CFPB launches overdraft fee inquiry

The Consumer Financial Protection Bureau is taking regulatory concerns about checking account overdraft fees to the next level.

The Consumer Financial Protection Bureau is taking regulatory concerns about checking account overdraft fees to the next level.

CFPB launched an inquiry into financial institutions’ overdraft fee practices, focusing on four key areas:

  • Transaction reordering, in which financial institutions process the largest overdrafts first.
  • Missing or confusing information, or “how clearly overdraft terms are disclosed and the extent to which consumers are made aware of, qualify for, and take advantage of, alternative means of covering overdraft transactions.”
  • Misleading marketing materials, which result in widely different opt-in rates from institution to institution.
  • Disproportionate impact on low-income and young customers.

The Bureau has requested data from the nation’s largest financial institutions and filed a Notice and Request for Information from the public.

At the same time, the CFPB is seeking comments on a proposed “penalty fee box” that financial institutions would have to print prominently on the statements of customers that overdraw their accounts. The penalty fee box prototype shows how much the account was overdrawn, the fees incurred and tips on how to avoid overdrafts.

The CFPB is also launching a public awareness campaign, “What’s your overdraft status?” to help consumers understand the opt-in process and options for avoiding fees.

Although banks and credit unions must now require customers to opt-in for overdrafts to be covered on point-of-sale debit and ATM transactions, the institutions may still cover check and online bill payments and charge an overdraft fee without the customer’s prior approval.

The average overdraft fee was $33 in 2011, a 17 percent increase over the past five years, according to the CFPB. Overdraft fees totaled an estimated $38 billion in 2011, Bloomberg reported.

Banks haven’t widely adopted the best practices on overdraft fees issued as joint guidance by other federal regulators, CFPB Director Richard Cordray has said.

Already, industry experts have cautioned banks and credit unions against viewing overdraft programs as a credit product with a fixed limit of, say, $500 – due in large part to last year’s proposed guidance from the Office of the Comptroller of the Currency.

“Over the last year, more and more community banks and credit unions have come to realize that fixed overdraft limits just don’t work anymore,” wrote Christopher Leonard of Velocity Solutions, Inc., in BAI Banking Strategies.

In addition, consumer groups and members of Congress have urged the CFPB to require a checking account disclosure form for bank customers.

Fredrikson & Byron Law