By Ray Birch
WASHINGTON—If credit unions under $10 billion in assets believe they will not feel the effects from the CFPB’s new overdraft proposal, one expert says they’re mistaken.
Brandy Bruyere, a partner at Honigman, LLP, told CUToday.info she believes the proposal will impact all financial institutions, no matter their size, first via competitive pressure and then by a follow-up rule if the current rule does not have the CFPB’s intended effect—which is to which is to drive the average OD charges well below $20 per incident, if not to eliminate them altogether.
As CUToday.info reported, the Consumer Financial Protection Bureau has proposed a rule it said is designed to “rein in excessive overdraft fees” charged by the nation’s biggest financial institutions, and is proposing benchmarks of $3-$14 per overdraft. The proposal applies to institutions of $10 billion or more in assets, which would affect approximately 21 credit unions.
‘A Big Problem’
“This is a big problem for all credit unions,” said Bruyere. “The first thing a lot of CUs are going to see is these changes only apply to credit unions over $10 billion in assets. But one thing that caught my eye is the CFPB basically said, ‘We're going to watch the market overall. We're going to monitor overdrafts and determine if another future rule is necessary for institutions with under $10 billion in assets’.”
As CUToday.info has reported, some of the nation’s largest banks have already either eliminated or significantly reduced their overdraft fees, replacing the revenue elsewhere on their balance sheets.
Big Source of Income for Many CUs
But that won’t be so easy for many credit unions, some of which drive much of their income from NSFs. A report on California’s state-chartered institutions, for example, found some 30 CUs earned haft or more of their net income from just OD and NSF fees. California’s state-chartered CUs took in $252 million in OD/NSF fees in 2022, the report found.
Bruyere contended the CFPB’s goal is to target larger financial institutions in the hope that creates competition to force all institutions to reduce their fees or change their process.
“If the bank down the street is only charging $3, how do you justify to your members that you're charging $20 to $35?” she asked. “We’ve seen this market change a lot, significantly with regard to overdraft and insufficient fund fees over the past several years. This has been driven in part by CFPB enforcement actions and in part by class-action litigation risk that goes back nearly a decade.”
Credit unions have been among those targeted by many of the lawsuits related to overdrafts.
Brandy Bruyere
‘Not Enough for the CFPB’
Bruyere pointed out the market has seen many banks and credit unions reduce their fees or add courtesy periods where no fee is going to be assessed if a balance is brought back into positive territory.
“So, we've already seen credit unions under $10 billion responding to what some of these bigger banks have been doing in the market,” Bruyere said. “Clearly, these broad market changes weren't enough for the CFPB, from their perspective.”
It's unlikely credit unions are going to have much time to adjust to what will likely become an even faster-changing OD market, Bruyere said.
“The CFPB wants to finalize this rule in a relatively fast fashion—they want comments by April 1 and the rule to take effect by Oct. 1, 2025,” she noted.
Bruyere believes the bigger picture must be considered when it comes to fees. President Biden, for instance, talked about the issue during one of his State of the Union addresses.
“I think there's some politics in play,” Bruyere said. “The optics of attacking the big guys, this might make this seem a little bit more palatable.”
‘That’s 100% Correct’
In a previous CUToday.info report, Michael Moebs, economist and chairman of Moebs $ervices, stated he believes the CFPB’s intent has always been to turn overdrafts into a loan.
https://www.cutoday.info/site/THE-feature/Strategies-Shared-for-Heading-Off-OD-Rules
“That's 100% correct,” Bruyere agreed. “Historically, regulations have excluded overdraft programs from Reg Z, unless it's some separate overdraft line of credit. This would change that as long as the program is not being provided at or below costs. In other words, if it's not a true courtesy to the consumer the rules for open end credit would apply.
“So, that includes now account opening disclosures, periodic statements, regulations, the advertising rules…,” continued Bruyere. “It also means that these would be treated as what the CFPB has called hybrid debit credit card programs, and that brings in other parts of regulation Z, like the ability to repay underwriting rule. They want consumers to have multiple options for repaying these overdrafted amounts. A lot of the news is focused on regulation Z, but this also pulls this into Regulation E.”
More Time & Money
Bruyere pointed out all of the changes surrounding overdrafts are going to require additional time investments by financial institution, new operational programs, possible changes to core systems, and more money spent.
“Disclosures, changing your systems, this doesn't come for free,” she said. “That may lead many institutions to stop offering overdraft programs. We end up with some institutions deciding that maybe they don't offer these programs and cards start getting declined at the point of sale, which is simply not what consumers are accustomed to.”
Bruyere said she believes that ultimately the CFPB proposal may only hurt consumers, as fairly priced overdraft programs are needed by many Americans as an alternative to a payday lender.
New Litigation Threat?
Could a new rule with new requirements, lead to more class-action overdraft lawsuits?
“I think we would be at greater risk for continued consumer class-action lawsuits,” Bruyere said.
Bruyere reiterated that by targeting the biggest banks and credit unions that control the major share of the overdraft market, the CFPB wants to push every financial institutions in the direction of charging a low overdraft price or eliminating them.
“Again, if they end up not pushing everyone in this direction they made it clear they'll make a rule that includes the smaller institutions, too,” she said.
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