Navigating the New Overdraft Fee Guide for Community Banks – Independent Banker

Illustration by Jozefmicic/Adobe

The CFPB recently issued new guidance on overdraft fees that was not anticipated by community banks. Learn what this means for the industry and how community banks can deliver.

By Maria Thorson Wright

In October 2022, President Biden announced a crackdown on so-called junk fees, including new measures that effectively bar banks from imposing disclosed overdraft fees. At the same time, the Consumer Financial Protection Bureau (CFPB) issued Circular 2022-06 guidance on “Unforeseen Overdraft Fee Assessment Practices”, which is compliant with TILA, EFTA, Regulation Z, Regulation E and the prohibition of unfair, deceptive and abusive acts or practices. (UDAAP) in Section 1036 of the Consumer Financial Protection Act (CFPA).

Banks offer a variety of products or services designed to allow overdrafts on deposit accounts, including:

• Credit lines
• A sweep of funds from another client’s deposit account
• A courtesy period during which the customer can pay off the overdraft
• An ad hoc decision to pay or not to pay the overdraft, or some other combination of allocations

Regardless of the type, the bank may choose to also impose a pre-disclosed fee on overdraft transactions as a deterrent to future activity or to cover costs associated with administering the program. Fee disclosures are generally provided at account opening, the commencement of an overdraft feature, a change in the overdraft-related terms or account program, and any other subsequent disclosure triggers. Good compliance management requires consistent written disclosures, procedures and actual practices.

Overdraft programs benefit customers by helping to ensure that transactions are still processed and that the beneficiary is not notified of the customer’s account balance. Banking regulators have issued guidance and raised concerns about how banks manage overdraft programs and the fees charged to customers. In March 2022, the CFPB noted on its blog that “overdraft fees can drive people out of banking.”

The Effects of the Overdraft Fee Circular

Of late, the CFPB has been taking regulatory action using novel tools including interpretive rules, advisory opinions, and circulars, rather than formal rule changes. The circular is an example of this less formal approach.

“The Circular will definitely have a regulatory impact on community banks, even without CFPB oversight.”
—Rhonda Thomas-Whitley, ICBA

“The content of the circular and also the way in which it was set out are of concern,” says Mickey Marshall, ICBA AVP and regulatory adviser. “ICBA believes that this change should have been made through the rulemaking process. The industry did not anticipate the circular, and the public and industry were not given an opportunity to provide feedback or consider its impact prior to implementation. The process did not promote transparency or give banks an opportunity to comment or explain their position prior to implementation.”

It is not entirely clear how the circular will affect community banks. “The CFPB exercises direct supervision and examinations for banks with total assets of more than $10 billion, while most community banks are directly supervised by the FDIC, Federal Reserve, or OCC,” Marshall says. “While the CFPB circular may not be technically binding on other federal banking regulators, community banks should consider that publishing and promoting the circular does not occur in a vacuum. It is reasonable to believe that examiners from those agencies can begin to apply this model for unforeseen overdraft fees in their community bank examinations.”

Rhonda Thomas-Whitley, ICBA’s vice president and regulatory counsel, agrees: “The circular will definitely have a regulatory impact on community banks, even without CFPB oversight.”

While community banks have offered overdraft protection to their customers for decades and have been subject to compliance monitoring, internal and external audits, and federal and state bank examinations, the CFPB’s Overdraft Fee Circular and public statements from the Biden administration now subject their programs to a rule change.

“Inspectors have scrutinized account disclosures, fee schedules, banking procedures and overdraft fee records for years,” says Thomas-Whitley. “It now appears that those same disclosures, fee schedules, and their associated implementation may not be enough. It’s hard to conceive of overdraft fees and practices not being anticipated when they’ve been so thoroughly disclosed to customers and vetted by examiners.”

At the time of writing this report, the CFPB had issued the first report of compliance with the circular.

“Community banks have been engaged in extensive reviews of their disclosures and procedures for years,” Whitley says. “Banks have found themselves in a situation where they are following the rules but are being scrutinized by the same agencies that make the rules. How do we capture and evaluate what will drop with the next shoe?

“Bankers are in the position to monitor trends and available guidance, but may be in a waiting pattern to see how they play out based on anecdotal feedback or issuance from the CFPB or their top federal banking regulators.”

Mary Thorson Wright is a writer in Virginia.