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From Banking and Finance Law Daily, June 11, 2013

Overdraft Practices Impact Consumers

By John M. Pachkowski, J.D.

The Consumer Financial Protection Bureau has released a study on bank and credit union overdraft practices that raised concerns about whether the overdraft costs on consumer checking accounts can be anticipated and avoided. The study was a result of year-long effort by the CFPB based on confidential information obtained from a small set of large banks supervised by the bureau, responses to a CFPB Request for Information issued to the public in February 2012, and a recent study by the Independent Community Bankers of America.

In a press call, CFPB Director Richard Cordray noted, “we recognize that federal agencies have addressed these issues in different ways at different times, and our review is intended to help develop more consistent federal oversight of these issues across financial institutions.”

A study published in 2008 by the Federal Deposit Insurance Corporation of overdraft practices among banks it supervised found that more than two-thirds of surveyed banks with assets of $250 million or more had automated overdraft programs. The FDIC study found that overdraft and non-sufficient fund (NSF) fees accounted for 74 percent of the deposit service income of banks with automated overdraft programs during the 2006 study period. The CFPB estimated that overdraft and NSF fees represented 60 percent or more of consumer checking account fee income; and that between 2000 and 2011, the average monthly consumer checking account payments per household grew by 53 percent.

The study found “big differences across financial institutions when it comes to overdraft coverage on debit card transactions and ATM withdrawals, drawing into question how banks sell this account feature.”

Opt-ins. The CFPB study also found that consumer that had opted into overdraft coverage based ATM and point-of-sale debit card transactions, based on a 2009 Federal Reserve Board rule, now codified at 12 C.F.R. §1005.17, faced greater risks. For example, these opt-in consumers were assessed, on average, $196 in checking account fees, while the average fees for those consumers who did not opt in were $28. Also, involuntary closure rates were more than 2.5 times higher for accountholders who had opted-into debit and ATM overdraft coverage.

Complex policies and procedures. The overdraft study also found each bank’s overdraft policies, procedures, and practices to be “highly complex” and “difficult for a consumer to navigate.” This finding was based on a number of factors which included: complicated fee structures due to overdraft fees for small dollar amounts; differences among institutions overdraft coverage limits; and complex and varied transaction postings which can influence the number of overdraft fees. These various issues can be illustrated by a comment, made in 2012, by Senators Richard Durbin (D-Ill) and Jack Reed (D-RI) in which a consumer a consumer pays “$40 in penalties for overdrawing on a $2 dollar cup of coffee.”

Commenting on the study, The Independent Community Bankers of America noted, “The CFPB's report on overdraft payment services acknowledges consumer value of overdraft programs, which were created to meet the customer demand for these services. Regulatory policy and oversight should not impede a bank’s ability to offer a variety of overdraft payment services to meet their customers’ financial needs. Consumers must retain the ability to access overdraft services that best fit their unique financial needs and avoid being locked into an ill-fitting ‘one size fits all’ overdraft program. ICBA looks forward to continuing its ongoing communications with the CFPB on overdraft payment services and other issues affecting community banks and the communities they serve.”

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