CR supports the proposal but advises the CFPB to include smaller financial institutions to protect more consumers from this abusive practice
WASHINGTON, D.C. – In a comment letter submitted today to the Consumer Financial Protection Bureau (CFPB), Consumer Reports (CR) highlighted its strong support for the Bureau’s proposed overdraft lending rule. The proposed rule would lower overdraft fees charged by large financial institutions, which disproportionately impact low and moderate income consumers with excessive charges and can trap them in debt. Additionally, CR encourages the CFPB to expand the rule’s scope to include smaller financial institutions to protect more consumers from abusive overdraft practices.
“Consumer Reports commend the CFPB for taking proactive steps to rein in excessive overdraft fees, saving vulnerable consumers from punitive charges that have little relation to the actual cost of service,” said Jennifer Chien, senior policy counsel at Consumer Reports. “We urge the CFPB to adopt this rule without delay and to continue to work towards expanding these safeguards to cover consumers of all financial institutions who are susceptible to these abusive practices.”
Overdraft has shifted over the years from an occasional courtesy service provided to consumers to a profitable line of business for banks, with consumers paying an estimated $9 billion in overdraft fees in 2022 alone, according to the CFPB. Many overdraft services have become the equivalent of short-term loans with exorbitant interest rates. As per the CFPB, large banks typically charge a $35 overdraft fee, even though most overdrafts are under $26 and repaid in three days. This translates into an Annual Percentage Rate (APR) of over 16,000%, which is extremely high.
“The burden of overdraft fees falls most heavily on low and moderate income customers making under $65,000 a year,” said Chuck Bell, programs director for Consumer Reports. “Black consumers are 69 percent more likely and Hispanic consumers are 60 percent more likely than white consumers to live in a household charged at least one overdraft or NSF fee in the past year. It is important that financial institutions and the CFPB take steps to address these disparities and work towards providing fair and accessible financial services for all customers.”
The CFPB’s proposed rule will require fees for “courtesy” overdraft services to align with financial institutions’ breakeven costs, which could potentially lower fees down to $3. Overdraft loans with higher rates will still be allowed if they comply with existing requirements and protections in the Truth in Lending Act (TILA). This practical approach protects vulnerable consumers from misleading and abusive practices while allowing them to access necessary services with full knowledge of associated costs upfront. The new limits proposed by the CFPB could save consumers up to $5.6 billion annually and will particularly benefit vulnerable consumers.
To protect more consumers, CR recommends that the CFPB apply similar requirements to credit unions and smaller banks. The current proposed rule by the CFPB only applies to financial institutions with over $10 billion in assets. While these institutions account for over two-thirds of total market-wide overdraft fee revenue, there are clear indications of problematic overdraft practices at smaller financial institutions as well. Requirements for smaller institutions could be tailored to their circumstances and phased in over time.
Consumers have shown strong support for the proposed rule, as indicated by the 28,708 petition signatures received by Consumer Reports in support of the rule. For a more detailed explanation of Consumer Reports’ recommendations and consumer stories on their experiences with overdraft, see CR’s comment letter to the CFPB.
Media Contact: Emily Akpan, emily.akpan@consumer.org