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From Banking and Finance Law Daily, August 1, 2014

CFPB: opting in to overdraft coverage can be financially risky

By Katalina Bianco, J.D.

The Consumer Financial Protection Bureau is sounding the alarm about bank account overdraft coverage. The problem lies with opting in to coverage for debit card and ATM transactions, the bureau said.

study by the CFPB revealed that the majority of debit card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days. “Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate,” according to the bureau.

The study is based on data from a set of large banks supervised by the CFPB. The bureau stresses that the data used for the study did not contain consumers’ directly identifying personal information. The study reflects a significant portion of U.S. consumer checking accounts and was supplemented by other research and responses to a CFPB Request for Information notice issued to the public in February 2012.

“Today’s report shows that consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card,” said CFPB Director Richard Cordray. “Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be ‘gotchas’ when people use their debit cards.”

Cordray noted that consumers use their debit cards nearly three times as often as they write checks or pay bills online. As a result, consumers who opt in find that overdraft fees can pile up quickly on smaller debit card purchases.

Regulatory/policy changes. In 2010, a Federal Reserve Board rule took effect that barred depository institutions from charging an overdraft fee for ATM withdrawals or most debit card transactions unless the consumer has affirmatively “opted in.” Institutions are permitted to charge overdraft fees on checks or automatic payments through the Automated Clearing House system, and on debit card transactions that are set up on a recurring basis without requiring consumers to opt in.

In addition to regulatory changes, financial institutions have updated their overdraft policies in recent years. Some banks and credit unions do not charge an overdraft fee if the consumer is only overdrawing on his or her account by a small amount. Some institutions also cap the number of overdraft and NSF fees they will charge on an account on a single day.

Report highlights. Key points in the CFPB’s study include the following:

  • among the banks in the study, overdraft and insufficient funds fees represent more than half of the fee income on consumer checking accounts;

  • consumers use their debit cards for purchases about 17 times a month, by far the most common way money in accounts is accessed;

  • most overdraft transactions for which a fee is charged, including debit overdraft transactions, are $50 or less;

  • more than half of consumers bring their accounts to a positive balance within three days; and more than 75 percent become positive within a week;

  • nearly one in five opted-in consumers overdrafts more than 10 times per year; and

  • opted-in consumers pay seven times more in overdraft and NSF fees per year.

“I want to take pains to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage,” said Cordray. “But we need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”

Call for legislation. Representative Carolyn B. Maloney (D-NY) cited the bureau’s study when calling on the House to pass the Overdraft Protection Act in 2013 (H.R. 1261), a bill Maloney introduced in March 2013.

“The evidence in the case against excessive overdraft fees continues to pile up,” said Maloney. Noting that many banks continue to re-order transactions in a way that leads to “exorbitant” overdraft fees, the lawmaker urged the House to “end the $35 cup of coffee.”

The Overdraft Protection Act would:

  • require consumer consent before financial institutions can permit overdraft fees to paper checks, automated clearinghouse charges, and debit card swipe-terminal transactions on consumer accounts;

  • define overdraft fees as charges subject to the Truth in Lending Act;

  • prohibit financial institutions from manipulating the sequence in which checks and other debits are posted if it causes more overdrafts and maximizes fees paid to financial institutions;

  • require that fees be “reasonable” and “proportionate” to the amount of the overdraft;

  • cap the number of fees that could be charged at one per month and six per year; and

  • enhance disclosures both at the point of opt-in and when an overdraft fee is charged.

Maloney’s bill also would require that the CFPB study prepaid debit card overdraft fees and would grant rulemaking authority over those fees to the bureau.

CBA input. Community Bankers Association President and CEO Richard Hunt commented that overdraft protection is a “vital banking service” chosen by consumers. The CBA urges Congress to act with caution when considering regulatory action.

Center for Responsible Lending. The Center for Responsible Lending noted that the CFPB’s report underscores the “urgent need for reform on bank fees.” The CRL said that in addition to overdraft fees, “consumers get hit even harder when banks reorder transactions to trip consumers into paying higher fees and charge additional fees each day an account is overdrawn.”

Companies: Center for Responsible Lending; Community Bankers Association.

MainStory: TopStory BankingOperations CFPB CreditDebitGiftCards TruthInLending

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