• The Long Arm of The CFPB: Overdraft Programs
  • December 5, 2012 | Author: David Brown
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • For as long as checking accounts have been available, holders have sometimes used overdraft programs to meet critical cash flow needs in lieu of an official line of credit. A financial institution has the right, however, to access certain fees for overdraft activity on an account. These fees have become criticized more recently by consumers, with claims of serious economic harm on individuals. As a result, the Consumer Financial Protection Bureau (CFPB) has included the overdraft programs in their jurisdiction, to monitor alleged risks posed to consumers.

    The CFPB indicated an interest in: how consumers utilize overdraft programs; the information provided to consumers that inform their everyday banking decisions; alternatives consumers have for meeting short-term shortfalls; how recent regulations and changes in bank products and terms have impacted overdraft incidence; and the costs financial service providers incur to provide banking and overdraft services 1.

    On February 22, 2012, the CFPB launched a public inquiry into checking account overdraft programs to determine how these practices impact consumers and also commenced an industry research study to gain additional insight.2 The public comment period of the investigation ended on June 29, 2012. To date, the CFPB has not promulgated any new rules or regulations as a result of its investigation. This does not mean, however, that they will not do so in the future.

    The CFPB’s inquiry is focused on four main areas: (1) Transaction re-ordering that increases consumer costs; (2) Missing or confusing information; (3) Misleading marketing materials; and (4) Disproportionate impact on low-income and young consumers.3 The CFPB is also considering requiring banks to implement a “penalty fee box” that would appear prominently on the checking account statements of consumers who overdraw their accounts.4 The inquiry builds on actions previously taken by the Federal Reserve Board in July, 2010. Specifically, the Federal Reserve Board passed a rule that requires banks to obtain an “opt-in” from customers for overdraft protection on debit and ATM transactions.5

    The CFPB is also reviewing alleged inequalities in the amount charged consumers for overdraft situations. For instance, most overdraft fees are a set or fixed fee, regardless of the amount of the overdraft. The amount of the fee varies greatly, however, from $35 per overdraft, compared with $25 at smaller institutions.6 Many financial institutions also charge an additional extended overdraft fee if the consumer fails to repay the shortfall within a few days.

    While the CFPB is charged with protecting consumers, any action taken to restrict the financial institutions’ rights related to overdrafts and fees could threaten not only a major revenue stream for banks which are already struggling to replace income lost to recently reduced debit-card interchange fees, but jeopardize the consumer’s ability to rely on payment of a check presented with a minor overdraft resulting from a mathematical error. Last year, bank customers paid $31.6 billion in overdraft fees, down from $33.1 billion in 2010.7 In total, about 15 million Americans overdraw their accounts 10 or more times a year.8

    In February 2005, the FDIC, Office of the Comptroller of the Currency, National Credit Union Administration, and Federal Reserve Board issued supervisory guidance that suggested best practices for overdraft programs. The FDIC issued additional guidance that applies only to FDIC-regulated institutions and the OCC and OTS issued proposed guidance in 2011 and 2010, respectively. Financial institutions can currently continue to collect overdraft fees and avoid penalties regardless of their size by taking the following steps:

    First, implement a neutral check clearing processes. As stated above, one of the CFPB’s main areas of focus is transaction re-ordering that increases consumer costs. In other words, the CFPB is concerned about a practice where some banks intentionally reorder transactions so that the largest purchases are processed first. This maximizes the number of transactions incurring overdraft fees.9

    Second, clearly disclose any fees that will be charged to the customer’s account in the event of an overdraft. As the CFPB Director, Richard Cordray exclaimed, “many of the consumers we heard from did not realize (overdraft fees) could happen, despite the opt-in requirement that is supposed to provide them with the means of protecting their own interests”.10 This point was driven home by a study that found the median page length of banks’ disclosure forms to be sixty nine pages long with type six-point font.11

    Third, fully and clearly disclose the overdraft program in marketing materials. “Make sure account holders understand the fees associated with opting in to overdraft coverage for electronic transactions, as well as their options for avoiding the fees.”12

    Fourth, avoid a disproportionate impact on low-income and young consumers by implementing the above disclosures and by educating all consumers of alternatives to overdraft payment programs that may better fit their lifestyles.13

    It’s clear that through its inquiry, the CFPB is attempting to implement fairness and uniformity in overdraft programs throughout the industry. The Bureau expects neutrality in processing, clear and simple disclosures of overdraft terms and conditions, and honesty in advertising materials. Financial institutions that honor these principles should require only minimal changes if and when the CFPB issues new rules for overdraft programs.

    1 http://www.consumerfinance.gov/blog/category/overdrafts/
    2 Consumer Financial Protection Bureau launches inquiry into overdraft practices, Feb. 22, 2012, http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/
    3 Id.
    4 Id.
    5 Carter Dougherty and Margaret Collins, Nine U.S. Banks Said to be Examined on Overdraft Fees, Bloomberg, Apr. 20, 2012, http://www.bloomberg.com/news/2012-04-20/nine-u-s-banks-said-to-be-examined-on-overdraft-fees.html
    6 Id.
    7 Id.
    8 Barbara S. Mishkin, CFPB Monitor, Sept. 5, 2012, http://www.jdsupra.com/legalnews/cfpb-shows-continued-interest-in-regulat-44317/
    9 Ellie Wilkinson, The CFPB Takes on Overdrafts, The PEW Charitable Trusts, June 18, 2012, http://www.nerdwallet.com/blog/2012/cfpb-takes-overdrafts/
    10 Claes Bell, CFPB takes aim at bank overdraft fees, Bankrate.com, Feb. 24, 2012, http://www.bankrate.com/finance/news/cfpb-takes-aim-bank-overdraft-fees.aspx
    11 See Ellie Wilkinson, supra.
    12 John M. Floyd, The Consumer Financial Protection Bureau Launches Inquiry into Overdraft Programs: What it Means for Your Bank, The Ohio Community Banker, 3rd Quarter, 2012.
    13 Id.