On Capitol Hill this week during Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra’s testimony for the Semi-Annual Report, members of Congress touched on several hot button issues impacting financial service providers. One area that prompted discussion during hearings in both chambers was the use of overdraft products. The director’s related remarks provide some important insights into his thinking on these products.
In the wake of the CFPB’s February Request for Information (RFI) about “junk fees,” which included some critical language about overdraft services, a number of members of Congress pressed the director during the hearings on his future plans in this area. Despite the lack of specificity, it was clear that the CFPB has a renewed interest in this product under Director Chopra’s leadership. There was a focus previously on overdraft products during Director Richard Cordray’s leadership at the CFPB during the Obama administration, but during the past few years there has been minimal movement.
Notably, the “junk fee” RFI stated, “Only recently have companies started to substantially vary their overdraft practices. This is of course a positive development, but these changes will not reverse the trend of pricing deposit accounts primarily through back-end fees.” Director Chopra made similar remarks in the hearings, indicating that he believes overdraft products should be priced differently, changed, or eliminated altogether. Sen. Pat Toomey (R-PA), ranking member of the Senate Banking, Housing, and Urban Affairs Committee, stated in his opening remarks that the CFPB has falsely justified its campaign against overdraft fees as promoting competition. Director Chopra subsequently discussed the need for increased competition several times throughout both hearings.
In response to other questioning, Director Chopra shared that the CFPB has received 80,000 comments in response to its RFI on “junk fees.” He indicated that the Bureau is in the process of carefully reviewing the comments.
How the CFPB Might Take Action in This Area?
As we wait for the spring 2022 edition of the CFPB rulemaking agenda, it is unclear exactly how the CFPB plans to use the comments it received on the RFI related to overdraft. One possibility is that the CFPB, at some point in the next year, will begin an overdraft rulemaking, using the RFI as a springboard.
It also seems likely, however, that this will be another area in which the CFPB utilizes public pressure campaigns to force more immediate changes outside of, or parallel with, the formal rulemaking process. Late last year, the CFPB released research titled, “showcasing banks’ ‘deep dependence’ on overdraft fees,” which included major criticism of overdraft products.
In its press release related to this research, the CFPB was also very clear that it will be focused on enforcement activity, whicharguably might mean “regulation by enforcement” activity.
The press release specifically stated,
“The CFPB will be enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees. In recent years, the CFPB ordered TD Bank to pay $122 million in penalties and customer restitution, and ordered TCF Bank to pay $30 million in penalties and restitution.”
Additionally, the CFPB urged consumers to submit complaints related to overdraft services through the agency’s complaint portal. In a press call accompanying the release of the research referenced above, Director Chopra laid out specific plans in this area:
- “First, the CFPB will take action against large financial institutions whose overdraft practices violate the law. In investigating, the CFPB will also seek to uncover the individuals who directed any illegal conduct. The CFPB is also considering additional policy guidance outlining unlawful practices. Law-abiding institutions should not be disadvantaged by these practices.
- Second, I’ve asked the CFPB’s bank examiners to prioritize examinations of banks that are heavily reliant on overdraft. Financial institutions that have a higher share of frequent overdrafters or a higher average fee burden for overdrafting should expect us to be paying them close supervisory attention. Ultimately, we plan to inform institutions on where they stand relative to their peers with overdraft. We believe sharing that information will increase transparency and help against the race to the bottom we have seen in this market.
- Third, the CFPB will be looking to harness technology in ways that give American families the power to more easily fire poor-performing banks. We can only accrue the benefits of competition if customers can vote with their feet. Unfortunately, switching bank accounts isn’t easy. It involves new account numbers, new debit cards, updating direct deposit, updating auto-debits, and much more. If America can shift to an open banking infrastructure, it will be harder for banks to trap customers into an account for the purpose of fee harvesting.”
The CFPB’s next steps for overdraft products are not completely clear. However, the robust discussion around them from lawmakers on both sides of the aisle, Director Chopra’s outreach to the press, and public arguments that changes are needed, signal that this is an area he will be looking at from various angles over the next few years.
Click here for Brownstein’s summaries of Director Chopra’s appearances before the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee.
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