CFPB Report: Overdraft Fees “Impose Heavy Costs” on Consumers

by Manatt, Phelps & Phillips, LLP

Expressing concern about the cost to consumers of opting in to receive overdraft protection, the Consumer Financial Protection Bureau (CFPB) released a new report furthering speculation about regulatory action.

According to the Bureau, the majority of debit card overdraft fees are incurred on transactions of $24 or less and repaid within three days. “Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent APR,” the CFPB said.

In its report “Data Point: Checking account overdraft,” the CFPB gives a summary of the data it reviewed from a set of large banks under its supervision, which it said reflected “a significant portion of U.S. consumer checking accounts.” The report focuses on accounts that have affirmatively opted in to overdraft protection on ATM and onetime debit card transactions pursuant to the 2010 revisions to 2010’s Regulation E.

“Today’s study raises concerns that despite these recent changes, a small number of consumers are paying large amounts for overdraft, often for advances of small amounts of money for short periods of time,” the Bureau said. “Today’s report finds that among the banks in the study, overdraft and NSF [non-sufficient fund] fees represent more than half of the fee income on consumer checking accounts.”

The Bureau noted that the increased use of debit cards plays an important factor when considering overdrafts, as it is the most common way consumers access money in their accounts. The study found that consumers use their debit cards for purchases about 17 times each month, while consumer checkwriting and automatic bill payments each average only about 3 times per month. The wide use of debit cards can mean more fees for those who opt in for overdraft service.

Other findings from the report include that the majority of overdraft fees (almost 75 percent) are paid by around just 8 percent of customers. Consumers who opt in for overdraft fee service are paying significantly more for their checking accounts than non-opted-in accounts. On average, opted-in accounts pay almost $260 per year in overdrafts and NSF fees compared to just over $35 for non-opted-in accounts.

Transactions triggering overdraft fees are generally “quite small,” the CFPB wrote. For all types of transactions, the median amount leading to an overdraft fee is $50; for overdrafts created by debit cards, that amount is reduced to just $24. Seventy-six percent of consumers bring their accounts positive within one week, the report found, with more than half becoming positive within three days.

The Bureau said the propensity to overdraft generally declines with age and that consumers who opt in for overdraft protection are three times more likely to have more than 10 overdrafts per year than accounts that have not opted in, noting that “disentangling the causal nature” of the relationship between opt-in status and overdrafting requires further analysis.

To read the report, click here.

Why it matters: Could banks be facing additional regulation for overdrafts created by ATM and onetime debit card transactions? In its 2014 rulemaking agenda issued earlier this year, the CFPB targeted February 2015 for “prerule activities” relating to overdrafts. The new report, combined with a report last year, seems to indicate that additional regulation is a strong possibility. Further studies “on how overdraft works and how it is affecting consumers” are planned, the Bureau said, adding that it is “weighing what consumer protections are necessary for overdraft and related services.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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