As of late, “junk” fees have been bank regulators’ favorite punching bag. The most frequent “junk” fee target has been overdraft services and the CFPB just issued a haymaker of a proposed rule that could decrease overdraft fees throughout the industry.
Traditionally, overdraft fees are considered service charges rather than finance charges, meaning they are traditionally treated as a deposit account feature rather than an extension of credit. As a result, honoring an overdraft does not make a bank a “creditor” subject to Regulation Z. Regulation Z also makes clear that debit cards are generally not “credit cards,” even if their use results in an overdraft so allowing consumers to overdraw their account with a debit card and honoring any such overdrafts does not make a bank a “card issuer” subject to Regulation Z.
The CFPB’s new proposed rule would fundamentally change that for larger banks. If finalized in its present form, the proposed rule would treat overdraft fees as finance charges under certain conditions. The proposal would subject overdraft services provided by banks with over $10 billion in assets to Regulation Z’s disclosure provisions that apply to consumer credit cards, but only when overdraft fees exceed the direct cost of providing the service. A large bank’s overdraft fees would not be considered a “finance charge,” and would not trigger coverage under Regulation Z, if the fees do not exceed the average direct costs and charge-off losses associated with providing overdraft services. This can be calculated in one of two ways:
- Banks could rely on a “benchmark” fee established by the CFPB. The proposed rule sets fourth four possible benchmark fees — $3, $6, $7 and $14 – arrived at using different methodologies; or
- Banks could calculate the fee on their own by adding together all the direct costs (such as direct operational costs of providing the service) and charge-off losses from the previous year, and then dividing that amount by the number of overdrafts it honored in the past year for a fee was charged.
If more is charged for honoring an overdraft fee than a bank’s average costs and charge-off losses then the charge would be considered a “finance charge” and covering the overdraft would be an extension of credit covered by Regulation Z. This would seem to create significant pressure for covered banks to cap overdraft fees at the benchmark rate or lower.
Smaller banks underneath the $10 billion threshold can continue offering overdraft protection without any changes but the CFPB noted that they will continue monitoring the market which at least opens the door for the potential for the rule’s coverage to expand in the future. It should also be noted that more and more institutions reducing their overdraft fees may create market pressures on smaller institutions to similarly reduce fees over time.