The CFPB’s goal is not to remove overdraft protection from banks’ product menu. That was CFPB Director Richard Cordray’s message after the bureau’s released a new study on overdraft on July 31. “I want to take pains,” he said, “to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage.”
The CFPB’s goal, however, is “to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent,” Cordray said.
The bureau completed its first study on overdrafts last year. Cordray said it “raised concerns about the ability of consumers to anticipate and avoid overdraft costs.” The study released in July, “compounds our concerns,” he said.
In 2009, the Federal Reserve Board required financial institutions to obtain affirmative consent from account holders, known as opt-in, to be charged fees for overdraft. Institutions are less likely to authorize overdrafts for account holders who are opted-out. The CFPB’s study split consumers between those who have opt-in and those who have opted-out. The bureau extracted the following points from its research:
● The majority of checking account fees are for overdraft or non-sufficient funds fees. Opted-in consumers average more than $250 per year in overdraft or non-sufficient funds fees, which account for about 75 percent of their total checking account fees.
● About 8 percent of customers pay nearly 75 percent of all overdraft fees.
● Only 2.8 percent of consumers older than 62 overdraft more than 10 times per year. About 10.7 percent of consumers between ages 18 and 25 overdraft more than 10 times per year.
● Opted-in accounts are three times more likely than opted-out account to have more than 10 overdrafts per year. Opted-in accounts have seven times more overdrafts fees than opted-out accounts.
● Transactions that lead to overdrafts are often quite small. In the case of debit card transactions, the median amount that leads to an overdraft fee is $24 and the median amount of a transaction that leads to an overdraft fee for all types of debits is $50.
● More than half of consumers who overdraft bring their accounts positive within three days and 76 percent within one week.
Cordray said the CFPB’s study shows that problems still persist with overdraft products.
He also noted that the bureau’s study is based on data from large banks supervised by the CFPB. Whatever the bureau does to rectify the problems it sees with banks’ overdraft practices, it is to be hoped that the CFPB will gain an understanding of the community bank segment of the market before it writes rules that apply to the industry from top to bottom.