By: Nathalie K. Salomon
The Consumer Financial Protection Bureau (CFPB) is considering potential regulations related to overdraft services on checking accounts. An overdraft occurs when a consumer withdraws more money than he has in his account. When a bank covers the transaction, it charges an overcharge fee in return.
Overdraft services bring substantial revenues to banks: relying on data submitted to regulators, Bloomberg BNA reports that fees for non-sufficient funds and overdrafts generated $11.1 billion in revenue in 2015. Overdraft services are also valuable products to consumers: when short in cash, consumers tend to use overdraft services as short-term loans. The CFPB Director Richard Corday recognized that "overdraft can provide consumers with needed access to funds" but expressed concerns that policies and programs may be difficult for customers to comprehend and "greatly affect whether and how often an account holder will incur overdraft fees." Banks are already prohibited (by regulations in place since 2010) from charging fees for paying overdrafts on ATM and one-time debit card transaction unless the customer assents or opt-in to the overdraft service. It is unclear if more regulation is needed.
In 2012, the CFPB commenced its analysis of overdraft practices. A year later, and upon review of bank study data from 2011, the CFPB issued a white paper summarizing its findings as follows: overdrafts are costly ($225 on average), a substantial portion of consumers are "heavy" overdrafters (incurring more than ten overdrafts), and bank closed 6% of their consumers checking accounts due to unpaid negative balances.
Then in July, 2014, the CFPB released a report finding that a small fraction of customers pay overdraft fees (8% of customers incur nearly 75% of all overdraft fees), the amount of the transaction leading to overdraft is generally small (about $24 when overdraft fee is about $50), and most customers bring their accounts positive quickly (within 3 days to a week).
There are many options to regulate overdraft services, such as disclosure requirements, and limit the number of time fees can be charged. So far, however, there is no indication as to what type of regulation the CFPB will propose, if any. The risk is that regulations may deprive some customers of access to short-term liquidity.
The CFPB's analysis of the overdraft data is still ongoing. "The CFPB is continuing to engage in additional research and has begun consumer testing initiatives relating to the opt-in process" said the CFPB in its spring 2016 rulemaking agenda. By letter in May 2016, the American Bankers Association ("ABA") urged the CFPB to stop collecting data without giving the public an opportunity for comment. The ABA accused the CPFB of failing to comply with guidance interpreting the Paperwork Reduction Act of 1995. "We have concerns that the bureau is trying to collect data for its policymaking without subjecting the methodology of that collection to public comment," explained Jonathan Thessin, senior counsel at the ABA's Center for Regulatory Compliance.
It is unlikely that the CFPB will submit a proposal this year given all the other priorities the CFPB has on its plate, such as its recent submission of a debt collection proposal to the panel at the end of July.
Fitch Law Partners LLP will continue to monitor developments regarding the CFPB's pre-rule making activities regarding the overdraft services on checking accounts as well as industry responses thereto. For more information about the firm's banking law practice, please visit our website.