The Consumer Financial Protection Bureau (CFPB) recently conducted a study and found that the overdraft polices for consumer accounts can vary widely between financial institutions and these variations can lead to adverse consequences to consumers.
This comes on the heels of a July 2010 amendment to Regulation E requiring financial institutions to provide fee and term disclosures that allow consumers the ability to opt-in or opt-out of overdraft protection. According to a Federal Reserve memo released at the time, the disclosure “will enable consumers to limit the costs of overdraft services by providing consumers a choice regarding their institution’s payment of overdrafts…”
However, citing the complexity of overdraft programs, the CFPB report from June 2013 notes 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.” The concerns about the ability of consumers to navigate overdraft programs stem from complicated fee structures, differences in overdraft coverage limits, variations in transaction posting orders, and the way overdraft programs are marketed to consumers, according to the report.
The findings for the study are based on the aggregation of institutional-level data acquired from large banks (monitored by the CFPB), financial institutions that voluntarily supplied data, and a study conducted by the Independent Community Bankers of America (ICBA).
Highlighting the consumer impact of overdraft protections, the report notes that among the banks taking part in the study (and using data from 2011), the average checking account fee for consumers who chose to opt-in for overdraft protection totaled $196, whereas those that chose to opt-out saw an average account fee of $28.
However, overdraft polices have a different impact on financial institutions’ bottom line. The CFPB study concludes that “overdraft and non-sufficient funds fees accounted for 61 percent of total consumer deposit account service charges in 2011.” If the fee-ratio from the banks participating in the study was extrapolated to cover all FDIC banks, the CFPB estimates that overdraft revenue would have totaled $12.6 billion in 2011.
The CFPB white paper shows the Agency’s commitment to using data-driven analysis in its efforts to identify consumer harm. Based on the report, the CFPB can be expected to further examine overdraft policies and practices. The research and data from this report provides an ideal opportunity for financial institutions to assess their overdraft practices and policies.