June 12 - The Consumer Financial Protection Bureau has released a report that raises concerns about the ability of consumers to anticipate and avoid overdraft costs on their checking accounts. The report found wide variations across financial institutions when it comes to the costs and risks of opting in to overdraft coverage on debit card transactions and ATM withdrawals. The report also found that consumers who opt in for overdraft coverage end up with higher account fees and more involuntary account closures than consumers who decline to opt in.
“Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that some overdraft practices may increase consumer costs beyond reasonable expectations,” said CFPB Director Richard Cordray. “What is marketed as overdraft protection can, in some instances, create greater risk of consumer harm.”
The overdraft report is available at: http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf.
When consumers try to withdraw more money from their checking accounts than is available, the financial institution can reject the transaction. For certain types of transactions, like checks, the institution generally charges a non-sufficient funds fee. The financial institution can also choose to cover the payment by advancing funds on the consumer’s behalf, and generally charges a fixed overdraft fee for doing so.
In recent years, most depository institutions 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. The CFPB estimates that overdraft and non-sufficient funds fees represent 60 percent or more of the fee income on consumer checking accounts.
The CFPB conducted this overdraft study, which reflects a significant portion of U.S. consumer checking accounts, after initial market research raised concerns about overdraft practices. Many of these concerns are not new. Over the past decade, federal regulators have taken a number of different steps in an effort to address them. The CFPB report is intended to provide the factual basis to develop more uniform treatment of these issues across financial institutions. The report is based on data from a set of large banks supervised by the CFPB. The study was supplemented by other research and responses to a CFPB Request for Information issued to the public in February 2012.
Opting-In Puts Consumers at Greater Risk
In 2010, a new federal government regulation took effect requiring that depository institutions obtain a consumer’s consent (opt-in) before charging fees for allowing overdrafts on ATM withdrawals and most debit card transactions. Today’s CFPB report found that new customer opt-in rates varied substantially across institutions. At some banks in 2011, more than 40 percent of all new customers opted in while other banks saw opt-in rates of less than 10 percent. The report also found that a consumer’s decision to opt in may have significant ramifications:
Overdraft Practices Are Highly Complex for Consumers
The CFPB report raises questions about the ability of consumers to anticipate and avoid overdraft costs. Each institution’s overdraft policies, procedures, and practices are highly complex and can be difficult for a consumer to navigate, yet greatly affect whether and how often they will incur overdraft fees. These complexities include:
Costs and Risks Vary By Institution
These different overdraft policies, procedures and practices lead to very different outcomes for consumers at different financial institutions. This raises questions about some overdraft practices that can be difficult for consumers to navigate. The CFPB report found:
A factsheet about overdraft practices is available at: http://files.consumerfinance.gov/f/201306_cfpb_factsheet_overdraft-practices.pdf.
The CFPB has the authority to protect consumers in accordance with federal consumer protection law. The goal is to make checking accounts fair, transparent, and competitive and to ensure that consumers are empowered to take control over their financial lives. Toward this end, the CFPB plans to engage in further review of account-level data – which will not contain consumers’ personally identifiable information – to better understand how differences in practices affect consumers.