North Bay banks, credit unions brace for new rules on overdraft fees

A federal watchdog organization is wielding its clout by proposing rules designed to target fees banks charge for overdrawn accounts.

The proposal created by the Consumer Financial Protection Bureau has caused a bit of a stir from community and regional banks as well as credit unions with assets near or over the $10 billion threshold.

The bureau is accepting comments on the proposal until April 1. The proposal does not ban fees altogether, bureau officials said.

Consumer groups are fighting fees considered “excessive” — with bureau officials leaning toward a benchmark of between $3 to $14 the agency suggests banks charge. Bureau officials contend some financial institutions charge $35 per transaction. The bureau’s acceptable range will be solidified when the final version of the rules is approved.

Consumer Financial Protection Bureau proposed overdraft-fee rule, January 2024 (PDF)

Banks charge overdraft fees if account balances fall in the negative. Many customers have linked their checking accounts to credit cards to cover these errors. But some people haven’t established that coverage, leading banks and credit unions to take measures to cover the negative balance.

An overdraft fee might be charged for tansactions that overdraw the account. A non-sufficient fund (NSF) fee represents the amount banks place on accounts with payments that are declined.

Some bankers and finance executives expressed empathy for those customers who become buried under these fees, but they’re also wary of overreach.

Most North Bay-based regional banks’ and credit unions’ practices would be unaffected because of the size of several of the financial institutions. At the end of last year, Bank of Marin held $3.8 billion in assets; Exchange Bank, $3.3 billion; Summit State Bank, $1.1 billion; North Bay Credit Union, $120 million; and Community First Credit Union, $828 million.

But the larger institutions expressed some concern. Redwood Credit Union Chief Administrative and Risk Officer Tony Hildesheim issued a warning, if the rules are too onerous. “This will kill overdraft protection (programs). There’s no way any bank or credit union that has overdraft protection (services) will be able to afford (to run) the program,” he said.

The credit union’s assets, at $8 billion, stand just short of the level that would make the new rules applicable. Still, the risk officer expects the credit union will surpass the threshold at some point.

“We’re close and will probably meet that,” he said.

Diana Dykstra, president and CEO of the California Credit Union League based in Ontario, supports programs that allow customer choices.

“Overdraft protection services are a lifeline for individuals facing unforeseen financial challenges, offering a flexible and transparent option to manage their finances effectively,” she said.

As banks go, WaFd — which completed its buyout of Luther Burbank Savings of Santa Rosa at the end of last month — had $22.6 billion in year-end assets. Therefore, the bank would be subject to the new rules. It charges $30 in fees, but the bank has also capped NSF fees at three per day, per customer on consumer accounts.

CEO Brent Beardall agreed with Redwood Credit Union’s concern and support for services that assist customers.

“The big picture is, we think it’s good to protect consumers, but I also believe there should be a penalty (to being overdrawn). It’s finding that balance,” he said, adding that most consumers “expect it.”

With $3.18 trillion in assets, Bank of America would qualify as being subject to the new rules. In August 2022, one of the nation’s largest banks had already reduced its overdraft fees from $35 to $10.

“As a result of these industry leading changes, revenue from these fees has dropped more than 90%,” said Bill Halldin, regional spokesman for the bank. With branches scattered throughout the North Bay, the Charlotte, North Carolina-based bank declares it has become a measure of good will to its customers.

Nonetheless, August 2023 research from Bankrate — a New York-based consumer financial services company — found that overdraft fees are charged on 91% of accounts surveyed. Some charges reach as high as $39 per transaction. The average is $26.61.

The bureau estimates its proposed rules may save consumers over $3.5 billion in fees per year.

“Banks should be competing to provide better products at lower costs, not innovating to impose extra fees for no value,” bureau Director Rohit Chopra said in a statement.

Susan Wood covers law, cannabis, production, tech, agriculture as well as banking and finance. She can be reached at 530-545-8662 or susan.wood@busjrnl.com