Observing Overdrafts

CFPB study highlights differences in how banks administer overdraft protection programs

By Viveca Y. Ware

The Consumer Financial Protection Bureau’s highly anticipated June 2012 report on overdraft programs confirms what ICBA has been explaining for over a year: While there is universal value in offering consumers such programs, how those programs are administered varies greatly from institution to institution.

And while the CFPB’s findings noted “wide variations across institutions” in terms of bank practices and procedures and their associated impact on program fees and account closures, the report ultimately recommends further analysis to help determine whether further regulatory action is warranted. “Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage,” the CFPB concludes. “Additionally, our study notes progress in some areas in recent years in protecting consumers from harm.”

The report summarizes information obtained from the CFPB’s February 2012 Request for Information and from a detailed CFPB study of the overdraft programs operated by a small set of large banks (those with assets greater than $10 billion) supervised by the bureau. ICBA’s Overdraft Payment Services Study of community banks’ overdraft programs and consumers’ checking account practices and preferences, released in June 2012, was also cited as a source of bank and consumer information that the bureau considered.

Key findings

Noteworthy research findings in the CFPB report include the following:

– The median per-item overdraft fee in 2012 at smaller banks was $30 compared with $34 at the largest banks.

– In 2011, 27 percent of the accounts at those banks studied by the CFPB experienced at least one overdraft or NSF transaction, and the average related total fees accountholders paid to those institutions was $225 (and varied by as much as $201).

– The banks the CFPB studied involuntarily closed 6 percent of consumer checking accounts that were open or opened during 2011. The bank with the highest involuntary account-closure rate closed 14 times more of its accounts than the bank with the lowest involuntary account-closure rate.

– After Regulation E was amended to require banks to obtain permission from consumers for overdraft services related to debit card transactions, accountholders who chose overdraft protection experienced higher rates of involuntary account closures than those who had not chosen such protection (8.5 percent versus 5.5 percent, respectively).

– Consumers opening new accounts during 2011 accepted overdraft coverage more often than those who already had existing accounts, and the rates of consumers choosing overdraft coverage varied dramatically from bank to bank (from single-digit percentages to more than 40 percent).

– While a majority of the heaviest overdraft users did not select overdraft coverage after the amendment to Regulation E, those accountholders selected coverage at a higher rate than other accountholders (44.7 percent for heavy users compared with 15.2 percent for all accountholders among the banks the CFPB sampled).

– While all heavy overdraft coverage users paid less in overdraft fees during the second half of 2010, accountholders who did not choose overdraft coverage paid $347 less in overdraft fees on average during the same period.

Impact of variances

The CFPB report also pointed out numerous bank policies and practices that can affect when a transaction might overdraw a consumer’s account and whether the consumer would be charged a fee. These factors include:

– when banks make deposit funds available. Some of the surveyed banks make the total amount of deposited checks immediately available, resulting in more cleared items and potentially fewer overdraft or NSF charges to accountholders;

– how banks treat holds on funds in connection with debit-card transaction authorizations, particularly for transactions such as gasoline purchases, where the initially authorized amount often differs from the settled amount;

– which transaction posting order banks use (which affects debit authorizations) and when banks process transactions (which affects funds availability). No two banks the CFPB studied followed identical posting-order policies, and financial institutions responding to the CFPB’s request for information also described widely varying posting-order priorities;

– how banks set overdraft coverage limits and at what levels, which may be static or may vary based on an accountholder’s overdraft patterns or his or her relationship with the institution. Most banks that the CFPB studied imposed overdraft coverage limits between $500 and $1,000;

– whether banks offer waivers or delays in assessing overdraft fees for de minimis transactions (on a per-transaction or net-balance basis) or offer short negative-balance periods (21 of the 33 largest banks surveyed had de minimis policies; the median threshold was $5); and

– whether and how banks charge additional fees to provide extended or sustained negative balances, which 21 of the 33 largest banks surveyed employed. The frequency of these fees that banks applied range from daily to weekly, while several banks assess one-time negative-balance fees.

The CFPB also determined that how overdraft programs are promoted and to whom often influences how much consumers use overdraft protection. Some banks, for example, reported that a small fraction of new accountholders had selected overdraft services in 2011 while opt-in rates in 2010 had varied among existing accountholders who frequently overdraw their accounts.

Because overdraft fees represent a sizeable portion of the revenue generated by consumer checking accounts—overdraft fees make up approximately 61 percent of consumer checking account revenue for the large banks the CFPB studied—and given that the bureau found a “variation in consumer experiences and outcomes” related to overdraft programs, community banks should expect the CFPB to continue to closely scrutinize the industry’s overdraft programs.

ICBA is working diligently to avoid future regulations that impede community banks from offering this valuable service from which many customers benefit.

Viveca Y. Ware is executive vice president of regulatory policy at ICBA.