By Ray Birch
LAKE FOREST, Ill.—A new overdraft law has gone into effect in California that could impact credit union OD pricing, and possibly make some CUs targets for consumer groups, says one expert who adds a similar rule could be adopted in other states.
As CUToday.info has reported, SB 1415 requires CUs and banks subject to the authority of the California Department of Financial Protection and Innovation (DFPI) to disclose the revenue they earn from overdraft and nonsufficient funds fees. Credit unions and banks, regardless of charter type, that are headquartered outside of California but with facilities in California are not subject to the California law.
California’s state-chartered credit unions and banks subject to the law have until March 1 to file the information, after which the DPFI is required to publish a report on its website by March 31 for the 2022 calendar year.
Michael Moebs, economist and CEO at Moebs $ervices, said the law is the first of its kind at the state level.
“In 1993, California Senator Dianne Feinstein and Washington Senator Patty Murray suggested to the Senate Banking Committee legislation should be passed so that overdraft revenue and prices would be tracked nationally,” noted Moebs. “Fed Chair Allen Greenspan found out it would cost the Federal Reserve about $490,000 to do the study that would support this effort.”
The contract for the project was awarded to Moebs $ervices for $90,000 to start in 1994 and continue through 2003. Funding was approved by Congress, he said.
Other States May Follow
“Now, Gov. (Gavin) Newsom and California state representatives and senators passed a law mandating the California Department of Financial Protection and Innovation to do what the Fed did 30 years ago,” Moebs explained.
Moebs suggested the law may be adopted by other states.
“Since the federal government does not do this on an annual basis anymore, many states will follow California if there is a positive response from California consumer users,” Moebs predicrted.
The legislation, passed out of the Assembly Committee on Banking and Finance, defines “nonsufficient funds fees” as those resulting from the initiation of a transaction that exceeds the customer’s/member’s account balance if the customer’s/member’s bank or credit union declines to make the payment.
The law defines overdraft fees as those resulting from the processing of a debit transaction that exceeds a customer’s/member’s account balance.
Language in the bill at the time it was proposed said “overdraft fees are disproportionately borne by consumers who are least able to afford these oppressive charges: workers with volatile incomes, parents of young children, and Millennials and Gen Z adults. These fees are also highly concentrated, with less than 9% of consumer accounts paying 10 or more overdrafts per year, accounting for nearly 80% of all overdraft revenue generated by financial institutions.
‘More Transparency’
“California policymakers and the public deserve more transparency about the overdraft practices at financial institutions under the states’ oversight,” the language continues. “This bill will provide better information about overdraft practices that will inform future policy efforts to reduce the burden of high fees on vulnerable consumers.”
Michael Moebs
Moebs believes the ability of consumers’ to easily access data today and their desire to be more involved with their financial decisions is one reason the new rule was passed.
“The positive is since big data has come into greater use, the consumer wants information to make product and service purchase decisions,” said Moebs. “The negative is price information can be used in both the private and public sectors to control price. Yet, combining both these positive and negative aspects leads to greater economic harmony among users and providers. Having this information readily available will achieve a proper balance of price and features.”
Alternatives to be Sought
How might credit unions that are subject to the rule be affected?
Moebs said the effect of the law on any credit union that is currently pricing its overdrafts too high will be to drive that price down. And for those that don’t move off of a high price, they will see OD usage markedly fall as consumers shop around.
“Users may even seek alternatives with payday lenders and alternative market sources,” Moebs forecast. “Also, overdrafts are unsecured credit, which financial institutions dislike, so some banks and credit unions may stop offering overdrafts and bounce or decline all overdrawn account transactions.”
Moebs contended that history shows price controls in the U.S. do not work. But price information, which leads to to more competition, more usage and more revenue, does.
The publishing of OD price and revenue will make lead to some financial institutions being targeted by consumer groups, Moebs believes.
“Walmart and Bank of America, who charge $15 and $10 for ODs, will be the lovable targets by consumers,” said Moebs. “But those charging $30 and more will get the attention of all sorts of advocacy groups and government agencies.”
Forced to Drop Prices
As a result, Moebs further believes the law will force many FIs to rethink both overdraft approvals and fees, with many ultimately dropping their prices.
“The average American consumer does not care about laws, but they do care about their pocketbook. In short order the consumer will likely reap the benefits of more information and a more competitive marketplace pricing, but will never know this started because of this law,” he said. “Over 60% of all financial institutions publish their full fee schedule on their websites now and this law will increase it, especially in California. The more that is known about price the better off are users and providers of goods and services.”
CUToday.info reached out to the California league for its input on the issue but the league declined to comment.