Strategy Proposed for Dealing With CFPB Overdraft Proposal

LAKE FOREST, Ill.—With the math and some analysts suggesting most financial institutions will eliminate overdrafts if the new CFPB overdraft proposal becomes a rule, one economist is recommending an “overdraft holiday” be held to highlight the importance of the service to consumers.

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.

Michael Moebs, economist and chairman of Moebs $ervices, outlined the costs for overdrafts that he said credit unions and other financial institutions would have to absorb if overdrafts are reclassified as loans.

“The calculation is simple: The average OD is for nine days. The average amount is $120. The max rate is 33%. So, $120-times-33%-divided-by-360-days-times-nine-days equals $0.99 in revenue,” explained Moebs. “The cost to do an OD is over $9 each. Even if only a direct cost, the cost exceeds revenue.”

Finding Revenue Elsewhere

That would lead most financial institutions to discontinue the service, Moebs believes. And if the big banks cut their fees to zero, they would simply make up the money with another, higher charge, he predicted.

“Overdrafts, per the 1968 Truth-In-Lending Act, are credit but not a loan created by an account deficit from withdrawing more money than available,” explained Moebs. “Are ODs loans? The OD is created without a signed loan agreement. The Truth-In-Savings Act in 1991 affirmed this overdraft definition. Overdrafts in the United States originated over 100 years ago to cover shortfalls in the banking payment system as deposit and loan transactions ‘floated’ for several days between citizens, businesses, and their banks. Congress eliminated float in 2003 with the Check Clearing for the 21st Century Act.”

Making ‘Errors’

Michael Moebs

Moebs posits that overdrafts are now mainly payment errors made by consumers and businesses.

“With the elimination of float, less than 10% of all ODs are intentional shortfalls of compensation,” he said.  “Bankers do not like ODs, since they are unsecured credit with no signed loan agreement, so they limit the OD amount to $500 which has not changed in 25 years.”

Moebs data show overdrawn amounts range from a median of $40 to an average of $115. Overdrafts last on average nine days.

“OD prices range from $0 to less than $40, with the average at $22,” Moebs said. “Walmart leads with more than 100-million checking accounts and charges $15 per OD, while Bank of America is second with more than 68-million accounts and charges $10. Less than 30% of all FIs have profitable checking portfolios. Would Walmart and Amazon keep this service?”

What’s Being Overlooked

Moebs pointed out consumer groups have been rallying behind the CFPB to eliminate or markedly lower the price of overdrafts, but said they are not taking into account the needs of consumers.

“An overdraft that is fairly priced, below $20, is a service that is very much needed by consumers, especially those who live paycheck to paycheck,” stated Moebs. “It is an affordable way for consumers to make ends meet each month when money falls short, and it keeps them away from predatory payday lenders.”

Moebs contended that attention needs to be drawn to the need for overdrafts, and he believes the best way to do that is with an “overdraft holiday.”

“On March 6, 1933, President Roosevelt declared a bank holiday, shutting down the banking system until March 13, 1933,” Moebs explained. “The president did this to stop a massive withdrawal of cash from banks after a month-long run. Temporary deposit insurance was installed during the bank holiday—later to be permanent—and the public brought back their cash. Confidence was restored in the banking system. While no doubt well intentioned, the Consumer Financial Protection Bureau has created chaos concerning overdrafts with over 610-million checking account holders.”

Let Congress Decide

Moebs contended that many members of Congress recognize the overdraft turmoil created by the CFPB, which is why he is making his proposal.

“One answer is an overdraft holiday,” Moebs told CUToday.info. “Hold it in June of this year for a month, or another time. But it should be held soon enough. If all financial institutions cease covering overdrafts for a month, the value of overdrafts will finally be known based on consumers’ feedback. Whether good or bad, Congress can finally, lawfully, decide the fate of overdrafts.”