The Consumer Financial Protection Bureau (CFPB) 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.”
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.
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:
►Consumers who opt in end up paying higher fees: The CFPB report looked at previous heavy overdrafters who declined to opt in when the new federal requirements were implemented in 2010. It found that by not opting in these accountholders reduced their overdraft and non-sufficient fund fees, on average, by more than $450 during the second half of 2010.
►Consumers who opt in to overdraft coverage are more likely to end up with involuntary account closures: Negative account balances are a significant contributor to involuntary account closures, which can leave a black mark on a consumer’s record and make it difficult to open an account elsewhere. The CFPB report found that involuntary closure rates at some banks in the study were more than 2.5 times higher for accountholders who had opted in to debit and ATM overdraft coverage.
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:
►Complicated fee structures: Depository institutions have different fee structures when it comes to the number of overdrafts that can be incurred in a single day. Some, for example, limit the number of overdraft charges in a day to two; others have no cap on fees or caps that allow as many as 12 overdrafts and non-sufficient fund fees in a day. Similarly, some institutions will not charge an overdraft fee for any item that overdraws the account by less than $5, while others charge fees on every overdraft transaction regardless of size.
►Overdraft coverage limits often depend on many factors: The overdraft coverage limit is the amount of money the institution is willing to advance to an accountholder when his or her funds are insufficient to cover a pending payment. Some institutions have fixed limits; others vary the limits based on the accountholder’s individual circumstances, such as his or her balance, overdraft history, or deposit patterns.
►Complex transaction postings: The order in which check, debit card, and other transactions are posted to an account can influence the number of overdraft fees. The report found wide variation in posting practices, from institutions debiting transactions at periodic intervals throughout the day to debiting them in nightly batches. Institutions also differ in how they combine, sort, or order the transactions. If larger transactions are processed first, a consumer can end up paying multiple overdraft fees on a single day, whereas posting smaller transactions first may result in only one overdraft fee.
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:
►Average annual overdraft charges vary among institutions: The report found the average consumer who overdrew his or her account paid $225 in overdraft and non-sufficient fund charges over the course of one year. But among the institutions in the report, consumers at some banks paid an average of $298 while consumers at others paid $147.
►Involuntary account closures vary widely: The highest involuntary account closure rate observed in the study was 14 times the involuntary closure rate at the bank with the lowest rate.
