Tuesday, December 5, 2023

Navigating new overdraft charge steerage for neighborhood banks – Unbiased Banker

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The CFPB just lately issued new steerage on overdraft charges that was unanticipated by neighborhood banks. Be taught what this implies for the trade and the way neighborhood banks can keep in compliance.

By Mary Thorson Wright

In October 2022, President Biden introduced a crackdown on so-called junk charges, together with new steps that successfully ban banks from imposing disclosed overdraft charges. Concurrently, the Shopper Monetary Safety Bureau (CFPB) issued Round 2022-06 steerage on “unanticipated overdraft charge evaluation practices,” which complies with TILA, EFTA, Regulation Z, Regulation E and the prohibition towards unfair, misleading, and abusive acts or practices (UDAAP) in Part 1036 of the Shopper Monetary Safety Act (CFPA).

Banks provide a wide range of services or products designed to permit overdrafts on deposit accounts, together with:

  • Strains of credit score
  • A sweep of funds from one other deposit account of the shopper
  • A courtesy interval throughout which the shopper can clear the overdraft
  • An advert hoc determination to pay or not pay the overdrawn quantity, or another mixture of allowances

Whatever the kind, the financial institution could select to additionally impose a beforehand disclosed charge upon the overdrawn transactions as a deterrent to future exercise or to cowl prices incidental to administering this system. Charge disclosures are sometimes offered at account opening, the graduation of an overdraft characteristic, a change in phrases associated to the overdraft or account program, and every other subsequent disclosure set off. Sound compliance administration requires constant written disclosures, procedures and precise practices.

Overdraft applications profit clients by serving to guarantee transactions are nonetheless processed and {that a} payee isn’t notified relating to the shopper’s account stability. Financial institution regulators have issued steerage and expressed considerations about how banks administer overdraft applications and the charges which can be charged to clients. In March 2022, the CFPB famous in its weblog that “overdraft charges can worth individuals out of banking.”

The overdraft charge round’s results

Of late, the CFPB has been taking regulatory actions utilizing novel instruments together with interpretive guidelines, advisory opinions and circulars, fairly than formal rule modifications. The round is an instance of this less-formal strategy.

“The Round will certainly have a regulatory impression on neighborhood banks, even with out the supervisory oversight of the CFPB.”
—Rhonda Thomas-Whitley, ICBA

“The substance of the round and in addition the way wherein it was established are of concern,” says Mickey Marshall, ICBA AVP and regulatory counsel. “ICBA believes this modification ought to have been finished by way of the rulemaking course of. The round was unanticipated by the trade, and the general public and the trade didn’t get the chance to offer suggestions or to contemplate its impression previous to implementation. The method didn’t promote transparency or give banks the chance to remark or clarify their place previous to implementation.”

How the round will have an effect on neighborhood banks isn’t totally clear. “The CFPB workouts direct supervision and examinations for banks with complete belongings over $10 billion, whereas most neighborhood banks are instantly supervised by the FDIC, Federal Reserve or OCC,” Marshall says. “Whereas the CFPB round might not be technically binding on the opposite federal financial institution regulators, neighborhood banks want to contemplate that the publication and promotion of the round isn’t taking place in a vacuum. It’s cheap to consider that examiners from these businesses could start to use this mannequin for unanticipated overdraft charges of their neighborhood financial institution examinations.”

Rhonda Thomas-Whitley, ICBA vp and regulatory counsel, agrees: “The round will certainly have a regulatory impression on neighborhood banks, even with out the supervisory oversight of the CFPB.”

Whereas neighborhood banks have supplied overdraft safety to their clients for many years and have been topic to compliance monitoring, inside and exterior audits, and federal and state financial institution examinations, the CFPB’s overdraft charge round and public statements by the Biden administration now topic their applications to a change in requirements.

“Examiners have scrutinized account disclosures, charge schedules, financial institution procedures and information of overdraft charges for years,” Thomas-Whitley says. “Now it seems that those self same disclosures, charge schedules and their related implementation might not be enough. It’s troublesome to conceive that overdraft charges and practices are unanticipated once they have been so totally disclosed to clients and vetted by examiners.”

On the time of writing, CFPB had issued the primary report of enforcement below the round.

“Neighborhood banks have been devoted to complete evaluations of their disclosures and procedures for years,” Whitley says. “Banks have discovered themselves in a state of affairs the place they’re following the foundations however are being scrutinized by the identical businesses that make the foundations. How will we seize and consider what is going to fall with the subsequent shoe?

“Bankers are put within the place of monitoring traits and out there steerage however could also be in a holding sample to see how they play out from anecdotal suggestions or issuances from CFPB or their major federal financial institution regulators.”

ICBA’s response to the overdraft charge round

In response to President Biden’s remarks and launch of CFPB Round 2022-6, ICBA president and CEO Rebeca Romero Rainey issued a press release in assist of overdraft safety companies supplied to financial institution clients. She famous that the president’s feedback mischaracterize the companies neighborhood banks provide their clients for crucial monetary options and safeguards, and that the charges related to applications are totally disclosed to clients. In November 2022, ICBA submitted a written response to CFPB director Rohit Chopra concerning the round. Go to icba.org/advocacy for extra info.

Mary Thorson Wright is a author in Virginia.

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