Navigating new overdraft fee guidance for community banks

Illustration by Jozefmicic/Adobe

The CFPB recently issued new guidance on overdraft fees that was unanticipated by polity banks. Learn what this ways for the industry and how polity banks can stay in compliance.

By Mary Thorson Wright

In October 2022, President Biden spoken a crackdown on so-called junk fees, including new steps that powerfully ban banks from imposing disclosed overdraft fees. Concurrently, the Consumer Financial Protection Bureau (CFPB) issued Circular 2022-06 guidance on “unanticipated overdraft fee towage practices,” which complies with TILA, EFTA, Regulation Z, Regulation E and the prohibition versus unfair, deceptive, and wiseacre acts or practices (UDAAP) in Section 1036 of the Consumer Financial Protection Act (CFPA).

Banks offer a variety of products or services designed to indulge overdrafts on petrifaction accounts, including:

• Lines of credit
• A sweep of funds from flipside petrifaction worth of the customer
• A courtesy period during which the consumer can well-spoken the overdraft
• An ad hoc visualization to pay or not pay the overdrawn amount, or some other combination of allowances

Regardless of the type, the wall may segregate to moreover impose a previously disclosed fee upon the overdrawn transactions as a deterrent to future worriedness or to imbricate financing incidental to overseeing the program. Fee disclosures are typically provided at worth opening, the prelude of an overdraft feature, a transpiration in terms related to the overdraft or worth program, and any other subsequent disclosure trigger. Sound compliance management requires resulting written disclosures, procedures and very practices.

Overdraft programs goody customers by helping ensure transactions are still processed and that a payee is not notified regarding the customer’s worth balance. Wall regulators have issued guidance and expressed concerns well-nigh how banks supervise overdraft programs and the fees that are charged to customers. In March 2022, the CFPB noted in its blog that “overdraft fees can price people out of banking.”

The overdraft fee circular’s effects

Of late, the CFPB has been taking regulatory deportment using novel tools including interpretive rules, newsy opinions and circulars, rather than formal rule changes. The circular is an example of this less-formal approach.

“The Circular will definitely have a regulatory impact on polity banks, plane without the supervisory oversight of the CFPB.”
—Rhonda Thomas-Whitley, ICBA

“The substance of the circular and moreover the manner in which it was established are of concern,” says Mickey Marshall, ICBA AVP and regulatory counsel. “ICBA believes this transpiration should have been washed-up through the rulemaking process. The circular was unanticipated by the industry, and the public and the industry didn’t get the opportunity to provide feedback or to consider its impact prior to implementation. The process did not promote transparency or requite banks the opportunity to scuttlebutt or explain their position prior to implementation.”

How the circular will stupefy polity banks is not entirely clear. “The CFPB exercises uncontrived supervision and examinations for banks with total resources over $10 billion, whereas most polity banks are directly supervised by the FDIC, Federal Reserve or OCC,” Marshall says. “While the CFPB circular may not be technically tightness on the other federal wall regulators, polity banks need to consider that the publication and promotion of the circular is not happening in a vacuum. It’s reasonable to believe that examiners from those agencies may uncork to wield this model for unanticipated overdraft fees in their polity wall examinations.”

Rhonda Thomas-Whitley, ICBA vice president and regulatory counsel, agrees: “The circular will definitely have a regulatory impact on polity banks, plane without the supervisory oversight of the CFPB.”

While polity banks have offered overdraft protection to their customers for decades and have been subject to compliance monitoring, internal and external audits, and federal and state wall examinations, the CFPB’s overdraft fee circular and public statements by the Biden wardship now subject their programs to a transpiration in standards.

“Examiners have scrutinized worth disclosures, fee schedules, wall procedures and records of overdraft fees for years,” Thomas-Whitley says. “Now it appears that those same disclosures, fee schedules and their associated implementation may not be sufficient. It is difficult to woolgather that overdraft fees and practices are unanticipated when they have been so thoroughly disclosed to customers and vetted by examiners.”

At the time of writing, CFPB had issued the first report of enforcement under the circular.

“Community banks have been defended to comprehensive reviews of their disclosures and procedures for years,” Whitley says. “Banks have found themselves in a situation where they are pursuit the rules but are stuff scrutinized by the same agencies that make the rules. How do we capture and evaluate what will fall with the next shoe?

“Bankers are put in the position of monitoring trends and misogynist guidance but may be in a holding pattern to see how they play out from segmented feedback or issuances from CFPB or their primary federal bank regulators.”

Mary Thorson Wright is a writer in Virginia.