule is finalized, will confuse the member and make him/her feel the credit union doesn’t have its act together on this.

Stay calm. Let’s see if this is another cry of “wolf” or if a CFPB rule actually is proposed and becomes likely to be enacted in 2024.

If so, there will be time for analysis and decision making at that time.

But this could be – notice the word could – the year the wolf finally arrives at your door on overdraft regulation.

As always, we wanted to give you a heads up about what we are hearing so that our clients can be thinking about these important issues while other credit unions are sitting back reading the trade publications and not getting a clear picture until it does of what is happening and why.

Until next time.

Dennis Dollar