• Director Consumer Financial Protection Bureau Rohit Chopra: Cash advance practices need changes

    Director Consumer Financial Protection Bureau Rohit Chopra: Cash advance practices need changes

    Recently, the Consumer Financial Protection Bureau Director Rohit Chopra (CFPB) said that his department intends to come to grips with the issue of excessive payments on cash advance in the United States. There are many situations when interest payments on purchases of $ 10 can end up costing the consumer 8 times more. Moreover, such rates exist for the most part only for low-income segments of the population which causes a heavy public outrage.

    Bankers shamelessly charge high interest rates not even hiding that this is the most profitable, albeit not honest, way of making a profit for them. According to the CFPB, in 2019, the country’s three largest banks earned over $ 5 billion in overdraft profits, and the total market profit equaled to $ 15 billion. That is a vast sum, isn’t it?

     The history of the emergence of overdrafts

    It’s hard to believe now, but the emergence of overdrafts at the beginning of the late 20th century was aimed at encouraging customers to buy. This service was provided by banks completely free of charge cash advance, without charging a commission. For example, banks allowed their regular customers to pay rent or electricity bills by check in the mail in cash advance, even before they received their paychecks.

    However, when the population became hooked on this service, in the early 2000s, almost all banks made the overdraft service paid and began to charge a commission. Banks’ profits only increased over the years For example, Bank of America overdraft fees are $ 35 per $ 100, Wells Fargo fees are $ 35, and Chase fees are $ 34.

     What CFPB offers

    Obviously, by proposing to tighten control over the collection of overdraft fees, the CFPB is not trying to completely stop this practice. It is beneficial for low-income segments of the population, and helps to avoid complicated procedures for obtaining a bank loan. The Bureau proposes a number of measures aimed at regulating the process, as well as alleviating the financial burden for low-income individuals. The following measures are proposed:

    • thorough verification of banks that charge half or more of the overdraft amount from users;
    • not charging overdrafts from clients if the loan amount is less than $ 50;
    • limiting financial fees for the annual period;
    • introduction of a daily grace period;
    • charging no more than one overdraft commission.

    Additional measures to control this process are also being discussed. A proposal was made to all banks engaged in this field of activity to make proposals for optimizing the process in the initial quarter of 2022.

     How banks reacted to the CFPB’s actions

    Almost immediately after the statement of CFPB Director Rohit Chopra, the Director of Capital One Richard Fairbank announced the abolition of cash advance collection from clients in the new 2022. He called this step a manifestation of humanity and simplification of life for US citizens. However, why did this step follow only after the statement of the CFPB head?

    Most banks, even though they tightened controls, have not given up on high fees. Yes, JPMorgan Chase stated that it intends to introduce a daily grace period for its clients, but there are no plans to cut interest rates on payments. Many banks have openly stated that overdraft payments are easy money, and that no one is going to voluntarily give up such profits. Well, then the CFPB statement was announced just in time.

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