REMINDER: CFPB OVERDRAFT RULE COMMENT PERIOD CLOSES ON APRIL 1
Tuesday, March 12, 2024
This Client Update is a reminder for those of you who might be interested in filing an official comment letter on the CFPB’s overdraft rule that the comment period ends on April 1. The CFPB does not have to consider or even count any comments received after that date.
While it is quite clear where the CFPB is headed with this rule for financial institutions with $10 billion or more in assets, because any federal agency rule requires an official comment period under the federal Administrative Procedures Act before it can be adopted there is opportunity for any credit union that so desires to have its views considered.
Therefore, we certainly encourage you – if you are so inclined – to write a comment letter from your credit union or organization.
Even though it may have minimal impact on what the CFPB finally decides in enacting this rule, your comment letter will help build a solid administrative record that could be used by Congress if they decide to review the CFPB’s final rule as they have the right to do or could become evidence in what is almost certain to become a federal lawsuit about this far-reaching rule, the CFPB’s actions that are essentially federal price fixing and the process through which it was enacted.
In addition, we have encouraged any credit union that writes a comment letter to CFPB to also copy the three NCUA Board members that are almost certain – based upon comments by Chairman Harper at the recent Governmental Affairs Conference sponsored by America’s Credit Unions – to follow the CFPB shortly after their overdraft rule is finalized for FI’s above $10 billion in assets with a mirror NCUA version for credit unions below the $10 billion threshold.
Copying the NCUA Board members on a credit union’s comment letter to the CFPB will, at the very least, give NCUA advance notice that their credit union stakeholders will not simply roll over when NCUA decides to play copy-cat with the CFPB on overdraft over-regulation.
Congress could review the NCUA rule, just as they have the right to do with the CFPB rule. Likewise, legal action is almost certain on the CFPB rule, and NCUA needs to be aware that the impact on credit unions and their members of a follow-up NCUA copy-cat rule will very like result in legal action by a consortium or organization of impacted credit unions.
So, if you elect to comment on the CFPB rule, we again encourage you to copy the NCUA Board members even though they do not have a formal rule proposal before them at this time. Your comment copy will be, even though they may disregard it, a shot across the bow to the agency that the impact on credit unions and their members is so significant that the hornet’s nest of opposition is going to swarm and perhaps sting.
As always, we encourage you to draft your own letter to the CFPB on the overdraft rule in your own words. If you would like us to review your letter once it is drafted and before you submit it, please do not hesitate to send it to us for any suggested edits since we have read thousands of comment letters during our time running a federal agency.
The filing process for submitting your comment letter is provided below, along with the link and email address if you want to file your letter electronically. If you prefer to send an actual letter, the address for such a submission is also provided.
You may submit comments, identified by Docket No. CFPB-2024-0002 or RIN 3170-AA42, by any of the following methods: • Federal eRulemaking
Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Another option is to submit your comment letter by email as specified below:
Email: [email protected]. Include Docket No. CFPB-2024-0002 or RIN 3170-AA42 in the subject line of the message.
Should you prefer to mail a hard copy of your comment letter, the address to do so is provided below:
Mail/Hand Delivery/Courier: Comment Intake—2024 NPRM Overdraft, c/o Legal Division Docket Manager, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.
Copies can be sent to NCUA Board members at the following address or email:
Honorable Todd M. Harper
Chairman
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314
Honorable Kyle Hauptman
Vice-Chairman
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314
Honorable Tanya Otsuka
Board Member
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314
Back in January we provided you with the template from which you can construct your comment letter if you need some starting point suggestions.
Those are provided again below.
We encourage you to pick which of these paragraphs best reflect your concerns. Feel free to use any or all of them in your comment letter. It is always best to take these suggestions and edit them into your own words.
However, a cut and paste comment letter is better than no comment letter at all. Therefore, if you would like to use some or all of these suggestions, feel free to do so.
You should begin your comment with an introductory paragraph similar to the following:
On behalf of ABC Credit Union, I would like to provide an official comment on the proposal by the Consumer Financial Protection Bureau (CFPB) through its CFPB-2024-0002 overdraft rule. There are a number of concerns with this proposed rule and through this letter ABC Credit Union would like to respectfully provide the following comments for your consideration.
THIS PROPOSED RULE IS NOT IN CONSUMER BEST INTERESTS
While the CFPB attempts to make the case that this proposed rule is in the best interests of consumers, the history of the past twenty years would seem to indicate otherwise as millions of American consumers have by their signature voluntarily opted into overdraft programs at their financial institutions with full written disclosures provided of how the program works.
To essentially remove this consumer opted service through what amounts to what some might call federal price fixing by the CFPB will lead millions of these same consumers to leave the traditional financial institutions that offer this service and likely remove themselves from the financial mainstream by utilizing less desirable services typically offered by a payday lender, check casher or pawn shop. This would not be in the best interests of American consumers.
