Overdraft services are standard banking products. Life happens and fortunately most banks offer an overdraft product to come to the rescue in these circumstances. The end of 2021 has come with a cautionary tale for financial institutions from regulators: revise your overdraft services or potentially face intense scrutiny. Banks that derive a significant portion of their revenue from overdraft fees should consider the most recent research and statements on this topic from the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of Currency ( OCC).
This is not the first time the CFPB has conducted research on overdraft programs. Shortly after its creation in 2011, the CFPB published a semi-annual report in 2012 that highlighted the pitfalls and consumer setbacks related to account maintenance and overdraft programs. The report revealed general consumer challenges with financial services, but specifically discussed consumer confusion around overdraft programs, alluding to complex parameters. There was poor management of items, such as large-to-small quantity methods or chronological order of presentation, and secret shoppers revealed a general lack of knowledge of branch-level settings. This led to an overall perception of programs that were too complex for consumers to anticipate the costs associated with the transactions that would be associated with that product.
Over the past few years, there have been enforcement actions here and there related to overdraft fees. Many of these enforcement actions stemmed not from the products themselves, but from how consumers were sold or registered with them. Most recently, in 2020, TD Bank was found to be in violation of Regulation E with respect to overdraft fees for ATM transactions and one-time debit card transactions and was ordered to pay $112 million in costs.1 In 2018, Minnesota-based TCF National Bank was in hot water for similar practices and was assessed $28 million in charges.2 Regions Bank, headquartered in Birmingham, Alabama, was found to charge consumers overdraft fees when consumers failed to take out overdraft cover and had to pay $56.5 million in damages and fines.3
The CFPB conducted research using data from call reports to determine the impact of overdrafts and insufficient fees on bank revenues. He mainly looked at two data points:
- Reliance on overdraft fees/insufficient funds (NSF) since 2015
- Verification of an account overdraft in financial institutions served by a basic processor
The first data point showed that institutions holding more than $1 billion in assets totaled $11.97 billion in fees in 2019. The overall market revenue for these fees was $15.47 billion in 2019. The seemingly problematic statistic for advocacy groups and regulators is that overdraft and NSF fees account for about two-thirds of commission revenue for institutions, making banks highly dependent on this revenue. The second data point looked at core processors and their data for small institutions, primarily data for the year 2014. This research found that 92.9% of small banks and 60.9% of credit unions had an overdraft program, with fees 13-19% lower than those of the big banks.4
On December 1, 2021, CFPB Director Rohit Chopra posted comments prepared in conjunction with published CFPB research. One comment pointed out that instead of being paid (in interest) to hold consumers’ money, consumers are now paying the big banks for this privilege, primarily through account fees like overdraft fees. Chopra then compared overdraft fees to interest paid on a short-term loan, using the example of a consumer who is charged a daily fee of $34 for a day or two from the bank to cover the small negative balance. of his deposit account, and how that would equate to an annual percentage rate (APR) of more than 10,000% on a loan.
Chopra went on to state that the CFPB expects institutions to be responsible for a fair, transparent and competitive financial market for consumers, and therefore the CFPB “will strengthen its review of banks that are highly dependent on discovered”.5 He threatens that the CFPB will take action against big banks that break the law and is considering additional policy guidance on the matter.
CFPB bank examiners should prioritize examinations of banks that rely heavily on overdraft fees, likely again focusing on call reporting data for this position. “Financial institutions that have a higher share of frequent overdrafts or a higher average fee burden for overdrafts should expect us to give them close prudential attention. Eventually, we plan to inform institutions about their position relative to their short peers. We believe that sharing this information will increase transparency and help combat the run to the bottom we have experienced in this market.”
On Dec. 8, 2021, Acting Comptroller of the Currency Michael Hsu wasn’t so forthright about regulators’ scrutiny. It emphasizes reform of traditional overdraft programs and only seems to threaten enforcement if reform becomes bogged down. OCC staff list features of overdraft programs that would benefit financial health, such as:
- Require consumers to join the overdraft program
- Provide a grace period before charging overdraft fees
- Allow negative balances without triggering overdraft fees
- Provide consumers with balance alerts
- Provide consumers with access to real-time balance information
- Link a consumer’s checking account to another account for overdraft protection
- Collect overdraft or NSF fees on a consumer’s next deposit only after other items have been posted or cleared
- Do not charge separate and multiple overdraft fees for multiple items in a single day and do not charge additional fees when an item is re-presented
In response to the CFPB’s demand for greater control of overdraft-related products, several large institutions have begun to reduce overdraft and insufficient funds fees or have radically revamped their overdraft products with features that are more beneficial to consumers. Here is a brief overview of some of the changes in major institutions:
Reducing fees in these programs can be more difficult for smaller institutions that lack the diversified revenue streams that larger banks have. Fortunately, most banks currently have more deposits on their balance sheets and can replace some potentially lost revenue with interest income. As your institution reviews its programs and procedures regarding overdraft protection and NSF management, keep in mind consumer protection regulations that may apply:
- Regulation B – Equal Credit Opportunity Act
- Regulation E – Electronic Funds Transfer Act
- Regulation V – Fair Credit Reporting Act
- Regulation Z – Truth in Lending Act
- SD Regulation – Truth in Savings Act
- Third party monitoring
- Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
If you have any questions about changes to your institution’s overdraft services, contact your advisor or submit the Contact Us form below.
1 Consumer Financial Protection Bureau Announces Settlements with TD Bank for Illegal Overdraft Practices, August 20, 2020, https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-settlement-td-bank-illegal- overdraft-practices/. ↩
2 Bureau of Consumer Financial Protection Settles With TCF National Bank, July 20, 2018, https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-tcf-national-bank/. ↩
3 CFPB Fines Regions Bank $7.5 Million for Illegal Overdraft Practices, April 28, 2015, https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-regions-bank-7 -5-million-for-unlawful-overdraft-practices/. ↩
4 CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees, December 1, 2021, https://www.consumerfinance.gov/about-us/newsroom/cfpb-research-shows-banks-deep-dependence-on-overdraft-fees/. ↩
5 CFPB Director Rohit Chopra’s Prepared Remarks on Overdraft Press Call, December 1, 2021, https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra -overdraft-press-call/. ↩