Protecting Overdraft Protection

ABA Position

Overdraft protection offers an important form of short-term liquidity that covers bank customers’ insufficient funds transactions.

In a backdoor move to impose a de facto price cap on overdraft fees, on January 17, 2024 the Consumer Financial Protection Bureau (CFPB) proposed to apply requirements of Regulation Z to overdraft fees at banks and credit unions with more than $10 billion in assets.

Under this proposal, Regulation Z would apply to overdraft protection services provided by banks and credit unions with assets over $10 billion, unless the overdraft services are “provided at or below costs and losses as a true courtesy to consumers.” The proposal envisions two ways of determining cost: allowing covered institutions to calculate their own costs and losses using the bureau’s proposed standards, or by relying on a benchmark fee set by the bureau. (The CFPB asked for comment on $3, $6, $7 or $14 as proposed benchmarks.)

While the proposal does not cover financial institutions with assets of $10 billion or less, banks of all sizes will face market pressure to conform to the CFPB’s requirements. The bureau warned that it “plans to monitor the market’s response to this rule before determining whether to alter the regulatory framework for financial institutions with assets less than or equal to $10 billion.

The CFPB proposal:

Marks the bureau’s latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate.
Would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity.
Fails to fully acknowledge and appreciate the significant voluntary changes many banks have already made to their overdraft programs, including the growing availability of accounts that do not charge overdraft fees.

Consumer value and appreciate overdraft: A survey conducted in March 2024 by Morning Consult found that more than two-thirds of consumers (67%) find their bank’s overdraft protection valuable – as compared with only 16% who do not find it valuable – and 8 in 10 consumers (79%) who have paid an overdraft fee in the past year were glad their bank covered their overdraft payment, rather than returning or declining payment. While no one likes to pay fees, 64% of consumers think it is reasonable for banks to charge a fee for an overdraft, as opposed to only 23% who think it’s unreasonable. Prior surveys by Morning Consult found similar results and demonstrate the enduring reality that consumers value overdraft. Indeed, only a miniscule number of complaints submitted to the Bureau – 0.003% of the total – list ‘overdraft’ as the issue or sub-issue of the complaint.

Consumers use overdraft strategically to cover shortfalls in funds: Available evidence demonstrates that consumers use overdraft strategically to ensure that they can pay important expenses – such as rent, utilities, and medical bills – when they experience a shortfall in funds. For example, an analysis of transaction data from 11 banks found that the median size of items paid into overdraft is $370. Another analysis of data from 14 financial institutions found that the average size of items paid into overdraft was $198.

Bottom Line: Although the CFPB professes intent to protect “courtesy” overdraft, the proposal would do the opposite. It would effectively bring an end to overdraft services for millions of consumers who – following receipt of a consumer-tested disclosure – choose to use to the product to cover emergency expenses and other liquidity shortfalls, all to advance the administration’s political campaign against ‘junk fees.’ We call on the bureau to withdraw the proposal.