Big Banks Dodge Overdraft Rules, Take In Billions
$JPM, $BAC, $WFC
US banks are set to score a victory in their fight to keep regulators from squelching the billions of dollars in fees they charge consumers who overdraw their accounts.
After studying overdraft fees for more than 3 years, the Consumer Financial Protection Bureau (CSPB) is leaning against subjecting banks to tough new rules that would cap the size of charges or limit how frequently they can be imposed on consumers.
More likely, when the CFPB proposes regulations later this year or in early Y 2016, it will likely bar lenders from reordering transactions in a way that triggers overdrafts and also require better disclosure of policies that allow consumers to avoid the fees.
“The unfair, deceptive and abusive nature of bank overdrafts calls for deliberate, strong action by the CFPB,” said the co-Director of the New Economy Project, a New York advocacy group.
A CFPB spokeswoman said the agency is “carefully weighing what consumer protections” are needed on overdrafts.
“No decisions have yet been made,” she said, “We will continue our work to understand and address practices that put consumers at risk, and are committed to a fair and open process.”
Overdraft fees have been a focus at the CFPB since the regulator’s creation under the 2010 Dodd-Frank Act. The agency named its 1st softball team “The Overdrafts” and in Y 2012, in 1 of his 1st actions as the agency’s director, initiated a far-reaching review of the charges.
As the CFPB dug into the issue, banks deluged the agency with arguments that consumers actually like being able to overdraw their accounts. And while JP Morgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), and Wells Fargo Co (NYSE:WFC). generate the most fees, the fiercest lobbying has come from small banks that say the revenue is crucial to their survival. Community banks have clout with US lawmakers, many of whom have dozens of small lenders based in their congressional districts.
“There would be a fierce backlash if the CFPB gets too prescriptive here, and that would play badly in Congress,” said the CEO of the Independent Community Bankers of America, a Washington-based industry group, he warned the CFPB that overdraft fees help support branch networks, which could be at risk from stringent regulation.
The CFPB spokeswoman, said that the agency wants to “fully understand the overdraft practices at banks and credit unions of different sizes, a goal that has been encouraged by small institutions.”
The US banking industry is on pace to collect more than $10-B of the fees this year, with JP Morgan, Bank of America and Wells Fargo each generating more than $350-M of revenue from the charges in Q-1, according to SNL Financial. Regulators require banks with more than $1-B of assets to disclose their overdraft revenue.
Overdraft fees made up 2% of banks’ revenue and 33% of service charges in Q-1 of this year, down from 6% of revenue and 67% of service charges in Y 2006, according to the data. That is even though the median penalty assessed for overdrawing an account has risen 33% to $36 over the same frame.
One option the CFPB is considering would try to improve disclosure of opt-in policies, as studies by consumer groups have shown banks may not make it clear enough that customers can decline overdraft protection and avoid fees.
Another would govern the order in which banks process transactions.
Since 2011, Bank of America, JP Morgan and Wells Fargo have had to pay hundreds of millions of dollars to settle lawsuits that accused them of manipulating the order of debit-card transactions to boost overdraft fees.
Regulations in could cut into bank revenue, but a lot depends on the types of changes that are put in place.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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