Financial Regulatory Forum

Consumer Financial Protection Bureau white paper spotlights overdraft opt-in as costly choice

By Guest Contributor
June 19, 2013

By Bora Yagiz, Compliance Complete

NEW YORK, June 18 (Thomson Reuters Accelus) - A recent white paper by the Consumer Financial Protection Bureau (CFPB) on bank and credit union overdraft practices found that consumers who opt in for overdraft coverage end up with more costs and more involuntary account closures.

The report did not indicate whether additional account regulations were likely.

The report, analyzing service fee data obtained from a set of large banks representative of a large segment of U.S. consumer checking accounts, as well as information obtained through public Request for Information (RFI) for the period 2010-2012 was initiated in February 2012 over concerns that costs to consumers were increasing.

“What is often marketed as overdraft protection may actually be putting consumers at greater risk of harm,” CFPB Director Richard Cordray was quoted in the report.

An overdraft can occur when consumers spend or withdraw more money from their checking accounts than is available. The financial institution can choose to cover the payment by advancing funds on the consumer’s behalf, and generally charges a fixed overdraft fee for doing so. The institution can also choose to return the payment if it is a check, online bill payment, or direct debit, and then charge a non-sufficient fund fee. In recent years, most banks have adopted automated systems for making these decisions. These systems have contributed to the evolution of overdraft from an occasional courtesy to a significant source of industry revenues.

A 2009 Federal Reserve Board rule required depository institutions to secure affirmative consent (opting-in) from account holders for overdraft coverage of ATM and debit card transactions before the institution could charge overdraft fees. This change became effective for new accounts opened after July 1,2010 and for existing accounts on August 15, 2010.

Among the highlights of the report, it was found that overdraft and non-sufficient funds (NSF) fees accounted for 61 percent of total consumer deposit account service charges in 2011 in the banks examined. In reality, this percentage could be hiding other accounts prone to overdraft or NSF since about 40 percent of all accounts in the data are linked either to a credit facility or another deposit account, therefore avoiding any unintended overdrafts.

Incidences of involuntary account closures, which make it harder for the consumer to open an account elsewhere, were also observed to be 2.5 times higher for account holders who had opted in to debit or ATM overdraft coverage.

While acknowledging that specific policies related to overdraft programs varied across banks, the report noted that complicated fee structures and coverage limits and transaction postings as the possible reasons that make it harder for the consumer to anticipate the costs accurately or avoid involuntary account closures.

The Report conclusion stated that the CFPB will continue to study overdraft programs through the analysis of account-level data and examine the extent to which particular policies “magnify risks to consumers.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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