Yesterday, just after midnight, the CFPB released its initial data findings from its 15-month (and counting) Study of Overdraft Programs.
In a welcome departure from its April white paper on payday and deposit advance loans, the overdraft white paper is entirely devoid of a hostile tone, attacks on the industry or prejudgments on the basis of incomplete data. Nevertheless, the overdraft report and accompanying factsheet strongly hint that rule-making is likely down the road.
Thus, the report states (p. 4) that the CFPB intends to promote “more uniform treatment” of overdraft issues across financial institutions, and the factsheet uses language conceptually similar to the definition of “abusive” in Dodd-Frank, expressing doubts (p. 2) about “the ability of consumers to anticipate and avoid overdraft costs.” The reports’ Executive Summary concludes (p. 7):
In announcing the launch of this study, CFPB Director Cordray observed that “overdrafts can provide consumers with needed access to funds.” Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage. Moreover, 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 report draws principally upon information provided by nine of the largest banks in the country (so-called “study banks”) but also summarizes information from a larger universe of banks who responded to a CFPB request for information and from bank analysts and other third parties. It contains a wealth of data on overdrafts and variances from institution to institution. Generally on the basis of study bank data from 2011, it concludes (pp. 4-7):
- Overdrafts are costly—amounting to $225 on average in 2011 for consumers incurring overdraft or NSF fees but varying as much as $201 between study banks.
- A substantial portion of consumers who incurred overdraft or NSF fees in 2011 (either 27.8% or 13.5%, depending upon the measurement method) were “heavy” overdrafters who incurred more than ten overdrafts in 2011.
- Study banks involuntarily closed 6.0% of their consumer checking accounts in 2011, mostly due to unpaid negative balances, with one study bank closing 14 times the percent of its accounts closed by another study bank.
- Consumers who opened checking accounts in 2011 “varied dramatically” from one study bank to another in terms of the frequency they requested study banks to cover one-time debit and ATM overdrafts, for a fee. Opt-in rates ranged from single-digit percentages to more than 40%.
- The CFPB compared overdraft fees during the first and second halves of 2010 for heavy overdrafters who chose to “opt in” and those who did not opt in. While overdraft and NSF fees declined for both groups, the six-month decline for those who did not opt in exceeded the decline for opt-ins by $347 on average (or nearly $700 on an annualized basis).
- Numerous bank practices and policies affect overdraft and NSF fee levels, including: (1) when deposit funds become available; (2) how banks treat holds resulting from debit card authorizations; (3) item posting order; (4) the method and liberality used by banks in setting overdraft coverage levels; (5) whether fees are charged for de minimis or short-term overdrafts; (6) whether and how fees are charged for extended overdraft periods; (7) how overdraft protection programs are promoted. The CFPB observed that these policies and practices varied significantly and sometimes dramatically from one study bank to another. For example, the percentage of accounts with overdraft protection arrangements involving linked deposit accounts ranged by nearly 40 percentage points across study banks.
Considerably more information is contained in the report. Nevertheless, much work remains ahead for the CFPB. It intends to review 1.5 million accounts and 1 billion transactions in study bank accounts. It will also need to assess the extent to which bank-to-bank differences are attributable to bank policies, on the one hand, or to customer characteristics.
While regulation appears likely—I certainly hope the CFPB does not impose its policy preferences through informal “guidance” or enforcement actions—the CFPB report gives no hint of what type of regulation the CFPB might propose. Many options are available to the CFPB, from disclosure requirements, to limits on the number of fees that can be charged on a daily or other periodic basis, to expansion and/or modification of FDIC requirements for state non-member banks and other possibilities. Great thought and creativity will be required for the CFPB to appropriately protect consumers without depriving them of valuable overdraft services or unduly impairing bank revenues.
Wherever the CFPB ultimately goes in its rule-making process, banks cannot be comfortable that the CFPB and the federal banking agencies will exempt them from UDAAP enforcement actions arising from their overdraft practices. We have represented banks who have had to deal with these issues in an enforcement and pre-enforcement context and have helped a number of clients review and improve their overdraft practices from soup to nuts. Banks need to be proactive not only in dealing with the rule-making down the road but also in making sure their houses are in order today.