Compliance Blog

Written by Michael Coleman, Regulatory Compliance Counsel

Last week we blogged about the CFPB’s Study of Overdraft Programs, focusing on a couple of interesting points from CFPB Director Cordray’s prepared remarks. Today we’d like to take a closer look at the contents of the study itself and highlight some areas of particular interest. The study contains 6 sections:

1. Introduction
2. Market and Regulatory Context of Overdraft Programs
3. Consumer Overdraft Incidence, Fees, and Related Account Closure
4. Overdraft Use Following the 2010 Opt-In Requirement Under Regulation E
5. Overdraft Policies and Practices across Institution
6. Conclusion, Open Questions, and Further Research Steps

The study is an interesting read. Section 2 gives a re-cap of the development of overdraft programs and past regulatory actions relating to overdrafts, including the 2005 Joint Guidance on Overdraft Protection Programs. Section 4 takes a look at consumers’ usage of overdraft programs in the wake of the amendments to Regulation E which prevents a credit union from charging a member an overdraft fee – on an ATM or one-time debit card transaction – unless the member has opted-in for coverage. This section provides facts, figures and charts which are worth a look (with a grain of salt).

However, I found Section 5 on the overdraft policies and procedures of the “study banks” to be the most interesting. Particularly the section 5.5 on linked account overdraft protection. The CFPB’s overdraft study gives some general background on both linked checking accounts as well as linked lines of credit.

Linking checking accounts to savings accounts is certainly a viable overdraft protection option, however, there are some issues to consider if you are doing so. Last year we blogged (cough, ranted, cough) a few times on the issue of linking checking accounts to savings accounts and the Regulation D issues associated with it, check out these posts here, here, and here.

What were the CFPB’s conclusions you might ask? They were not too surprising. Here is an excerpt from section 6:

“Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage. Additionally, our study notes progress in some areas in recent years in protecting consumers from harm. Nonetheless, our findings with respect to the number of consumers who are incurring heavy overdraft fees or account closures and the wide variations across institutions indicate that certain practices and procedures merit further analysis to determine whether they are causing the kind of consumer harm that the federal consumer protections laws are designed to prevent. The CFPB will continue its study of overdraft programs, including through analysis of account-level data, to examine the extent to which particular policies magnify risks to consumers. This analysis will help the CFPB assess whether further action is warranted to implement and enforce federal consumer protection law consistently so as to ensure that the market for consumer financial products and services is fair, transparent, and competitive and that consumers are empowered to take more control over their economic lives.” (Emphasis added.)

Keep a weather eye to the horizon, we East-Coasters may have escaped the derecho relatively unscathed last week, but the overdraft storm is still brewing on the radar.