By Ray Birch
WASHINGTON—The new CFPB circular on “phantom” overdraft opt-in agreements should grab the attention of credit unions of all sizes, says Brandy Bruyere, who notes that while the guidance only applies to FIs above $10 billion, the rules may eventually find their way down to CUs of all sizes via NCUA.
As CUToday.info reported, the Consumer Financial Protection Bureau has published guidance it says is designed to help federal and state consumer protection enforcers stop financial institutions from charging overdraft fees based on “phantom” opt-in agreements.
Phantom opt-ins occur when financial institutions claim they have customers’ consent to charge overdraft fees but there is no proof they actually obtained that consent. Under the Electronic Fund Transfer Act, FIs cannot charge overdraft fees on ATM and one-time debit card transactions unless consumers have affirmatively opted in, the CFPB said.
“The CFPB has found instances where banks have no evidence that they obtained consent for overdraft,” said CFPB Director Rohit Chopra. “No Americans should be hit with bank account fees that they never agreed to.”
“The CFPB has fees in its crosshairs and that's not going to change,” said Bruyere, a partner at Honigman, LLP.
New Angles
“If they can find new or different angles to tell financial institutions that a fee they're charging wasn't properly assessed, and they can push back and try and get you to not charge the fee anymore, they're going to do that.”
This guidance does not target the fee directly, only the recordkeeping behind a consumer’s consent to be charged an OD fee, Bruyere noted.
“In this case, the CFPB is asking do you have the right recordkeeping that legally allows you to charge this fee,” she said. “They’re saying you've got to stop charging until you've got that documentation.”
While most credit unions are below $10 billion in assets, CFPB guidance often flows down to NCUA, noted Bruyere.
“I wouldn't be surprised if at some point in 2025 NCUA starts asking, during exams, ‘What is your documentation on these options?’” Bruyere said.
Brandy Bruyere
Credit union recordkeeping, typically, is sound, Bruyere said.
Pain Points
“But I think there's a couple of possible pain points here,” she said. “One of the consent orders cited by the CFPB questions this idea of did somebody really consent? If somebody is in the branch and we're asking them if they want overdrafts, and then our form pre-populates their opt-in decision instead of letting the person check the box agreeing to opt in, the CFPB has hinted they don't think that's proper consent, and that cuts against good member service.”
Bruyere cited the Atlantic Union Bank consent order in which the CFPB took issue with consumers not receiving written disclosures about the overdraft service prior to being provided the mandatory opt-in form.
Bruyere acknowledged certain situations can make recordkeeping difficult, especially regarding new rules that reach back many years.
“We've done a core conversion, or we merged in another credit union…What records did we get when we merged them in? Can we prove that those merged in members opted in back in the day?” Bruyere said. “If we have long-standing legacy members who opted in for the first time, when this began many years ago…”
Part of the problem, Bruyere pointed out, is the CFPB is requiring FIs to have kept that kind of data.
Permanent Record
Bruyere said questions still exist on whether a consumer’s overdraft choice, many years ago, is considered a permanent record.
“The way this (guidance) reads, it seems to indicate if I'm going to be charging fees on an ongoing basis, I might have to, in perpetuity, prove that I have obtained proper consent,” she explained. “The way I see it, this guidance indicates that records should be kept for as long as the credit union may need to prove it had the proper consent to charge a particular fee—so ongoing retention during the account relationship and for the statute of limitations beyond account closure. In other words, do you have what you need to prove you obtained consent years ago on legacy accounts?”
What should credit unions do regarding the new guidance?
“I’d look at my record keeping,” Bruyere said. “Look and see how many fees I'm really charging. I think the overarching message that keeps coming from the regulators is the more reliant you are on fee income, the more risk that will continue to present to the balance sheet. We just need to keep looking for alternative revenue options.
“Meanwhile, I would be checking these records and at least doing a risk assessment,” Bruyere continued. “Where can my credit union show I have these records and then what's the risk? Is it 1% of my members? Is it 20%, 60%? And then make a decision around how to mitigate that risk moving forward.”
Credit unions, too, should review not just the new circular, but the various consent orders and supervisory highlights cited to by the CFPB in the endnotes to the circular (CFPB v. TCF National Bank; Atlantic Union Bank; 2015 Order involving Regions Bank; the Summer 2015 Supervisory Highlights), Bruyere added.