March 11, 2016

Increased CFPB Attention to Overdraft Products Serves as Important Reminder to Banks

Arnold & Porter Advisory

The Consumer Financial Protection Bureau (CFPB) has released a series of publications that may provide good reason for banks to thoughtfully assess their deposit account practices. Recently, the CFPB released an analysis of overdraft and non-sufficient fund (NSF) fee revenues that examines data from more than 600 banks’ call reports. This in-depth analysis, combined with CFPB Director Richard Cordray’s February 3, 2016 letter to financial institutions and the agency’s expected proposed rule on overdraft programs, indicates increased scrutiny of bank overdraft practices. Indeed, in a blog post releasing the overdraft fee analysis, the CFPB stated that it is “currently looking closely at overdraft practices and will continue to analyze this data to better monitor and understand overdraft programs in the market and the consumer experience.” Banks should take note of this development and take the opportunity now to review and assess their overdraft products and practices.

I.          CFPB Developments Relating to Deposit Products and Overdrafts

In his February 3 letter, which was sent to 25 major retail banking companies, Director Cordray suggested that these institutions should consider making available to their customers a “viable choice of a lower-risk account that promises no authorized overdrafts.” Expressing concern that many consumers may not be able to choose an account that is right for them because of what the CFPB perceives as the limited availability and visibility of consumer-friendly products, the letter urged banks to consider offering lower-risk products to consumers, irrespective of whether there is any regulatory requirement to do so.

The CFPB interest in and scrutiny of deposit accounts has been progressive and consistent, much like the CFPB’s focus on other products, terms and conditions, and services, such as arbitration clauses and payday lending. First, in 2012, the CFPB issued a request for information on bank and credit union overdraft programs. In 2013, the CFPB published a study of overdraft programs, and then in 2014, it published data points detailing overdraft programs’ impact on consumers. As noted above, it is expected that the CFPB will issue a proposed overdraft rule within this year.

II.         Analysis of FFIEC Data

The CFPB’s recently released overdraft analysis examines the call report data of more than 600 banks provided in Item 15 of revised Schedule RI – “Components of service charges on deposit accounts (in domestic offices)” – which requires information from banks with US$1 billion or more in total assets that offer one or more consumer deposit account products (i.e., transaction account or nontransaction savings account deposit products intended primarily for individuals for personal, household, or family use). Specifically, Item 15 requires banks to list consumer overdraft-related charges,1 periodic maintenance charges, automated teller machine fees, and all other service charges on deposit accounts.

This disaggregation of overdraft-related charges from other deposit fees across hundreds of financial institutions provides the CFPB with new visibility into banks’ overdraft practices. The CFPB may use this visibility to aid its supervision and enforcement efforts. For example, the Item 15 data provides the CFPB with a metric on which it could compare overdraft revenue percentages against peer institutions, and then identify outliers. Indeed, the regulatory agencies’ use of peer institution data comparisons is not a new phenomenon and is increasingly being employed as a means to assess bank compliance in other areas, such as fair lending. This new overdraft metric provides another tool for the CFPB to conduct holistic supervision of the industry’s offering of overdraft services.

III.       Potential Use of Data by CFPB Enforcement

In addition to the potential interest of the CFPB’s supervisory staff, the agency’s enforcement division may also take an interest in overdraft practices. In a manner not unlike its approach in the debt-collection space, the CFPB could use its broad enforcement authority to police unfair, deceptive, and abusive acts and practices (UDAAPs) to remediate overdraft practices it views as harmful to consumers, even prior to issuance of rules governing the area. The CFPB could use its newly analyzed overdraft data in support of such an action.

Under the Dodd-Frank Act, all covered persons or service providers are required to refrain from committing UDAAPs. The CFPB has demonstrated that its analysis to determine whether grounds for a UDAAP case exist is one of specific facts and circumstances. Although high overdraft fees relative to peer institutions would not, by themselves, constitute a UDAAP, they may well be viewed by the CFPB as an indication of improper practices in a bank’s presentation or administration of overdraft services. To complete its case, the CFPB would likely probe the underlying reasons for the disparity by looking at various factors. For example, after making a finding of overdraft revenue dissimilar to that of peer institutions, the CFPB might inquire into whether the bank’s customer base has a particular need for overdraft services or whether the bank’s sales or marketing campaigns contain misleading statements about the service. Banks would be wise to anticipate and consider these different inquiries.

IV.       Proactive Steps for Banks

The CFPB will likely use its overdraft analysis, together with its consumer complaint data and other internal analyses, to inform its supervision and enforcement priorities and efforts. Should the CFPB develop an interest in your bank’s deposit and overdraft practices, expect inquiries into the underlying documents and data supporting those practices, such as copies of the bank’s overdraft policies, procedures, deposit agreements, consumer notices, marketing materials, training materials, sales scripts, and summary or even account-level data.

As with respect to other preventive steps aimed at weathering agency supervision and enforcement, our recommendation is that banks proactively review their overdraft fees as compared to their peers. Banks can then meaningfully use that information to direct the compliance analysis of their overdraft policies, procedures, and marketing practices, before the CFPB offers to conduct an analysis for them.

  1. For deposit account products intended, marketed, or presented to the public primarily for individuals’ personal, household, or family use, banks must report the amount of service charges and fees related to the processing of payments and debits against insufficient funds, including “nonsufficient funds (NSF) check charges,” that the reporting institution assesses with respect to items that it either pays or returns unpaid, and all subsequent charges levied against overdrawn accounts, but excluding those fees equivalent to interest and reported in Schedule RI, item 1, “Interest and fee income on loans.” Instructions for Preparation of Consolidated Reports of Condition and Income (FFIEC 031 and 041), 67.


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