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CFPB proposes rule to close bank overdraft loophole that costs Americans billions each year in unwanted fees
WASHINGTON DC – The Consumer Financial Protection Bureau (CFPB) today proposed a rule to control excessive overdraft fees charged by the country’s largest financial institutions. The proposal would close an outdated loophole that exempts overdraft services from long-standing provisions of the Truth in Lending Act and other consumer financial protection laws. For decades, very large financial institutions were able to issue highly profitable overdraft loans, which brought them billions of dollars in revenue annually. Under the proposal, big banks would be free to make overdraft loans if they comply with long-standing credit laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recover their costs at a set benchmark – as low as $3, or at a cost they calculate if they present their cost data.
“Decades ago, overdraft loans received special treatment to make it easier for banks to cover paper checks that were often mailed,” said CFPB Director Rohit Chopra. “Today, we are proposing rules to close a long-standing loophole that has allowed many large banks to turn overdraft into a massive junk fee harvesting machine.”
The proposed rule would apply to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country. These institutions typically charge $35 for an overdraft loan, although most consumers’ debit card overdrafts are less than $26 and are repaid within three days.
Approximately 23 million families pay overdraft fees in any given year. The CFPB estimates that this rule could save consumers $3.5 billion or more in fees per year. The potential savings would translate into $150 for families who pay overdraft fees.
The Truth in the Lending Gap
In 1968, Congress enacted the Truth in Lending Act. In 1969, the Federal Reserve Board wrote rules to implement the new law, which generally required lenders to clearly disclose the cost of credit to the borrower. At the time, many families were receiving and sending checks in the mail and had little certainty about when their deposits and withdrawals would clear. When a bank clears a check and the consumer has no funds in the account, the bank is issuing a loan to cover the difference. The Federal Reserve Board created an exemption to Truth in Lending protections if the bank was honoring a check when its depositor “inadvertently” overdrawn his account. At the time, this was used infrequently and was modest in cost. It wasn’t a huge profit generator.
However, in the 1990s and early 2000s, with the emergence of debit cards, institutions began raising fees and using the exemption to generate large volumes of overdraft loans on debit card transactions. Annual revenue from overdraft fees in 2019 was estimated at $12.6 billion. And in 2022, Wells Fargo and JPMorgan Chase led the way – accounting for one third of overdraft revenues reported by banks in excess of US$1 billion.
Recent policy changes at some banks have reduced revenue from overdraft fees to about $9 billion a year. The policy changes followed the CFPB’s enforcement and oversight efforts to root out illegal overdraft practices, such as charging fees to consumers who had enough money in their account to cover the transaction at the time the bank authorized it.
Proposed Rule
The proposed rule would require very large financial institutions to treat overdraft loans like credit cards and other loans, as well as provide clear disclosures and other protections. Many banks and credit unions now offer lines of credit linked to a checking account or debit card when a consumer overdraws. The proposal provides clear traffic rules to ensure consistency and clarity.
The CFPB also proposes limiting the long-standing exemption to overdraft practices that are offered as a convenience rather than a profit generator. The proposed rule would allow financial institutions to charge a fee in line with their costs or in accordance with an established benchmark. The CFPB has proposed reference values of $3, $6, $7, or $14 and is seeking comment on the appropriate value.
CFPB’s Unwanted Fee Efforts
The proposed overdraft rule is part of an ongoing effort by the CFPB to control junk fees and encourage competition in the consumer financial products market. In early 2022, the CFPB released an initiative to save billions of dollars in junk fees, which generated more than 80,000 responses from the public. The overwhelming majority of responses were complaints about overdraft fees.
The CFPB has taken several steps to reduce out-of-control overdraft fees and other junk fees prevalent on consumer financial products. The CFPB has issued guidance to control surprise overdraft fees in October 2022. It also took coercive measures against Wells Fargo, Bank of RegionsIt is Atlantic Union return to consumers $205 million, $141 million, and $5 million in illegal fees, respectively, in addition to significant civil monetary penalties paid to the CFPB’s Victim Relief Fund.
Additionally, the CFPB’s recent supervisory efforts have resulted in the return of financial institutions US$120 million on junk overdraft and insufficient funds fees for consumers. And in a separate enforcement action, the CFPB ordered Bank of America pay $90 million for, among other things, doubling non-sufficient funds fees.
