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The CFPB lately issued new steerage on overdraft charges that was unanticipated by neighborhood banks. Study what this implies for the trade and the way neighborhood banks can keep in compliance.

By Mary Thorson Wright

In October 2022, President Biden introduced a crackdown on so-called junk charges, together with new steps that successfully ban banks from imposing disclosed overdraft charges. Concurrently, the Shopper Monetary Safety Bureau (CFPB) issued Round 2022-06 steerage on “unanticipated overdraft charge evaluation practices,” which complies with TILA, EFTA, Regulation Z, Regulation E and the prohibition towards unfair, misleading, and abusive acts or practices (UDAAP) in Part 1036 of the Shopper Monetary Safety Act (CFPA).

Banks supply a wide range of services or products designed to permit overdrafts on deposit accounts, together with:

• Strains of credit score
• A sweep of funds from one other deposit account of the shopper
• A courtesy interval throughout which the shopper can clear the overdraft
• An advert hoc choice to pay or not pay the overdrawn quantity, or another mixture of allowances

Whatever the kind, the financial institution might select to additionally impose a beforehand disclosed charge upon the overdrawn transactions as a deterrent to future exercise or to cowl prices incidental to administering this system. Charge disclosures are usually offered at account opening, the graduation of an overdraft characteristic, a change in phrases associated to the overdraft or account program, and another subsequent disclosure set off. Sound compliance administration requires constant written disclosures, procedures and precise practices.

Overdraft applications profit clients by serving to guarantee transactions are nonetheless processed and {that a} payee shouldn’t be notified concerning the shopper’s account steadiness. Financial institution regulators have issued steerage and expressed issues about how banks administer overdraft applications and the charges which are charged to clients. In March 2022, the CFPB famous in its weblog that “overdraft charges can worth folks out of banking.”

The overdraft charge round’s results

Of late, the CFPB has been taking regulatory actions utilizing novel instruments together with interpretive guidelines, advisory opinions and circulars, fairly than formal rule adjustments. The round is an instance of this less-formal strategy.

“The Round will certainly have a regulatory impression on neighborhood banks, even with out the supervisory oversight of the CFPB.”
—Rhonda Thomas-Whitley, ICBA

“The substance of the round and in addition the way through which it was established are of concern,” says Mickey Marshall, ICBA AVP and regulatory counsel. “ICBA believes this transformation ought to have been finished by way of the rulemaking course of. The round was unanticipated by the trade, and the general public and the trade didn’t get the chance to offer suggestions or to contemplate its impression previous to implementation. The method didn’t promote transparency or give banks the chance to remark or clarify their place previous to implementation.”

How the round will have an effect on neighborhood banks shouldn’t be solely clear. “The CFPB workouts direct supervision and examinations for banks with whole property over $10 billion, whereas most neighborhood banks are instantly supervised by the FDIC, Federal Reserve or OCC,” Marshall says. “Whereas the CFPB round might not be technically binding on the opposite federal financial institution regulators, neighborhood banks want to contemplate that the publication and promotion of the round shouldn’t be taking place in a vacuum. It’s affordable to consider that examiners from these companies might start to use this mannequin for unanticipated overdraft charges of their neighborhood financial institution examinations.”

Rhonda Thomas-Whitley, ICBA vice chairman and regulatory counsel, agrees: “The round will certainly have a regulatory impression on neighborhood banks, even with out the supervisory oversight of the CFPB.”

Whereas neighborhood banks have supplied overdraft safety to their clients for many years and have been topic to compliance monitoring, inner and exterior audits, and federal and state financial institution examinations, the CFPB’s overdraft charge round and public statements by the Biden administration now topic their applications to a change in requirements.

“Examiners have scrutinized account disclosures, charge schedules, financial institution procedures and information of overdraft charges for years,” Thomas-Whitley says. “Now it seems that those self same disclosures, charge schedules and their related implementation might not be ample. It’s troublesome to conceive that overdraft charges and practices are unanticipated after they have been so completely disclosed to clients and vetted by examiners.”

On the time of writing, CFPB had issued the primary report of enforcement underneath the round.

“Group banks have been devoted to complete opinions of their disclosures and procedures for years,” Whitley says. “Banks have discovered themselves in a state of affairs the place they’re following the foundations however are being scrutinized by the identical companies that make the foundations. How can we seize and consider what’s going to fall with the following shoe?

“Bankers are put within the place of monitoring tendencies and obtainable steerage however could also be in a holding sample to see how they play out from anecdotal suggestions or issuances from CFPB or their major federal financial institution regulators.”

Mary Thorson Wright is a author in Virginia.