The CFPB will likely pursue overdraft rulemaking, an underappreciated risk to 30% of net income for TD, TCF, and Regions banks.
January 28, 2021 – Capstone believes the Consumer Financial Protection Bureau (CFPB) is likely to undertake rulemaking to increase restrictions on overdraft charges for automatic teller machine (ATM) and one-time or point-of-sale (POS) debit transactions. Our discussions indicate the issue is a growing priority for consumer advocates who are likely to help drive the bureau’s priorities under Democratic leadership after the previous administration declined to amend the rule following a review that began in 2019. While it is too early to be certain what the CFPB’s rulemaking may include, consumer advocates have consolidated around several principles that are likely to lead any discussions. Of these, we believe the most impactful would be limiting the number of overdraft charges per consumer in a month and/or year. Because of the imbalance in overdraft fees (less than 5% of accounts represent more than 60% of charges), this move will likely have a greater impact than limiting the size of the charge itself. We believe the changes would have most significant impact on TCF Bank (TCF), Regions Financial Corp. (RF), and TD Bank (TD).
We estimate that if the CFPB rules align with consumer advocate recommendations, the limitation on the number of overdraft charges alone would reduce ATM/POS overdraft income by roughly 65%. With overdraft accounting for more than 30% of net income at banks such as TCF ($6.0 billion market cap), Regions ($16.6 billion market cap), TD ($103.2 billion market cap), and South State Corp. (SSB, $5.4 billion market cap) through the first three quarters of 2020, this change would reduce total net income by 15%–20% for these banks (assuming 70% of overdraft charges come from ATM/POS). Even in 2019, which would remove any COVID-19–related reserve charges, overdraft charges accounted for more than 20% of net income for three of these banks and 16% of net income for South State. At this “normalized” level of 20% of net income, a 65% reduction in ATM/POS overdraft charges would reduce total net income by nearly 10%.
In the remainder of this report, we provide an overview of the potential impact of a rulemaking, based primarily on consumer advocate priorities and previous legislative proposals. We believe these positions are likely starting points for any CFPB rulemaking. The specifics would evolve through the rulemaking process, as the CFPB would have to study the impact of any rule and be responsive to industry comments in response to a proposed rule.
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