By Ray Birch
LAKE FOREST, Ill.—The overdraft guidance issued by the CFPB last week should not have credit unions panicking—yet—over the future of their OD programs, says one expert, who is emphasizing the guidance issued is just that, guidance.
Michael Moebes, economist and CEO at Moebs $ervices, however, does believe that should the government formally intervene in overdraft programs it will prove to be disastrous to consumers and financial institutions—including knocking almost 750 FIs and fintechs out of business.
Moreover, he is advising that credit unions should pay attention to certain aspects of the CFPB’s guidance and take steps to make sure that in the future they stay out of the CFPB’s OD crosshairs.
“I think a lot of financial institutions are on edge now, thinking these circulars may be enforceable,” said Moebs. “The result of the CFPB’s action on October 26 in their OD & RDI circulars is this: The action is not law, and Congress must vote and tell the CFPB to do this. The CFPB has changed no regulation. So, there is no directive or order to be done. The CFPB has given guidance that does not have to be followed in any way.”
Nevertheless, Moebs said the measures being proposed by the CFPB should make every depository aware of their checking features and charges, which should be reviewed at least quarterly.
The Big Concern
Michael Moebs
The big concern, emphasized Moebs, is if Congress gives the CFPB the power to make rules regarding overdrafts.
“In 1933, after a month-long run on all American banks starting with the collapse of a New York bank, a severe loss of confidence faced all depositors. So, President Roosevelt proclaimed a Bank Holiday to curb the panic,” said Moebs. “On March 6, 1933, the banking system was shut down reopening on March 13. Depositors stood in line to return their hoarded cash. The bank holiday worked by restoring faith in the banking payment system—overdrafts need a bank holiday to correct government misdirected guidance of the marketplace.”
Moebs predicted to CUToday.info that if the government sets rules regarding overdrafts, depositories could stop offering OD services and then the following would happen:
- 700+ million debit cards purchases of gas, groceries, dentist services, etc., would be declined
- 60-million Americans’ monthly ACH charges would be returned NSF for cell phones, auto loans, mortgages payments, etc.
- 749 banks, thrifts, credit unions, and fintechs will go out of business
- 51,000+ depository employees’ jobs will be gone as an economic recession looms with the highest inflation in 40 years
Like ‘Seatbelts’
“Overdrafts are like seatbelts,” said Moebs. “They are part of the transaction package. An overdrafter knows their bills will be paid even if their transaction account (T-account) is overdrawn, so they feel safe from bill collectors. Yet blaming banks, credit unions, thrifts and fintechs for payment system problems, over which they have no control, is not a way to reduce overdraft transactions. The seatbelt approach provides safety and confidence to all that overdraw.”
Moebs pointed out what the recent CFPB circulars target:
- Depositories need to stop unfair returned deposited item (RDI) fees. An RDI is a check which a consumer deposits into their T-account that is returned because the check could not be processed against the maker’s account
- Depositories need to avoid charging illegal junk fees on deposit accounts, such as APSN debit card overdrafts. Junk fees as solely defined by the CFPB as a surprise cost charged to a consumers T-account
What Can Be Done?
What should credit unions and banks be doing?
“The CFPB has raised awareness, though, to get transaction accounts in order,” said Moebs, adding the “facts and options” available to financial institutions are:
- As defined by the Federal Reserve and confirmed by the CFPB circulars, overdrafts are a credit but not a loan
- It is essential to have a deposit agreement (DA) well documented, current, and signed by the users
- Make the DA available on the financial institution’s website, written in “junior high school language and not legalize”
- Suspend fees charged for return deposit items; this is limited to paper check deposited items, which are few
- Do not charge for authorized positive, settled negative (ASPN) debit card overdrafts
- Substantially raise OD limits to $1,800+. “This will offset RDIs and ASPN debit card no-fee transactions,” he said.
- If OD net revenue/assets < 5bps, then do as Capital One Bank, Ally Bank, and Alliant CU have done and do not charge for ODs
- Do as installment or payday lenders have done—do secured overdrafts as a loan with house liens
- Current actual OD price is $22.52, which is down from $30 per transaction at the beginning of 2022
- Walmart charges $15 per OD and Bank of America charges $10; try to reduce OD price to less than $20
- Remember revenue = price x volume, so lowering the price and raising the limit makes more money
A Radical Change
“Overdrafts changed radically when in the spring of 2021 Walmart announced it has leading national marketshare with over 100 million of the 547 million national consumer T-accounts,” said Moebs. “Bank of America is number two with 68 million. The CFPB credibility has been challenged constitutionally by the courts regarding its status as a legitimate federal regulator and affirmed recently in Federal Appellate Court. With Fed Now, Zelle, Visa Direct, and Mastercard Send, immediate real-time payments will happen in 2023. Overdrafts will be around in a viable marketplace format unless Americans stop making errors with their transaction accounts.”