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Last year, the Consumer Financial Protection Bureau began exploring whether it needed to further tighten regulation of overdraft fees after the Federal Reserve revised the rules in 2010. Now the new financial industry watchdog appears to be taking a go-slow approach after pushback from small lenders that rely on the revenue far more than major commercial banks. In a Feb. 5 conference call with credit unions, CFPB Director Richard Cordray noted that the bureau “got an earful from a number of you and many others on the issue of overdraft” when it began seeking public comment a year ago.
Revenue from overdraft fees represents 3 percent to 15 percent of total revenue for smaller lenders, according to Camden Fine, president of the Independent Community Bankers of America. In contrast, at Wells Fargo (WFC), overdraft and other fees brought in $4.3 billion in 2011—just 1 percent of the bank’s net revenue, financial disclosures show. “The gross dollars go to megabanks, but those are a tiny percentage of their balance sheet,” says Fine. “There are more than a few community banks that would really be hurt by restrictive regulation.”
Overdrafts occur when consumers spend or withdraw more money than is available in their checking account. For a fee, banks will honor the transaction. In the past, institutions automatically signed up customers for such services. A 2010 Fed rule requires that account holders choose to opt in.
Bank customers paid $31.6 billion in overdraft fees in 2011, down from $33.1 billion in 2010, according to Moebs Services. About 15 million Americans overdraw their accounts 10 or more times a year, the firm says. There’s no reliable data on how many people are choosing overdraft services. Moebs estimated the opt-in rate at 77 percent; the Consumer Bankers Association found it was 17 percent. “Overdrafts are rife with predatory features,” says Rebecca Borne, senior policy counsel at the Center for Responsible Lending. “None of that has changed.”
The issue presents a political dilemma for the CFPB, pitting two important constituencies against each other: consumer groups, which lobbied for the agency’s creation, and community banks, which the agency has courted as a counterweight to Wall Street. The bureau may revisit the Fed’s opt-in rule, according to a person briefed on the discussions. CFPB spokeswoman Michelle Person says the agency “is looking at a wide range of issues involving overdrafts.”
Robert Kottler, executive vice president at Lafayette (La.)-based Iberiabank (IBKC), says the uncertainty over the bureau’s intention and timing has led it to shelve plans for changes to its overdraft programs. “We don’t want to go down a path if regulations are likely to affect it,” he says.
The bottom line: After pressure from smaller banks, the CFPB is moving more deliberately as it weighs whether to tighten overdraft rules.