Maloney: CFPB can and should do more to stop overdraft abuses
WASHINGTON – Congresswoman Carolyn B. Maloney (D-NY) today urged Consumer Financial Protection Bureau Director Richard Cordray to act immediately to curb abusive overdraft fees. Maloney, who authored the Credit Card Accountability Responsibility and Disclosure Act of 2009, says the CFPB has the authority to limit overdraft fees charged to bank accounts in the same way her bill limited similar fees on credit card transactions. The Congresswoman called for two specific actions by the CFPB: a limit on overdraft fees and expanded opt-in requirements.
The Congresswoman’s call to action comes on the heels of a recent CFPB report that shows many consumers are effectively charged a 17,000 percent annual percentage rate for transactions when banks levee excessive overdraft fees.
“You can still buy a $35 cup of coffee,” said Maloney. “The CFPB’s own report found that too many Americans are still being hit with excessive overdraft fees. I’ve introduced a bill, the Overdraft Protection Act, to end this practice, but the CFPB already has some of the authority it needs. I am urging Director Cordray to limit overdraft fees and expand overdraft opt-in requirements in order to address the serious problems that the Bureau’s report identified. Too many Americans who are living paycheck to paycheck are being charged unfair and abusive fees. We helped fix some of the most abusive credit card practices with the CARD Act. We should do the same thing for checking accounts.”
Specifically, Maloney urged Cordray to limit overdraft fees charged to consumers’ checking accounts so that they are “reasonable and proportional” to the amount of the overdraft. Most debit card overdraft fees were incurred on small purchases of $24 or less, and yet financial institutions charged a median overdraft fee of $34 for these small overdrafts.
Maloney also says CFPB should expand overdraft “opt-in” requirements to the use of checks and Automated Clearing House (ACH) transactions, which include direct debit transfers used by consumers to pay bills. A consumer presently must opt-in to overdraft coverage for ATM transactions, but a similar opt-in is not required for checks or ACH transactions.
Maloney’s Overdraft Protection Act would go even further, building on reforms established by Maloney’s Credit Card Accountability Responsibility and Disclosure Act. Specifically, H.R. 1261:
- Requires consumer consent before financial institutions can permit overdraft fees to paper checks, automated clearinghouse (ACH) charges and debit card swipe-terminal transactions on consumer accounts, and defines overdraft fees as finance charges subject to the Truth in Lending Act disclosures. Current regulations require opt-in to overdraft fees only for ATM and non-recurring point-of-sale debit card transactions.
- Prohibits financial institutions from manipulating the sequence in which checks and other debits are posted if it causes more overdrafts and maximizes fees paid to financial institutions.
- Requires that fees be “reasonable and proportional” to the amount of the overdraft.
- Caps the number of fees that can be charged at one per month and six per year.
- Enhances disclosures to consumers both at the point of opt-in (disclosing alternatives to overdraft protection, including linked accounts or lines of credit) and when an overdraft fee is charged (if consumers choose to opt in).
- Requires the Consumer Finance Protection Bureau to study prepaid debit card overdraft fees and grants rulemaking authority over those fees to CFPB.
The full text of Maloney’s letter to Cordray follows:
September 10, 2014
The Honorable Richard Cordray
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552
Dear Director Cordray:
I am writing with regard to the Bureau’s recent report on checking account overdraft practices. As the author of H.R. 1261, the Overdraft Protection Act of 2013, I want to thank you for taking the time to study this important issue, and to highlight two key findings from the overdraft report that I believe provide compelling evidence that additional consumer protections from the Bureau are necessary.
As you know, some progress has been made in protecting consumers from unfair and abusive overdraft fees. For example, in 2009, the Federal Reserve amended Regulation E to require consumers to opt-in to overdraft protection for ATM and non-recurring point-of-sale (POS) debit card transactions. However, as the Bureau’s report notes, significant problems remain.
In particular, the Bureau’s report provides indisputable evidence that consumers who have not opted-in to overdraft protection are still paying substantial overdraft fees, and that financial institutions are still charging overdraft fees that are disproportionate to the amount of the overdraft. That is why I hope that the Bureau will take action to address these specific problems by expanding opt-in rules to checks and ACH transactions, and by requiring overdraft fees to be “reasonable and proportional.”
Expand Opt-In Rules to Checks and ACH Transactions
First, the report found that even among consumers who had not “opted-in” to overdraft protection under the Regulation E rules, overdraft and non-sufficient funds (NSF) fees still constituted 41 percent of their total checking account fees. As noted above, the Federal Reserve’s 2009 amendment to Regulation E required consumers to affirmatively opt-in to overdraft protection before a financial institution can charge a fee for covering an overdraft, but this rule only covers ATM and non-recurring POS debit card transactions.
The fact that overdraft and NSF fees account for such a large percentage of the total account fees even for consumers who have not opted-in strongly suggests that the current Regulation E rules need to be expanded to cover all transaction types where overdraft is prevalent. As the Bureau’s report shows, overdrafts are just as likely to occur for checks and ACH transactions as they are for debit card and ATM transactions. Thus, at a minimum, the Bureau should expand the current Regulation E opt-in rules to checks and ACH transactions.
Require Overdraft Fees to be “Reasonable and Proportional”
Second, the report found that most debit card overdraft fees were incurred on small purchases of $24 or less, and yet consumers are charged a median overdraft fee of $34 for these small overdrafts. Such disproportionate fees might be acceptable if it took consumers a long time to pay back the bank. However, according to the Bureau’s report, 29 percent of all overdrafts are brought current the next day, more than half are brought current within 3 days, and 76.1 percent are brought current within a week.
As the Bureau itself pointed out, if a consumer borrows $24 for three days and pays a $34 finance charge, that’s the equivalent of a loan with a 17,000 percent annual percentage rate (APR). Unfortunately, the Bureau’s report reveals that these 17,000 percent APR loans are commonplace in overdraft programs. The Overdraft Protection Act of 2013 would protect consumers from these outrageous practices by requiring that overdraft fees be “reasonable and proportional” to the amount of the overdraft — thus prohibiting a $34 fee for a $1 overdraft. In light of the data in the Bureau’s report, I believe that the Bureau should follow suit and require, by rule, that all overdraft fees be reasonable and proportional to the amount of the overdraft.
As the Bureau continues to weigh additional consumer protections for overdraft practices, I respectfully urge the Bureau to consider adopting the protections described in this letter. I look forward to your response.
Carolyn B. Maloney
Subcommittee on Capital Markets and
Government Sponsored Enterprises
 See Consumer Financial Protection Bureau, Data Point: Checking Account Overdraft (July 31, 2014).