THIS RULE WILL CONSIDERABLY ELIMINATE CONSUMER CHOICE AND COMPETITION IF FINALIZED AS PROPOSED
The financial institutions that will be most impacted and may never be able to recover from the unintended consequences of this proposed rule are smaller ones without the scale to recover the revenue. This is going to result in literally hundreds, if not thousands, of financial institutions merging away. The resultant loss of consumer choices among financial institutions will not be in the best interests of American consumers.
In almost every case, the financial institutions – particularly credit unions that are smaller institutions by comparison – trying to make up for the non-interest income brought about by overdraft fees from those who have opted into the overdraft privilege programs will require the scale necessary to enhance revenue from other sources. Many of the other avenues to recoup lost revenue such as interchange revenue, mortgage initiation and investments in related businesses require scale and size lacking in most smaller financial institutions.
These smaller institutions, many of them minority, faith-based and community development-based, will many times be unable to make up for this revenue without merger. In the credit union industry alone, we could see the possibility of losing 1500 to 2000 smaller institutions to merger in order to build the scale to replace the lost revenue.
Losing smaller financial institutions is not in the best interests of consumers and will have an adverse impact on pricing of financial services as the larger financial institutions will be driving the cost structure with fewer competitors.
THIS RULE WILL, IF ENACTED, PROVIDES A DRAMATIC BOOST TO THE BUSINESS INTERESTS OF ALTERNATIVE LENDERS
The American consumer that must buy groceries for the family on Thursday evening and does not get paid until Tuesday of the following week does not have the option to deny the baby its formula or the kids their breakfast before school. Likewise, the tenant facing possible eviction with rent overdue cannot just hope the landlord is understanding again this month.
If the consumer’s financial institution will not honor his debit swipe at the grocery store or his check slid under the door of the landlord, that consumer will be forced to find another way to feed to kids or keep their home. Payday lenders, check cashing outlets, rent-to-own centers and pawn shops are open 24 hours a day, 7 days a week to process the very debit or hold the very check that this rule would effectively prevent traditional financial institutions from honoring for a fee commensurate with the risk and value of the service sufficient for the consumer to opt-in by writing for the service.
Alternative lenders will undoubtedly cheer and welcome this proposal even as millions of consumers are driven from a preferred option at their financial institution that they understand and are willing to utilize.
THE CONSUMER OPTS INTO OVERDRAFT PROGRAMS WITH FULL DISCLOSURES PROVIDED
If additional disclosures are needed for the CFPB to be convinced American consumers understand the overdraft programs they have elected in writing to have attached to their accounts, we encourage the CFPB to develop disclosures it feels are more appropriate and provide those to financial institutions as a safe harbor for their overdraft program opt-in procedure.
However, the CFPB seems to prefer making overdraft programs so difficult for financial institutions to provide that their incentive to honor an overdraft, take the risk that the overdraft may never be cleared and process the administrative tracking and collection of overdrafts honored that it effectively removes this service option even to those who opt into the program with full disclosure.
FINANCIAL INSTITUTIONS MAKE WHAT INCOME IS DERIVED FROM OVERDRAFT FEES BECAUSE CONSUMERS USE THE PROGRAMS
It is somewhat ironic that financial institutions are basically being branded by this proposed regulation as taking advantage of consumers against their will even though consumers have paid this totally controllable fee for several decades voluntarily and with the right to opt out of it at any time.
To avoid an overdraft fee, all the consumer has to do is not swipe the card or write the check if there are insufficient funds in the account. Yet, even with total control of the transaction in their hands, consumers have chosen to overdraft their accounts and pay the disclosed fee because it is a valuable service to them as a cash management tool.
Financial institutions would not make considerable income if consumers were not using the overdraft programs they opted into. The fact that consumers are indeed utilizing the programs when they have total control of whether to do so would tend to mitigate somewhat the argument that financial institutions are taking advantage of consumers.
THE PROPOSED RULE DOES NOT APPROPRIATELY RECOGNIZE THE COSTS AND RISKS TO FINANCIAL INSTITUTIONS OF HONORING OVERDRAFTS EVEN FOR A FEE
One of the primary flaws in the proposed rule is that, when a financial institution is allowed to validate its costs for determining what should be a safe harbor for charging and overdraft fee, a financial institution can only use its actual losses from charge-offs to calculate the costs to the financial institution.
There are real administrative costs involved in covering overdrafts and monitoring the repayment process. Securing repayment of funds owed through an overdraft program is a collections challenge that must be managed.
It is imperative that the CFPB recognize that not only the potential losses of unpaid overdrafts are a risk that a financial institution must take through its overdraft program, but the administrative costs of effectively, safely and soundly overseeing such a program must be recognized.
