MW What's next for banks amid noise around new overdraft-fee cap
By Steve Gelsi
Consumer groups applauded the move, but banks said customers could be driven toward more expensive options such as payday loans
The Biden administration said Thursday that a new rule set to take affect in about 10 months will save Americans up to $5 billion a year in annual overdraft fees.
While consumer groups applauded the move, the banking industry said it could end up hurting the financial health of less affluent consumers - who could be driven toward more expensive options such as payday loans once restrictions have been placed on overdraft fees.
It's also uncertain whether the incoming Trump administration or the Republican-led Congress could change or eliminate the rule, which isn't scheduled to take effect until October. The rule change could also prompt a lawsuit from the banking industry in an attempt to overturn it, sources said.
Speaking to the overall environment for banks under Trump 2.0, Bank of America Chief Executive Brian Moynihan said, "I think people are feeling stronger on the company side in the sense that the regulatory changes will be favorable," at an industry gathering this week.
The noise around overdraft fees comes as the Consumer Finance Protection Bureau, which is an independent government group within the Federal Reserve System, released a final rule on overdraft lending for banks with assets of $10 billion or more.
These larger banks include $Bank of America Corp(BAC-N)$. $(BAC.SI)$ , JPMorgan Chase & Co. $(JPM)$, Wells Fargo & Co. $(WFC)$ and $Citigroup Inc(C-N)$. (C) - all of which serve millions of consumers each - as well a larger regional players such as PNC Financial Services Group Inc. $(PNC)$ and U.S. Bancorp $(USB)$.
The CFPB said the changes would allow large banks the option of charging $5 for overdraft fees, or offer overdraft as a "courtesy" by charging fees that cover "no more than costs or losses" from the overdraft.
A third path for banks would be to extend profit-generating overdraft loans, but only if they follow established lending laws, including the disclosure of applicable interest rates.
CFPB Director Rohit Chopra said the rule will save $225 per household that pays overdraft fees.
"The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they're charging on overdraft loans," Chopra said in a statement.
The rule closes a loophole that exempted overdraft fees as a finance charge under the Truth in Lending Act in 1968.
Jennifer Chien, senior policy counsel at Consumer Reports, said the CFPB's overdraft rule "protects consumers from misleading and abusive practices while still allowing them to access these services with full knowledge of the actual costs upfront," according to a prepared statement.
Meanwhile, the Consumer Bankers Association said the CFPB is "imposing unauthorized restrictions" on the industry, and that overdraft service helps the one in five American who don't have the ability to easily borrow money such as through a credit card.
"The CFPB's rule jeopardizes access to overdraft services when hardworking Americans face unexpected expenses, leaving them with worse alternatives like payday loans and pawnshops," the industry group said in a statement.
The Consumer Bankers Association said it was exploring "all potential options" to "ensure consumers continue to have access to this critical safety net."
Liz Zelnick of the consumer watchdog group Accountabe.US, said the CFPB's rule would end the $35 "surprise fee" that banks often charge customers for overdraft.
According to the group, the 10 largest U.S. banks drew in more than $2.34 billion from overdraft fees in the first nine months of 2023.
According to the CFPB, the typical overdraft is less than $26 and typically paid back in three days. Based on that dollar figure and time period for payback, the typical overdraft bank fee of $35 amounts to the equivalent of a loan interest rate of 16,000%.
A banking source said if the new CFPB director under Trump takes office before the overdraft final rule is published in the Federal Register, they could pull it back.
If the rule is published before then, the incoming CFPB director would have to launch a new rulemaking procedure under already established federal guidelines.
It's also possible that the incoming CFPB chief could take a populist stance on the rule and let it go through, another source said.
Also read: Biden administration wants to slash overdraft fees. Banks say consumers could lose an 'emergency safety net.'
-Steve Gelsi
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December 12, 2024 11:55 ET (16:55 GMT)
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