CFPB Continues to Scrutinize Overdraft Programs
Overdraft programs can account for as much as 77% of banks’ revenue from deposit account service charges. Many consumers intentionally use overdraft, allowing them to make purchases with a debit card or check/ACH payments when they do not have sufficient funds in their accounts. But in some instances the overdraft fees paid can be significantly higher than the purchase value and the Consumer Financial Protection Bureau has been closely monitoring overdraft programs since 2013. In 2012, the CFPB analyzed overdraft program data provided by a small set of large banks representing two million accounts, and in September 2015, it published a notice seeking approval from the Office of Management and Budget to conduct a web survey of 8,000 individuals to understand consumers’ comprehension of revised overdraft disclosure forms. New regulations could follow once the CFPB findings are finalized, further reducing overdraft and NSF fee revenue and prompting banks to re-evaluate checking account pricing.
Implications of 2010 Overdraft Opt-In Requirements
In 2010, the Federal Reserve Board began requiring banks to provide overdraft disclosure forms and seek cardholder consent to participate in overdraft programs for debit transactions under Regulation E. As a result, banks’ revenue from service charges decreased from $37Bn in 2009 to $33Bn in 2014, as shown in Figure 1.
Figure 1: Service Charge Revenue in Billions, 2009-2014
CFPB data shows that the vast majority of accountholders (85%) did not opt-in for debit card overdrafts—but most of them probably were not incurring overdraft fees in the first place. According to CFPB research, 70% of accounts had no overdrafts, while 8% had 10 or more overdraft or NSF transactions accounting for 74% of total overdraft fees (see Figure 2). These heavy overdrafters opted in at a much higher rate than the population overall (44.7% compared to 15.2%).
Figure 2: Accounts and Fees by Overdraft Frequency
The “Problem” Persists
While bank revenues from overdrafts have declined, CFPB director Richard Cordray has indicated that “problems still persist”.1
In 2012, overdraft and NSF fees ranged from $25 to $36 per instance, generating revenues of $147 to $298 per overdrawn account, on average, depending on the bank. Since the opt-in requirement only applies to ATM and non-recurring POS transactions, an accountholder that did not ‘opt-in’ under Reg E can still incur overdraft or NSF fees from check or ACH transactions. The CFPB believes that the number of people incurring overdraft fees and the average annual overdraft charges vary across institutions due to the diversity and complexity of bank fee structures. For example: some banks limit the number of overdraft charges a consumer can incur in a day to two, while others have no cap on fees; some banks charge an overdraft fee for small-dollar transactions, while others do not charge for transactions that overdraw the account by less than $5. Bank policies for transaction posting (e.g., the in order in which check, debit, and other transactions are posted) also vary widely, which can influence the number of overdraft charges accountholders may incur.
While Cordray has stated that the CFPB is not going to ban overdraft products, he indicated that the CFPB wants to develop more uniform policies across financial institutions so that consumers can better anticipate and avoid overdraft fees. To that end, the CFPB is analyzing different aspects of overdraft programs, including fee levels and frequency, occasions for fees, and transaction posting orders.
The CFPB plans to include a representative sample of the U.S. adult checking account population in the consumer survey, with oversampling of respondents who are more likely to have experience with overdraft fees. The research, which will likely launch in 2016 if approved, will focus on how well consumers understand the revised disclosure forms and why consumers decide to participate in an overdraft program. It will explore consumers’ use of financial products and traits that affect consumers’ experience with overdrafts. Based on the results of this research, the CFPB will determine if further regulation is needed to make overdraft programs more transparent. Given that the CFPB recently requested approval and comments on its plans to conduct the survey, it is unlikely that we will see further overdraft regulation before 2017.
1 CFPB, “Data point: Check Account Overdraft,” July 31, 2014.
For more information, please contact Ginna Rodriguez, Consultant, firstname.lastname@example.org, specializing in Debit and Prepaid.
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