WASHINGTON The Consumer Financial Protection Bureau is weighing whether to place further restrictions on overdraft programs after a study released Thursday revealed consumers who opted-in for such services are paying significantly more in fees.
Regulators finalized a rule in 2010 that required banks to get customers' permission before enrolling them in overdraft programs for ATM and debit transactions, while allowing institutions to still charge overdraft fees on all customers for bounced checks and ACH transactions.
Although the rule was meant to curtail the use of overdraft fees as a revenue driver for banks, the CFPB's study found that consumers who opted-in are paying far more in fees than those who did not.
A senior agency official speaking on condition of anonymity told reporters on a conference call that the data has sparked concerns at the agency, and it is now looking at a potential rulemaking addressing the issue. The regulation could tackle, for example, the order in which banks apply payments to an account.
Overall, CFPB Director Richard Cordray, who also spoke on the call, said the study suggests the issue needs to be addressed in some manner.
"In the years since these [regulatory] changes, people have had varied views about whether consumers' experiences with overdraft are improving," Cordray told reporters. "But our study today shows that problems still persist."
The report found that consumers who opted-in to overdraft services for debit cards and ATMs average $260 in fees per year, compared to roughly $35 in fees per year for those who are not part of such programs.
The study said the median overdraft fee is $34, but most overdrafts were triggered by a transaction of $24 or less for debit cards and $50 or less for other types of transactions.
"If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000%" based on a transaction of $24, Cordray said.
The CFPB has used similar "annual percentage rate" comparisons when referring to the high fees on payday loans and deposit-advance products. The agency is currently working on rules for those products. But a CFPB official said the APR comparison was meant to add context, but did not mean the agency views overdraft services in the same way it looks at payday loans.
Consumer groups immediately praised the CFPB for looking into potential regulation, particularly on the amount and number of times a bank can charge overdraft fees.
"The amount of overdraft fess are disproportionate to any sort of reasonable amount that either these overdrafts cost the bank or even the amount of the transaction itself," said Chi Chi Wu, a staff attorney at the National Consumer Law Center. "It's a high cost lending transaction and the CFPB hinted at that in its press release So there's plenty that still needs to be reformed with overdraft regulation."
The CFPB official also said the agency plans to continue performing studies to find out whether consumers understand the opt-in overdraft service in order to make an informed decision, if it is working appropriately for the consumer and what further protections may be needed in that process.
Additionally, the agency is looking at whether there needs to be requirements pertaining to the order in which banks are posting transactions to a checking account. If a check is processed the same day as several debit card transactions and there are insufficient funds at the end of the day, the bank can legally charge overdraft fees by posting the check last, regardless of how the transactions actually came into the bank.
Rachel Anderson, program director at the Center for Responsible Lending, said they would like to see the CFPB eliminate overdraft fees on all debit card transactions.
"The fee is unjustified in those instances because the transaction itself could be declined regardless," Anderson said. "What we have seen in looking at the opt-in process is that the option can be aggressively marketed by financial institutions and it has the potential to target consumers most likely to have overdraft or incur fees."
However, industry trade groups say the current overdraft rules should be clear for consumers.
"No one in America has debit card and ATM overdraft protection today who did not affirmatively opt in after receiving a one-page summary of the service and fees. They receive written verification of their choice, multiple reminders when they overdraw and can opt out at any time," said Nessa Feddis, senior vice present and deputy chief counsel for consumer protection and payments at the American Bankers Association. "Consumers have multiple tools to manage and check their accounts day and night to avoid overdrawing."
Richard Hunt, president and chief executive of the Consumer Bankers Association also cautioned the CFPB in issuing further rulemaking.
"These debit card services are completely optional, and consumers who freely choose to utilize the service can subsequently opt-out at any time," Hunt said. "We strongly urge policymakers to be cautious in their approach to regulating overdraft and to avoid completely eliminating the consumer's ability to choose."
Still, regulatory concerns about the order of transactions has only intensified as consumers use more debit transactions. The study found that consumers average 17 debit transactions a month, nearly three times the rate of check and online bill pay transactions.
The study also found that 18% of consumers who opted-in to an overdraft program had a greater likelihood of being charged overdraft fees at a rate of more than ten times per year. That compares to just 6% of consumers not part of an overdraft program who are likely to incur fees ten times per year.
"The overdraft fees should not be 'gotchas' when people use their debit cards. But unfortunately, the wider use of debit cards means those who opt in for overdraft are likely to get charged more fees," Cordray said. "Moreover, our study found that the majority of consumers put money back into their bank accounts within three days of their overdraft transactions maybe their paychecks got posted or a deposit finally cleared. In fact, more than 75% have positive account balances within a week."
On a larger scale, however, very few bank customers are paying overdraft fees. The study found that just 8% of customers are paying roughly 75% of all overdraft fees.
CFPB officials said that since the overdraft rulemaking of 2010, some financial institutions have taken it a step further by capping off the amount of overdraft fees that can be charged or allowing a consumer to overdraw the account without incurring a fee so long as the transaction is small, like $5.
"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," Cordray said. "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."