After the CFPB began its work to combat junk fees, many banks began to reform their overdraft and non-sufficient funds fee policies. These reforms resulted in annual savings of $3.5 billion in overdraft fees and an additional US$2 billion in savings in non-sufficient funds fees.
The CFPB has also taken action on credit card late fees and customer service fees. In February 2023, the CFPB proposed a rule to control excessive credit card late fees. In October 2023, the CFPB issued a advisory opinion stop big banks from charging illegal junk fees for basic customer service.
The CFPB is one of many independent regulatory agencies and cabinet departments that are members of the White House Competition Council established by the Executive Order on Promoting Competition in the American Economy.
Read the text of the CFPB’s proposed rule, Overdraft loans: very large financial institutions.
Read the Unofficial redline for overdraft loans: proposed rule for very large financial institutions .
Comments must be received by April 1, 2024.
Read the CFPB fact sheet on the proposed rule .
Read the CFPB research report, NSF and Overdraft Practices Report .
To read Director Chopra’s Remarks on the Proposed Rule.
Read more about the CFPB’s work on junk e-mail fees.
Consumers can lodge complaints about financial products or services by visiting the CFPB website or by calling (855) 411-CFPB (2372).
Employees who believe their company has violated federal consumer financial protection laws are encouraged to submit information about what they know to whistleblower@cfpb.gov.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces federal consumer financial laws and ensures that markets for consumer financial products are fair, transparent and competitive. For more information visit www.consumerfinance.gov.
The spotlight next week will shift somewhat to the Federal Reserve’s second-quarter earnings season and monetary policy. Market watchers will be treated to results from several major names, including Dow 30 components Goldman Sachs (GS), UnitedHealth (UNH), Johnson & Johnson (JNJ) and American Express (AXP), along with streaming giant Netflix (NFLX).
The Fed will still attract some attention as investors will be eager to hear from a packed lineup of central bank speakers just before the policy meeting lockout period.
In terms of the economic calendar, after fifteen days of labor market and inflation indicators, activity data will gain momentum in the form of the latest retail sales and industrial production reports.
Earnings Highlight: Monday, July 15 – Goldman Sachs (GS) and BlackRock (Black). See the full earnings calendar.
Earnings Highlight: Tuesday, July 16 – UnitedHealth (UNH), Bank of America (BAC), Progressive (PGR), Morgan Stanley (IN), PNC Financial (PNC) and JB Hunt Transport (JBHT). See the full earnings calendar.
Earnings Highlight: Wednesday, July 17 – Johnson & Johnson (JNJ), US Bancorp (USB), Morgan Children (KMI), United Airlines (UAL) and Ally Financial (ALLY). See the full earnings calendar.
Earnings Highlight: Thursday, July 18 – Netflix (NFLX), Abbott Laboratories (ABT), Black stone (BX), Domino’s pizza (ZDP) and Taiwan Semiconductor Manufacturing (TSM). See the full earnings calendar.
Earnings Highlight: Friday, July 19 – American Express (AXP), Halliburton (THANKS) and Travelers (VRT (return to recoverable value)) See the full earnings calendar.
IPO Observation: Hospital and healthcare clinic operator Ardent Health Partners (TARDT), insurance service provider Twfg (TWFG) and the biotechnology company Lirum Therapeutics (LRTX) are expected to price their IPOs and begin trading next week. The analyst quiet period ends at Rectitude (RECT) to free up analysts to publish ratings.
Police cars outside the residence of Thomas Matthew Crooks, the suspected shooter at a Trump rally on Saturday, investigate the area in Pennsylvania. Following the incident, one rally attendee was killed, two rally attendees are in critical condition and Donald Trump suffered a non-fatal gunshot wound. The shooter is dead after being shot dead by the United States Secret Service. (Photo by Kyle Mazza/Anadolu via Getty Images)
Investors will initially favor traditional safe-haven assets and may lean toward trades more closely tied to former President Donald Trump’s chances of winning the White House after he survived an assassination attempt, according to market watchers.
“There will undoubtedly be some protectionist or safe-haven flows into Asia early this morning,” said Nick Twidale, chief market analyst at ATFX Global Markets. “I suspect gold could test all-time highs, we’ll see the yen being bought and the dollar, and flows into Treasuries as well.”
Early market commentary suggested Trump’s shooting at a rally in Pennsylvania on Saturday could also prompt traders to increase his likelihood of success in the November election. His support for looser fiscal policy and higher tariffs is generally seen as likely to benefit the dollar and weaken Treasuries.
