CFPB Launches Inquiry Into Overdraft Protection Practices

Register now

WASHINGTON — The Consumer Financial Protection Bureau launched an inquiry Wednesday into overdraft protection practices, requesting data from a number of banks on their policies, terms and marketing of such programs.

The agency said it is focusing on four main areas of concern: reordering transactions from high-to-low to increase consumer costs; missing or confusing information about the terms of overdraft programs; misleading marketing materials; and the disproportionate impact the programs have on low-income and young consumers.

"With today's technologies, consumers have more opportunities to access their checking accounts and cause overdrafts," CFPB Director Richard Corday said in a press release issued early Wednesday. "But overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it. We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees."

The agency is also asking the public to weigh in on overdraft programs, and seeking input on a sample "penalty fee box," a new disclosure that would appear on checking account statements to highlight the amount of money overdrawn and the total overdraft fees charged each month.

The bureau said it is seeking data from "several" large banks on their overdraft policies, but did not say which banks received such requests. It plans to use the input collected through the inquiry to prioritize its regulatory work and assist with policymaking.

The inquiry builds on actions taken by other federal regulators, CFPB said in the press release, including joint supervisory guidance that regulators issued in 2005 outlining best practices for overdrafts. "Many of these best practices have not been consistently adopted," the bureau said.

According to a press release, CFPB is looking into reports that consumers are receiving misleading marketing materials about overdrafts.

Changes to the Federal Reserve's Regulation E said banks must require customers to opt in to debit overdraft protection programs starting in July 2010. (The bureau is now responsible for enforcing these rules.) Initial data suggests that opt-in rates vary significantly among institutions, CFPB said, and it seeks to understand the different ways institutions explain and promote overdraft programs.

The bureau is also exploring whether consumers can anticipate and avoid overdraft fees, and will examine how clearly overdraft terms are disclosed and whether consumers are made aware of, qualify for or take advantage of alternative means of covering transactions.

The CFPB is concerned about the reordering of transactions to maximize overdraft fees, and intends to examine the prevalence of that practice and how consumers are affected by it, according to the release.

A dozen banks have either settled claims of high-to-low processing, or are seeking to get settlements approved.

JPMorgan Chase & Co. became the latest when it announced a tentative agreement to pay $110 million to settle a class action lawsuit on Feb. 4. Bank of America Corp. was the first to come to a settlement, agreeing last year to pay more than $410 million, or around 10% of the overdraft fees it is alleged to have wrongfully charged. Subsequent settlements have recovered as much as 60% of estimated wrongful overdraft revenues.

Finally, the CFPB plans to revisit a 2008 study by the Federal Deposit Insurance Corp. that found that 9% of checking account customers bear about 84% of overdraft fees.

"Evidence suggests that overdraft programs disproportionately impact low-income and young consumers," the agency said.

According to the FDIC study, 46.4% of young-adult accountholders incurred overdraft fees — 15% recorded more than 10 in one year — suggesting that overdraft programs disproportionately impact low-income and young consumers, the bureau said.

The same FDIC study found that consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees annually. The average fee ranged from $30 to $35 in 201, and has increased by 17% in the past five years, the bureau noted.

To educate consumers about the opt-in debit overdraft rules, CFPB is also launching a "What's your overdraft status?" campaign.

"The goal is to encourage consumers to know whether or not they have opted in to overdraft fees on ATM and debit card transactions, both online and point-of-sale, and understand their options for avoiding penalty fees," the press release said.

For reprint and licensing requests for this article, click here.
Law and regulation Consumer banking