CFPB Concerned Overdraft Opt-In Requirement Not Protecting Consumers

CFPB Overdraft

On July 31, the CFPB released its latest assessment of overdraft data it has collected from large banks. The report provides the following summary findings:

• Overdraft and non-sufficient funds (NSF) fees constitute the majority of the total checking account fees that consumers incur. For opted-in consumers, overdraft and NSF fees account for about 75% of their total checking account fees and average over $250 per year.
• Most overdraft fees are paid by a small fraction of bank customers—8% of customers incur nearly 75% of all overdraft fees.
• Opted-in accounts are three times as likely to have more than 10 overdrafts per year as accounts that are not opted in. And opted-in accounts have seven times as many overdrafts that result in fees as accounts that are not opted in.
• Transactions that lead to overdrafts tend to be small—for debit card transactions, the median amount that leads to an overdraft fee is $24 and the median amount of a transaction that leads to an overdraft fee for all types of debits is $50.
• Most consumers who overdraft bring their accounts positive quickly.
• Younger customers tend to overdraft more than older customers.

As the CFPB explains, since mid-2010, Regulation E generally requires financial institutions to obtain affirmative consent from account holders to be charged fees for overdraft coverage on ATM and non-recurring point of sale (POS) debit card transactions. The CFPB states that as a result, institutions are less likely to authorize overdrafts on these types of transactions for account holders who have not opted in. However, the CFPB believes the study confirms that opting in for overdraft coverage for debit card and ATM transactions is an expensive way to manage a checking account, and the agency’s press release and Director Cordray’s remarks about the report indicate the CFPB is concerned about the ability of the opt-in requirement to protect consumers. Director Cordray raised specific concerns about the use of debit cards for purchases, stating that “consumers are now using their debit cards more than ever” and that “overdraft fees should not be ‘gotchas’ when people use their debit cards.”

The CFPB acknowledged that it has not sufficiently assessed the causal nature of the relationship between opt-in status and overdrafting. And Director Cordray stressed that “nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage.” But he called for continued review of “whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”

The report is part of the CFPB’s ongoing study of the overdraft market in advance of a potential rulemaking, and it is the second such report released to date. The CFPB recently substantially extended the timeline for its rulemaking on overdraft products, indicating in May that “prerule activities” could continue through February 2015; the CFPB previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could involve additional reports, or conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.