The CFPB regulation of checking accounts will change overdraft

Larger banks could see lower earnings from checking account regulation by the Consumer Financial Protection Bureau.

Larger banks could see lower earnings from checking account regulation by the Consumer Financial Protection Bureau. On Feb. 22, the CFPB announced its inquiry into checking account overdraft programs. No formal rules have been written yet but banks can expect the CFPB to follow through on its stated prerogatives. The CFPB is particularly interested in how banks decide which order to clear multiple checks presented on the same day, checking account marketing, disclosures and the impact of certain checking account features on low-income and young consumers.

“We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs and make it hard to anticipate fees. One of the practices that may contribute to consumer costs is transaction ordering,” said Richard Cordray, director of the CFPB at the Bureau’s Roundtable on Overdraft Practices on Feb. 22 in New York City. “Many do not understand the unintended consequences in the checking account agreements. They may have been misled by marketing materials…that emphasize the benefits of overdraft protection without outlining the costs,” he said.

The Bureau is concerned about the findings of a 2008 FDIC study on overdraft programs which show that 9 percent of checking account customers pay 84 percent of overdraft fees. In addition, 46.4 percent of young adult account holders incurred overdraft fees and 15 percent recorded more than 10 overdrafts in one year. “We want to fix these problems,” Cordray said.

Larger banks have more income connected with overdraft fees. The FDIC study shows that larger banks “had higher fee income per average dollar of deposits” and “accounted for a disproportionate share of income estimated for the study population.” In 2008, only 40.5 percent of all banks studied operated an automated overdraft program. 76.9 percent of larger banks studied used overdraft programs, compared with 65.2 percent of medium banks and 29.7 percent of small banks. The study defined small banks as those with less than $250 million in assets, medium banks as those with $250 million to $1 billion in assets, and large banks as those with more than $1 billion in assets.

Large banks tended to provide a fuller menu of overdraft programs, with 50 percent of large banks operating all three types of programs: an automated computer program, a linked-account program, and an overdraft line of credit program. In contrast, 59.9 percent of small banks operated only one program or no formal overdraft program at all. Since larger banks offer the most products they also have the highest potential for the most checking account regulation. If a larger bank offers three kinds of overdraft protection they will be required to have three kinds of transparent marketing materials, three clear disclosures and monitor for age or income discrimination for three products.

The CFPB’s actions are directed at reducing the fees consumers pay. The Bureau’s investigation of fee disclosure and checking account marketing will likely reduce the number of consumers who are assessed fees. The purpose of the Bureau’s inquiry is to determine if “consumers can anticipate and avoid overdraft fees,” according to its website. If the CFPB finds that it is “too difficult” for consumers to avoid fees, they could require banks to change the way the fees work. For instance, they may require banks to have real time checking account balances or raise the amount a customer can overdraft before getting a fee.

The CFPB has other campaigns directed at reducing these fees. The Bureau’s What’s your overdraft status? campaign is actively advising consumers on ways to cover overdrafts without paying overdraft fees. “Institutions can’t charge you for overdrafts on ATM or point-of-sale debit card transactions unless you have opted in. Knowing your status allows you to decide what is best for you. You can choose not to have debit overdraft,” the CFPB says on its website. The page goes on to guide consumers to “reduce or eliminate overdraft fees.”

The CFPB is likely to ban the practice of structuring transactions, the method of maximizing fees by processing the largest transactions first. The Bureau is dedicated to reducing consumer costs from overdraft fees and already believes structuring transactions to “contribute to consumer costs.” At the time of the FDIC study, “usage fees also tended to be higher for banks that batch processed items starting with the largest amount.” The study also found that 53.7 percent of large banks batch processed transactions by size largest-to-smallest.

Fredrikson & Byron Law