February 24, 2012

Time to Consider Overdraft Policies: It's on the CFPB's Radar

Consumer Advertising Law Blog

On Wednesday, the Consumer Financial Protection Bureau (CFPB) announced that it is beginning an inquiry into bank checking account overdraft policies. As an initial step, the CFPB issued a Notice and Request for Information seeking information from the public. Overdrafts have been the subject of increasing federal bank regulators' scrutiny during the past few years and the CFPB's interest in the issue is not surprising.

An "overdraft" occurs when an account does not contain sufficient funds to support a transaction. The types of transactions that could cause an overdraft include ATM, point-of-sale debit card, preauthorized debit card, Automated Clearing House (ACH), and online banking transactions. If a consumer did not have sufficient funds in his or her bank account to support a transaction, a bank may decline to pay the item and charge a non-sufficient funds (NSF) fee. However, in recent years, many institutions have introduced automated overdraft systems under which overdraft items are paid for the convenience of the account holder and an overdraft fee is charged per item.

Not surprisingly, a 2008 FDIC study concluded that the most frequent overdrafters were low and moderate income individuals and young adults. Since that study, the Federal Reserve amended its regulations (i) to require all depository institutions to provide periodic statement disclosures of overdraft fees and fees for returning unpaid items; and (ii) to prohibit an institution from charging fees for transactions that overdraw an account by use of a debit card at an ATM or point-of-sale unless the consumer opts in to permitting the institution to pay overdrafts. Most recently, in 2010 the FDIC issued guidance on identifying, managing, and mitigating risks associated with overdraft programs.

The CFPB is seeking information from the public regarding:

  1. lower cost alternatives to overdraft protection programs, such as linked savings accounts or overdraft lines of credit;
  2. the extent to which institutions provide consumer alerts regarding balances and overdraft triggers;
  3. the impact of the above-referenced regulatory changes made by the Federal Reserve, and demographics concerning overdraft opt-in rates;
  4. the impact of recent changes in some institutions’ operating policies, including, for example, changes to the posting order of debit transactions;
  5. the economics of the overdraft program, including the revenue generated from overdraft programs and the extent to which different consumer groups incur overdrafts and related fees disproportionately; and
  6. the long term impact of overdraft programs on consumer behavior and options.

The CFPB has also released a model "penalty fee box" for possible disclosure of overdrafts and associated fees.

Overdrafts are plainly in the limelight again. Financial institutions would be well advised to review carefully their overdraft policies and practices, including the disclosures to consumers regarding those policies and practices. Consumers would be well advised to track their spending habits closely and review their accounts to determine whether they want to opt for overdraft coverage.

© Arnold & Porter Kaye Scholer LLP 2012 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.


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