THE PROPOSED RULE LEAVES MANY QUESTIONS UNANSWERED
The proposed rule establishes a not-yet-finalized range from $3 to $14 that might become a safe harbor for financial institutions to charge for an overdraft provided certain criteria are met. That is an extremely wide range, particularly when it does not include administrative costs involved in monitoring and managing an overdraft program.
In addition, the proposed rule makes no distinction between debit transactions that can be made with a simple swipe and a handwritten check that must be filled out with more effort. While the consumer has the responsibility in either case to know the balance in their account, there is no recognition of the reasons consumers use checks versus debit cards today.
More times than not, a check pays the rent, mortgage payment, insurance premium or utility bill while a debit swipe is more likely to be used for smaller purchases. Some consideration should be given to exempting checks from the provisions of this proposed rule because, even though checks are being used less and electronic payments are being used more, the purpose of many checks makes the possibility of them not being honored due to insufficient funds a much bigger issue for the consumer.
A rejected Starbucks cup of coffee purchase has not nearly the impact on a consumer as does a bounced rent check that results in late charges at best and eviction at worse, or an auto insurance premium payment after a recent accident where the insurance company is just looking for a reason to discontinue the consumer’s coverage.
Also, as it relates to checks, exempting them from this proposed rule and allowing incumbent overdraft programs to cover checks will save consumers millions of additional fees when the merchant adds another returned item charge on top of what the financial institution may have assessed as an overdraft fee or NSF fee.
THIS PROPOSED RULE COULD RETURN THE MARKETPLACE BACK TO THE DAYS OF RETURNED NSF CHECKS
Whether acknowledged or not, the advent of overdraft privilege programs over twenty years ago effectively brought an end to the NSF era in which financial institutions bounced a check, charged a fee, returned the item and the payee on the check charged another fee and maybe turned it over for prosecution.
If the CFPB had been around thirty years ago in the NSF return, fee and maybe prosecution era, there is little doubt that it would have addressed that system because it drastically needed an overhaul from a consumer perspective. Interestingly, the answer would possibly have been a requirement for financial institutions not to return the check for a fee but to instead honor the check for the same fee.
In other words, a overdraft privilege program similar to what we have today would be viewed as a consumer benefit replacing the previous double NSF fee and possible prosecution programs of decades ago. In our view, it would be a giant step backward to return to those days as a result of the unintended consequences of a rule that needs much more nuance than this proposed rule provides.
THERE ARE WAYS TO IMPROVE THE PROPOSED RULE
Among the options the CFPB should consider for improving the proposed rule but still adding further integrity to overdraft programs are a revised and more plain language standard disclosure upon a consumer deciding to opt in to an overdraft privilege program.
Another option would be to require an opt out notice to be provided either electronically or in writing to every consumer opted into an overdraft program at least once every two years.
A ban on ordering checks or debits to maximize overdraft fees could be implemented with deterrent level penalties for processing items any manner other than real time, order of receipt or order of check number. Even a requirement to process from smallest to largest could be considered, although this could adversely affect some consumers who would want their largest items such as rent, utilities or insurance to be processed first.
At the very least financial institutions should be allowed to calculate all administrative costs, along with actual losses from charge-offs, when determining the among of overdraft privilege fee that can be assessed.
For federal credit unions with an 18% usury limit, lines of credit to honor overdrafts should be fully disclosed and agreed to in writing but able to exceed the 18% usury limit in the discretion of the credit union with full disclosure to the member.
A requirement that overdrafts below $200 can only be assessed at 10% of the face amount of the item would eliminate the $40 cup of Starbucks examples we hear often to the exclusion of the consumer who needs groceries or to pay his rent four days before payday. Address the de minimis exception rather than removing a program that millions of member have opted into with full disclosure of the terms and utilize when they deem it is needed and the benefit to them at that time exceeds the cost.
You should then close with a paragraph similar to the following:
In closing, on behalf of ABC Credit Union, let me thank you for the opportunity to provide our thoughts, concerns and suggestions for your consideration. If I or any member of the ABC Credit Union team can answer any questions or provide any further information, please feel free to reach out to me at (the signatory direct line phone number).
We hope that this template language can help you fashion your comment letter if you have the desire to let your voice be known on the CFPB’s overdraft rule proposal. Again, we encourage you to copy the NCUA Board on your comments to CFPB for effect since the likelihood of a follow-up mirror rule for all federally chartered credit unions is almost certain.
It is always good to let the regulators know, before they start down the road of excess regulation, that efforts at overreach will be opposed strongly by an agency’s stakeholders.
Please let us know if we can assist you further with this or any other matter.
Until next time.
Dennis Dollar