VIDEO: Are Changes Coming to Overdraft Programs?
In this Compliance Clip (video), Adam shares some interesting hints of change that relate to overdraft protection programs. While nothing has been formally planned to be changed, this video shows several actions by the regulators which could be a foreshadow to changes with guidance for overdraft protection programs. If your organization has an overdraft protection program, you won’t want to miss this 7 minute video.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about overdraft protection programs and some potential changes that may be coming based on what we're seeing in the industry. This actually comes from a couple of programs we have in our store. First and foremost, it comes from our Winter 2022 Quarterly Compliance Update where we talked about some regulatory activity that took place in the fourth quarter of 2021, that we want to share with you today. It also comes from our new program called Forward Thinking and that program talks about how the Reg B proposal may affect your bank and it talks about other potential changes for 2022. We actually discussed this topic there as well. We take a deeper dive into this in both of those programs.
As a quick overview, I wanted to talk about overdraft protection programs because we're seeing quite a bit of discussion from the regulatory agencies and the leaders in these agencies, which always tells me this is becoming an extreme focus. We've known for years, there've been people like Senator Carolyn Maloney from New York who every time she runs for Congress, she is proposing that overdraft fees be limited to one per month or six per year. There are consumer advocates that want overdraft protection programs and overdraft fees to go away completely. But we're probably here today and what we're going to end up is somewhere in the middle. We really do think that there are changes coming. Some of the things we've heard should get you thinking about your overdraft protection program and what you can do to potentially minimize the risk in your organization.
On December 1, 2021, the CFPB released a report talking about how banks still heavily rely on overdraft income as part of their revenue. They have some really big numbers. In fact, with what they're talking about here, they're using a word called “harvesting”. When words like harvesting are being used, this is something that we should be paying attention to because the regulators are saying that banks are harvesting overdraft fees. That's probably going to be a focus of theirs going forward. So it's definitely something we need to pay attention to.
They have previous research, they released this research and the findings and they're talking about all this research and the big dollar amounts that they're seeing in relationship to overdraft fees. They keep talking about this. Also we're seeing the leaders of regulatory agencies talk about overdraft fees. For example, in December, Acting Comptroller of the Currency spoke at the Consumer Federation's 34th Annual Financial Services Conference and he talked about overdraft practices and how they contribute to income and wealth inequality. We're not only talking about harvesting, we're talking about income and wealth inequality in relationship to overdraft fees. He talked to this program talking about how they were developed for one purpose in the nineties, but now they seem to be a huge moneymaker, and it's not really what was intended and it's harming consumers. That's the bottom line. He gave a recommendation that financial institutions look at best practices for overdraft fees.
If you're a FDIC regulated institution, you're probably doing a lot of these things, but if the FDIC has their own guidance for overdraft programs. We've thought for years that there would be unified guidance, but there has not been. If you're a FDIC regulated bank, you've got guidance you follow. The Federal Reserve doesn't really have anything, the OCC doesn't have anything, but the Acting Comptroller has now said that these are best practices that should be done. So we may see some changes in 2022 relating to overdraft fees.
In the beginning of February, on February 2, 2022, the CFPB also released a blog post titled the “The Hidden Cost of Junk Fees”. Of course, in this, they talked about how banks are charging junk fees. It’s not just merchants. They're talking about banks and junk fees related to fees that banks are charging. They said, junk fees include many forms, they include fees for late penalties, overdrafts, returns, using an out of network ATM, money transfers, inactivity and more. They talked about how a cup of coffee can go from $3 to 35. Then there's a trend now where individuals, if they want to actually talk to a person, they have to pay a fee for the head. The OCC has said some things, the other agencies have said some things, and now here, the CFPB has released a blog post referring to overdraft fees as junk fees. We have the word harvesting, junk fees, and this just isn't a good thing in the world of overdraft fees. The CFPB concluded their blog post asking for feedback regarding these junk fees. They're asking consumers to give feedback. They're basically saying, we want to know if you have fees for things you believe were covered by the baseline price of a product or service. We want to know if you have unexpected fees for a product or service. We want to know if fees seem too high for the proposed service. And we want to know if the fees were charged, where it was unclear why you were charged.
What this tells me is there is a UDAAP angle as well. In your financial institution, the biggest thing you can do is make sure your disclosures are absolutely clear. Make sure you're thinking about the consumer first, make sure you're not looking at just the bottom line, but you're also taking the approach of how does this affect consumers and how could a regulator criticize your overdraft programs.
There could be changes coming to overdrafts fees. We're not really sure what will be coming. I expect that there may be some inter-agency guidance at some point. In fact, I talked about what I expect to see in all those compliance changes that are going to take place in 2022 in our new program called Forward Thinking - How the Reg B Proposal Could Affect Your Financial Institution and Other Possible Changes for 2022. That program is available in our store so is our Winter 2022 Quarterly Compliance Update.
That's all I have for this Compliance Clip.