The Consumer Financial Protection Bureau released a white paper today on the impact of overdraft and non-sufficient funds (NSF) fees on the average bank account holder.
The report is the result of an examination the CFPB announced in February 2012, and involves an analysis of information provided from a request for information published in the Federal Register, along with institution data from a sample of large banks. The CFPB found three issues in particular to be especially troubling about overdraft protection programs: Opting in puts consumers at greater risk, overdraft practices are complex and may be difficult for consumers to understand, and the costs and risks vary by institution.
“Many financial institutions market their overdraft services as a protective measure that offers consumers greater peace of mind and security,” said Richard Cordray, Director of the CFPB, in a media call on Monday. “They correctly note that consumers often benefit when overdraft transactions are paid, which helps avoid returned checks or declined transactions. But our study also raises questions. What is marketed as overdraft protection can, in some instances, put consumers at greater risk of harm. Consumers need to be able to control their costs and expenses, and they deserve clarity on those issues.”
Since mid-2010, a bank cannot charge a consumer an overdraft or NSF fee without a consumer opting into a program. This change is rooted in a consumer protection instituted by the Federal Reserve when it changed Regulation E.
The CFPB study identified a group of Americans as “heavy overdrafters” — a small percentage of consumers who incur 10 or more NSF or overdraft charges in a year. The proportion of consumer checking accounts with at least one overdraft or NSF fee that were heavy overdrafters was 27.8% for banks that tracked all incidences for all accounts opened at any time during 2011.
“A small percentage of consumers are footing the bill,” Cordray said. The CFPB report also found a correlation between banks with heavy overdraft users and increased involuntary account closures.
The starkest statistic from the report showed accounts that had at least one overdraft or NSF fee in 2011 from the banks surveyed paid an average of $225 in annual fees. Also, these fees accounted for 61 percent of total consumer deposit account service charges in 2011 among the surveyed banks.
Overdraft protection can cost consumers a great deal, the study found. The average checking account fees per accountholder who chose to opt in were $196 in 2011, while the average fees for those who did not opt in were $28.
Cordray was careful to note that the CFPB is not suggesting in this report that financial institutions be prohibited from providing overdraft protection, which can be a valuable tool for consumers who need access to funds. But further examination of bank practices will continue.
“We need to determine whether or not they’re causing the kind of harm the federal consumer protection laws are designed to prevent,” Cordray said.
A senior CFPB official on Monday’s media call also reiterated that there are no legislative or enforcement actions planned on the issue, but the examination of banks’ particular practices in overdraft programs will continue to be examined.
That doesn’t mean Capitol Hill isn’t already interested in the issue of overdraft fees. Rep. Carolyn Maloney (D-N.Y.) and 45 other members of Congress introduced a bill in March to protect consumers from overdraft programs. The legislation would limit the number of overdraft fees consumers can incur, among other protections.