An indicator of market sentiment heading into the weekend: Bitcoin surged above $60,000, likely reflecting Trump’s pro-crypto stance.
Other assets positively linked to the so-called Trump trade include stocks of energy companies, private prisons, credit card companies and health insurers.
Traders will also be closely watching market measures of expected volatility on Monday, such as those in the tariff-sensitive Chinese yuan and Mexican peso, which have begun to price in the U.S. vote.
Trump said he was shot in the right ear after a shooting at his rally. His campaign said in a statement that he was “fine” after the incident, which prompted him to rush off the stage.
“Currencies will be the first major market on Monday in Asia to react to the weekend’s shots. There’s potential for extra volatility, and getting a clear reading could be especially difficult because liquidity will be hurt by Japan’s national holiday,” said Garfield Reynolds, Asia team leader for Bloomberg Markets Live.
Strategists had already expected a volatile run-up to the election, particularly as Democrats are still agonizing over President Joe Biden’s candidacy after his poor performance in last month’s debate raised questions about his age. Investors were also grappling with the possibility that the election could end in a drawn-out dispute or political violence.
But there is little precedent for events like those in Pennsylvania. When President Ronald Reagan was shot four decades ago, the stock market plunged before closing early. The next day, March 31, 1981, the S&P 500 rose more than 1% and benchmark 10-year Treasury yields fell 9 basis points to 13.13%, according to data compiled by Bloomberg.
Bond investors should pay particular attention as the attack is likely to boost Trump’s election chances and ultimately lead to concerns about the fiscal outlook, according to Marko Papic, chief strategist at California-based BCA Research Inc.
“The bond market must at some point become aware of President Trump’s greater chances of winning the White House than any of his rivals,” Papic wrote. “And I continue to believe that as his chances increase, so too must the likelihood of a bond market revolt.”
Kyle Rodda, senior financial markets analyst at Capital.com, said he was seeing client flows into Bitcoin and gold following the shooting.
“This news marks a turning point in American policy norms,” he said. “For markets, it means safe-haven trades, but more tilted toward non-traditional safe-havens.”
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Jio Financial share price: Should you buy this Reliance group stock on Monday ahead of Q1 FY2024 results?
Q1 2024 Results: Jio Financial Share Price will be in focus on Monday as the Reliance Group company has a fixed board meeting on July 15, 2024 to consider and approve the company’s unaudited standalone and consolidated financial results. Trust Group company informed about the Q1 2024 Results date on Wednesday last week via an exchange filing. According to stock market experts, Jio Financial Services Limited is poised to deliver impressive Q1 results for FY25 on solid operating income. They have forecast a healthy QoQ PAT for the company in Q1 FY25.
Jio Financial Services News
Speaking on the Jio Financial Services Q1 2024 results, Manish Chowdhury, Head of Research, StoxBox, said, “We believe Jio Financial Services is poised to deliver impressive results in Q1FY25 aided by its operating income, which is likely to show robust growth driven by strong investment income, which in turn should lead to healthy PAT growth on a sequential basis. Jio Financial Services continues to make strategic moves such as launching digital products and expanding its ecosystem, with a clear focus on future growth. The company has announced plans to introduce products for lending against stocks and mutual funds, leveraging Jio’s large user base, which could be a significant growth driver in the coming quarters.”
“Furthermore, with the NBFC receiving RBI approval to become a primary investment company, Jio Financial Services is well-positioned to unlock value from its investments. Overall, we expect the company to report robust numbers in the upcoming quarter,” the StoxBox expert added.
Jio Financial Stock Target Price
Speaking about the technical outlook of Jio Financial share price, Ganesh Dongre, Senior Manager, Technical Research at Anand Rathi, said, “Jio Financial Services share price is poised to make a fresh high at the ₹260 apiece level. If the stock breaks above this mark, the Reliance Group stock could make a fresh high by touching the ₹290-₹295 zone. Hence, those with Jio Finance stock in their portfolio are advised to stick to the script by keeping a stop loss at ₹205. If the stock breaks above ₹260 decisively, then one can upgrade the stop loss at ₹240 for the near-term target of ₹295.”
On the advice to new buyers regarding Jio Financial stock, Ganesh Dongre said, “New buyers are advised to wait for the breakout. Once the stock breaks above ₹260, one can buy this Reliance Group stock at the short term target of ₹295, keeping a stop loss of ₹240 apiece.”
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. Investors are advised to consult with certified experts before making any investment decisions.
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