The $5 Overdraft and Credit Unions

Jake Cooke for The Credit Union Connection

The Consumer Financial Protection Bureau (CFPB) released a new slate of regulations with the intent of ensuring “very large financial institutions adhere to consumer protections required of similarly situated products.” This new ruling, which applies Reg Z to overdrafts, will only directly impact institutions with more than $10 billion in assets.

“The final rule updates an exception that provides that a charge for overdraft is not a finance charge if the financial institution has not previously agreed in writing to pay items that overdraw an account,” according to the CFPB executive summary. “The rule updates this exception by limiting it to only overdraft credit that is provided at or below costs and losses. The final rule provides a financial institution the ability to determine whether an overdraft charge is at or below costs and losses by either 1) calculating its own costs and losses using a standard set forth in the rule or 2) relying on a benchmark fee of $5.” 

The second part of the new ruling has several changes to Regulation E. It prohibits the compulsory use of preauthorized transfers, and very large financial institutions must offer at least one alternate way of payment. Second, it requires overdraft credit to be structured as a separate credit account and prohibits structuring overdraft credit as a negative account balance. 

Third, it adds CARD Act provisions to hybrid debit-credit cards. 

Credit Union Response

The credit union trade associations’ response, unsurprisingly, has been largely negative. 

“We believe the CFPB has exceeded its authority under the law and are prepared to fight to prevent this rulemaking from taking effect,” America’s Credit Unions President/CEO Jim Nussle said. “The bureau's ongoing abuse of power cannot be tolerated any longer. We urge Congress, and we will work with the Trump administration, to pursue reforms to the CFPB that are long overdue.”

Henry Meier, a lawyer specializing in credit unions, explained, “The $5 has gotten most of the attention, understandably so. It’s clear that the CFPB is trying to do everything it can to eliminate [overdraft fees] in all but name only by making the process as long as possible.” 

Furthermore, Meier added that even though the regulation was applied to institutions with more than $10 billion in assets, it is likely to impact smaller credit unions and community banks as well because they will have to lower their overdraft to compete with larger institutions whose hand has been forced. 

However, Meier also believes the regulations will not be enacted for several years, if at all, as a result of the likely legal challenges this ruling will face.

The Defense Credit Union Council echoed a similarly negative opinion of the new regulations. In a letter to Congress, DCUC wrote, “The imposition of a $5 cap on overdraft fees disregards the operational realities of financial institutions and the costs incurred in providing overdraft protection services. This policy not only jeopardizes the sustainability of these services but also shifts the financial burden back onto consumers in unintended ways.”