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Booker, Warren Lead Senators in Questioning Consumer Watchdog About Predatory Bank Fees

Letter highlights Consumer Financial Protection Bureau’s recent decision to halt action on overdraft fees

June 22, 2018
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WASHINGTON, D.C. – U.S. Senators Cory Booker (D-NJ) and Elizabeth Warren (D-MA), along with more than a dozen of their Senate colleagues, today questioned the head of the Consumer Financial Protection Bureau (CFPB) on the agency’s recent decision to halt regulatory action on predatory bank overdraft fees.

In a letter sent to Leandra English, Acting Director of the CFPB, and Mick Mulvaney, Director of the Office of Management and Budget, the Senators highlighted the CFPB’s decision to leave out overdraft protection from its regulatory agenda submitted last month despite the fact that it has been one of the Bureau’s top priorities for four years.

“We write to express concern that the Consumer Financial Protection Bureau (CFPB) has halted its plan to pursue regulatory action relating to predatory bank overdraft fees,” the letter states. “Overdraft fees contribute to a vicious cycle from which vulnerable consumers struggle to recover. This action undermines one of the CFPB’s core functions: to protect consumers from unfair, deceptive, and abusive practices.”

Banks offer account holders the option of overdraft protection, allowing them to make purchases with a debit card even if they don't have sufficient funds in their account, while charging a fee for the service. Studies have shown, however, that more than half of the people who overdrew their checking accounts and paid an overdraft fee in the past year could not recall consenting to the service. These fees disproportionately fall on customers who are least able to afford them, especially workers living paycheck to paycheck.

Overdraft fees have become a major source of revenue for retail banks. According to FDIC Call Report data, the top three largest banks alone collected $5.2 billion in overdraft fees in 2017.

 

In addition to Booker and Warren, the letter was signed by Senators Kamala Harris (D-CA), Kirsten Gillibrand (D-NY), Catherine Cortez Masto (D-NV), Chris Van Hollen (D-MD), Bernie Sanders (I-VT), Richard Blumenthal (D-CT), Bob Menendez (D-NJ), Jeff Merkley (D-OR), Sherrod Brown (D-OH), Jack Reed (D-RI), Ed Markey (D-MA), Ron Wyden (D-OR), and Mazie Hirono (D-HI).

Full text of the letter is below.

Today’s letter to the CFPB follows a letter Booker sent last year to more than a dozen bank CEOs, pressing them on their predatory overdraft fee programs.

June 21, 2018

Ms. Leandra English, Acting Director

The Consumer Financial Protection Bureau

1700 G Street NW

Washington, DC 20552

The Hon. Mick Mulvaney

Director Office of Management and Budget

725 17th Street NW

Washington, DC 20503

Dear Acting Director English and Director Mulvaney:

We write to express concern that the Consumer Financial Protection Bureau (CFPB) has halted its plan to pursue regulatory action relating to predatory bank overdraft fees. In the most recent unified regulatory agenda submission by the CFPB to the Office of Management and Budget, this rulemaking was not included even though it had been on the Bureau’s agenda for four years.  This action undermines one of the CFPB’s core functions: to protect consumers from unfair, deceptive, and abusive practices.

Overdraft fees contribute to a vicious cycle from which vulnerable consumers struggle to recover.  Rather than providing a financial cushion on an occasional basis, overdraft fees charged to low income consumers exacerbate an already desperate situation and have long-term consequences.  Overdrafts are the leading reason that consumers lose their checking accounts (involuntary closure).[1] In addition, the FDIC’s 2013 survey of unbanked and underbanked households indicates that approximately 778,800 households, and well over 1 million adults, who once had bank accounts are currently unbanked primarily because of high or unpredictable fees.[2]

Research has consistently found that overdraft fees are disproportionately borne by a relatively small portion of account holders.  An August 2017 CFPB study of frequent overdrafters found that 79 percent of all overdraft and non-sufficient funds (NSF) fees were charged to only nine percent of the account-holders.  For one group of account-holders, the median number of overdraft charges was 37,[3] resulting in nearly $1,300 in fees annually.

Overdraft abuse by some financial institutions has been particularly egregious.  In 2017, the CFPB sued TCF Bank for misleading consumers into enrolling in overdraft coverage. The Bureau’s investigation uncovered that TCF Bank offered employees bonuses of up to $7,000 and encouraged employees to mislead customers to increase enrollment in overdraft coverage programs after new federal opt-in requirements were put in place. This strategy was so successful that the CEO of TCF Bank even named his boat the “Overdraft” to celebrate the bank’s success in getting consumers to opt-in.[4]  Other banks have used these and other tactics to increase overdraft revenue, demonstrating the continued need to institute consumer protections to prevent such predatory behavior.

Fortunately, the CFPB has been working since 2012 to study overdraft issues to inform the public about new tools to protect consumers.  For example, a 2017 survey by the Pew Charitable Trusts found that nearly 3 in 4 account-holders who had been charged an overdraft fee did not understand that they had the right to have transactions declined without a fee.[5]  Recognizing that this lack of consumer understanding continues to be a problem, in August 2017 the CFPB introduced new Know Before You Oweoverdraft disclosure prototypes designed to improve the model form that banks and credit unions already provide to consumers weighing overdraft coverage.  If implemented, these forms would make it clear that debit card and ATM overdraft coverage is optional, and that consumers are not required to opt-in to expensive overdraft programs. We are particularly concerned that the decision not to move forward on overdraft regulations could delay implementation of this important reform.

We respectfully request answers to the following questions:

1.      Why did the Bureau decide to halt its plan to pursue regulatory action on overdrafts even after CFPB’s own reports over several years have found that there has been significant abuse?

2.      The Bureau has indicated that the change in status to inactive of the overdraft rulemaking process is not intended to signal a substantive decision on the merits of the project.  Even if overdraft rulemaking is taken up at a later point, what will be the impact of this delay on the development of new rules?

3.      To what degree will the CFPB be able to further develop and facilitate adoption of its new prototype forms for overdraft disclosures while overdraft rulemaking is on hold?

4.      During this period in which new overdraft rulemaking is on hold, how does the CFPB plan to address unfair or abusive overdraft practices that are well documented in CFPB reports?

The CFPB’s role in serving as a watchdog for American consumers continues to be of critical importance. To this end, we urge you to move forward on the rulemaking process on overdrafts that will provide additional protections to consumers.   

Sincerely,


 


 

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1335873&download=yes

[2] http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_broken_banking_may2016.pdf

[3] https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf

[4] https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-richard-cordray-tcf-bank-enforcement-action-press-call/

[5]http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/12/overdraft-does-not-meet-the-needs-of-most-consumers