Community banks may fall within the lines the Consumer Financial Protection Bureau is expected to draw on overdraft protection programs this fall, but that doesn’t mean they’re pleased about it.
The bureau launched a public inquiry into overdraft protection programs early in 2012 and is anticipated to release new rules governing those programs in October. As part of its research into the subject, the CFPB late last year asked the three major core processors – Fiserv, Jack Henry and FIS – for large sets of anonymized data on their clients’ overdraft activities. That inquiry caused a kerfuffle more recently when Fiserv reportedly sent emails to some of its community bank clients indicating that it could raise fees to offset the cost of complying with the bureau’s request.
A little historical context is necessary, though. As Jon Skarin, senior vice president at the Massachusetts Bankers Association, pointed out, the CFPB is just the latest regulatory body to broach the subject of overdraft protection programs. Former FDIC chair Sheila Bair actually raised the issue well before the world fell off a cliff in 2008, and Skarin recalled that several of the association’s members actually participated in a pilot program that offered small-dollar loans to customers as an alternative to overdraft protection.
“Right now you have FDIC guidance that applies to FDIC-supervised banks, Fed rules that apply to all banks, and the OCC promulgated its own guidance but never finalized it a number of years ago,” he said. “This debate has been evolving for at least 10 years now.”
Kenneth Ehrlich, a partner at Nutter McClennan & Fish and co-chair of the firm’s banking and financial services practice, says it’s been on community bankers’ minds for a while now. Essentially, many bankers saw the writing on the wall and took measures to scale back their overdraft programs.
“I think if you surveyed the industry, you’d find that community banks derived a larger percentage of noninterest income from overdraft programs 10 years ago than they do today,” Ehrlich said. “Banks have seen this coming for almost 10 years. There’s been a barrage of regulations; you just hope that whatever’s coming down is fair and balanced.”
But Michael Rubin, an equity partner at Posternak Blankstein & Lund, offered a different assessment, likening overdraft programs to baggage fees that airlines began charging to help offset the cost of fuel and on which they’ve since come to rely. Likewise, fee income has become significant to banks’ bottom lines – and especially smaller banks’ bottom lines – as they’ve struggled with a prolonged low-interest rate environment.
The Bounced Rent Check Vs. The $40 Frappuccino
Meanwhile, bankers and industry observers are still waiting to see exactly what sort of parameters the bureau hands down.
While the CFPB cannot actually set the overdraft fee itself, Skarin said, regulators may look to circumscribe other program features.
Ehrlich identified what he called a few “hot button” issues where the bureau may decide to act. One easy target for critics is the order in which transactions are posted, as banks have caught flak in the past for processing transactions from the highest value to the lowest.
De minimis overdrafts – or that infamous $40 cup of coffee – might be another area on which the bureau acts, and daily fees on an overdrawn account could be yet another.
Meanwhile, bankers say that believe it or not, many of their customers prefer to have the overdraft protection. Nobody wants to pay $40 for a frappuccino, sure, but even worse than that is the bounced rent check or mortgage payment.
“I think most smaller banks have better clarity around their fees, so it’s always about making sure customers understand the service they’re getting,” said Hal Tovin, executive vice president and COO of Belmont Savings Bank. “There are people who want the service of being able to overdraft and they understand there’s a price for that. We want to be able to provide that.”
“The bottom line is, nobody’s complaining. We don’t have any complaints about this program,” said Glen S. White, the chairman and CEO of Mutual Bank in Whitman.
But the CFPB’s forthcoming regulations could give Mutual Bank – and likely others among its peer group – reason to reconsider its overdraft line of protection. If the bureau’s rules prove to be too disruptive to the bank’s current program, he said, Mutual Bank might need to reconsider whether it’s still profitable to solicit checking accounts in the way that it does.
So much still depends on exactly how the bureau decides it will circumscribe these programs, though, and other than standardizing overdraft rules across all the banking agencies, the CFPB has offered few clues as to how it may act.
Skarin commented, “Other than some of these public pronouncements on standardization, they haven’t tipped their hand too much as to what they’re looking to do on this, so we’ll have to wait and see.”
