In the last two weeks, the Consumer Financial Protection Bureau (CFPB) has proposed rulemaking for overdraft services and issued proposed rulemaking regarding non-sufficient funds (NSF) fees.

The proposals have certainly caught the attention of credit unions and banking groups which are asking for the reasons why these rules, especially those targeting NSF fees, are deemed necessary given how few banks actually levy them.

The consumer watchdog agency counters that although a good proportion of larger banks have eliminated NSF fees, some of the smaller institutions along with credit unions continue to assess them. Indeed a majority of credit unions including those with over $10bn in assets continue to charge NSF fees.

In announcing the CFPB’s new rules, Director Rohit Chopra said that the CFPB’s proactive approach is necessary because “large banks and their consultants have concocted new junk fees for fake services that cost almost nothing to deliver”.

Proposed rule on NSFs

Currently, when a consumer’s attempted withdrawal, debit, payment, or transfer transaction amount exceeds the available funds in their account, a financial institution could decline the transaction and charge the consumer a fee, often called a nonsufficient funds fee.

NSF fees are distinct from overdraft fees, which financial institutions charge when they pay, rather than decline, a payment when an account lacks sufficient funds. 

The agency’s proposed rule would prohibit NSF fees on transactions that are declined instantaneously or near-instantaneously; that is, those declined with no significant perceptible delay after the consumer initiates the transaction.

The prohibition would cover transactions involving the use of debit cards, ATMs, or certain person-to-person apps. The proposed rule would declare that charging such fees would constitute an abusive practice under the Consumer Financial Protection Act.

The proposed rule would cover financial institutions of any size and depositories as well as non-depositories.

CFPB’s reasoning

The CFPB’s analysis of NSF fees found that:

• Nearly two-thirds of banks with over $10 billion in assets have eliminated NSF fees.²
• All banks with over $75 billion in assets and all but seven of the 63 banks with over $25 billion in assets have eliminated NSF fees.
• Among credit unions with over $10 billion in assets, 16 of 20 continue to charge NSF fees, including four of the five largest.

In proposing the NSF fee rule, the CFPB indicated that it is using its authority under the Consumer Financial Protection Act to prohibit unfair, deceptive or abusive acts and practices (known as UDAAP). More specifically, the agency is saying that charging fees for transactions declined in real time constitutes an abusive practice.

And the agency clarified why it was taking proactive steps to ensure that financial institutions do not impose these fees despite the suggestion that very few do so at this point in time.

“CBA looks forward to working constructively with our regulators, beyond what appears to be its recent clamoring for headlines, to seek solutions to problems that American consumers are actually facing.”

Community Bankers of America, in a joint letter to the CFPB

In a separate press release on January 24 the agency said that such fees can arise for a host of reasons that are out of the consumer’s control. “Specifically, as technology advances, financial institutions may be able to decline more transactions right at the swipe, tap, or click. These transactions include ATM, debit or prepaid card, online transfer, in-person bank teller, and certain person-to-person transactions,” the agency said.

“Banks have previously increased fees when technology provided an opportunity,” it noted. The agency then pointed to overdraft fees – an area the CFPB also targeted this month with a proposed rule. The CFPB suggested that both rules attempt to close loopholes that have allowed banks to capitalize on technological changes and charge consumers billions of dollars in fees every year.

Industry groups respond

The Consumer Bankers Association (CBA) issued the following statement:

“[A]lthough the rulemaking acknowledges that ‘many financial institutions in recent years have stopped charging NSF fees,’ the agency relies heavily on ten-year-old data to justify the creation of yet another rule. CBA looks forward to working constructively with our regulators, beyond what appears to be its recent clamoring for headlines, to seek solutions to problems that American consumers are actually facing as they try to make ends meet”.

And officials from America’s Credit Unions, the American Bankers Association and the Independent Community Bankers of America sent a joint letter to CFPB Director Rohit Chopra.

In the letter, they contend that any such NSF and overdraft fees rules would have a negative economic impact on financial institutions and that the Bureau must go through the Small Business Regulatory Enforcement Fairness Act review process, which it bypassed in crafting its proposed rule.