Compliance Blog

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

The Pew Charitable Trusts (Pew) recently released the results of a study on consumers’ experiences with debit card and ATM overdrafts, as well as consumer knowledge, understanding, and attitudes about overdraft fees. This latest study was completed in December 2013 and is a follow-up to a similar study by Pew in 2012. According to Pew, both studies have similar findings – consumers are still confused and unhappy about overdraft practices and fees.

According to the report, “the key 2013 survey findings are:

• Younger, lower-income, and nonwhite account holders, as well as those who did not have a credit card, are among those who were more likely to pay an overdraft penalty.
• More than half of those who incurred a debit card overdraft penalty fee do not believe that they opted in to overdraft coverage.
• 10 percent of Americans paid at least one overdraft penalty fee in 2013, and another 5 percent paid an overdraft transfer fee.
• On average, people who paid an overdraft penalty also incurred additional fees, for a total of $69 the last time their account was overdrawn.
• 13 percent of people who paid an overdraft penalty say they no longer have a checking account; 19 percent report responding to overdraft fees by discontinuing overdraft coverage; and 28 percent report closing a checking account in response to overdraft fees.
• More than three-quarters of the people who paid an overdraft penalty fee express concern about specific overdraft policies, including the high cost of a penalty and the practices of charging “extended” overdraft fees—additional charges for failing to repay a negative balance on time—and of reordering withdrawals from highest to lowest dollar amount, which have the effect of increasing overdraft fees.
• Large majorities of those who paid an overdraft penalty prefer that a transaction be declined rather than overdraw an account, and they support greater regulation of overdraft products.
• Four groups of consumers surveyed—“overdrafters,” “transferers,” “decliners,” and “never-negatives” (see “Survey Details” sidebar)—express similar concerns about overdraft policies, in spite of their differing experiences."

Based on these findings, Pew makes a few recommendations, urging the CFPB to require that all financial institutions: (1) provide account holders with clear, comprehensive, and uniform pricing information for all available overdraft options; (2) make overdraft penalty fees reasonable and proportional to the bank’s costs in covering the overdraft; and (3) stop the practice of reordering transactions to maximize fees, and post deposits and withdrawals in a fully disclosed, objective, and neutral manner.

So, where does that leave us vis-à-vis the CFPB? It’s no secret that overdraft practices have been on the CFPB’s radar for some time now. At present, overdraft regulation is listed in the “prerule stage” on the CFPB’s Spring 2014 regulatory agenda, but back in June of 2013, the CFPB issued its own Study of Overdraft Programs which we blogged about here and here. Some of the areas highlighted in the CFPB’s study as potential areas of concern include opt-in processes, fee structures, involuntary account closures, and transaction posting order. The CFPB indicates that it is considering whether additional regulations are needed, which could include additional disclosure requirements or the regulation of specific acts or practices. Stay tuned on this one, because despite the amendment to Regulation E several years ago requiring affirmative consumer opt-in before charging a fee for one-time debit and ATM overdrafts (implemented in section 1005.17(b) of Regulation E), this is an issue that doesn’t look to be going away anytime soon.