The Trump administration is reviewing a 10-year-old federal rule that limits banks’ ability to charge overdraft fees without customers’ permission.
The move opens the door to a potential overhaul of regulations that the Consumer Financial Protection Bureau previously said saved consumers money but which the banking industry has argued needs an update.
The analysis will help the bureau determine whether the rule should remain intact, be amended or be “rescinded to minimize any significant economic impact,” the CFPB said Monday. The effort is part of a new CFPB initiative to assess how existing regulations affect small businesses, the bureau said.
Under the existing rule, banks and other financial institutions that issue credit or debit cards are required to get customers’ permission before enrolling them in overdraft protection programs. The policy was aimed at preventing customers from unwittingly incurring a $35 overdraft fee for a $3 latte, for example.
The requirements led to “a material decrease in the amount of overdraft fees paid by consumers” the CFPB found in a 2013 report. But that report also found some drawbacks. Customers with overdraft protection still incurred $196 in overdraft fees on average, the report said.
“I am most concerned about the CFPB using [the review] to water down the rule,” said Linda Jun, senior policy counsel at Americans for Financial Reform. “For vulnerable consumers, overdraft fees often compound their vulnerabilities by making it even harder to recover.”
The public will have 45 days to submit comments on the issue, the CFPB said.
Banks typically charge customers about $35 each time they withdraw more than they have in their accounts. The industry made more than $11.5 billion from overdraft fees last year, according to FDIC data. For some small banks, overdraft charges account for 25 percent of their fee income, according to a report from Raymond James.
This comes at a time when the banking industry is under close scrutiny in Congress. Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) have introduced legislation that would cap credit card interest rates at 15 percent, and Sen. Elizabeth Warren (D-Mass.) has proposed making it easier to jail bank executives for corporate misdeeds.
Democratic Sens. Cory Booker of New Jersey and Sherrod Brown of Ohio introduced a bill last year to ban overdraft fees on debit card transactions and ATM withdrawals in many circumstances.
“Overdraft fees are a tax on paychecks that are already stretched thin,” Brown said in a statement Tuesday. CFPB Director Kathy Kraninger “should stop helping big banks rob working families of their hard-earned money.”
These Democratic plans have little chance of passing Congress this year, but banking industry analysts say they are likely to become talking points during the 2020 presidential campaign. They could also lay the groundwork for banking industry reform if Democrats take control of the Senate.
“This represents a risk to banks as it will further politicize overdraft fees,” Jaret Seiberg, an analyst with Cowen’s Washington Research Group, said of the CFPB review.
Even if the CFPB’s effort results in only modest changes, there could still be political fallout, Seiberg said. “It won’t matter if the banks asked for this. Progressives will attack the industry for trying to escape the overdraft regulations,” he said.
However, the Independent Community Bankers of America said it welcomed review of the overdraft rule. It could “minimize the economic impact on community banks that provide this service as a safe and convenient option to help consumers to manage their financial shortfalls,” said Rhonda Thomas Whitley, the group’s vice president and regulatory counsel.
The CFPB has been undergoing a transformation under the Trump administration, adopting a business-friendly approach to the financial world’s prickliest issues. Over the last year, the bureau has proposed rolling back rules on payday lenders and limiting debt collectors to calling consumer seven times a week, while sending an unlimited number of emails and texts.
The CFPB plan to review the overdraft rule “is another step by the Trump Administration to erode the agency’s power and leave consumers paying the price,” Booker said in a statement.
Correction: An earlier version of this story incorrectly reported the name of the Independent Community Bankers of America. The story has been updated.