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CFPB Report Raises Concerns about Impact of Overdraft Practices on Consumers
Wednesday, June 12, 2013 5:25 AM

Yesterday, the Consumer Financial Protection Bureau (CFPB) released a report on bank and credit union overdraft practices that raises concerns about whether the overdraft costs on consumer checking accounts can be anticipated and avoided. The report shows big differences across financial institutions when it comes to overdraft coverage on debit card transactions and ATM withdrawals, drawing into question how banks sell this account feature. The report also finds that consumers who opt in for overdraft coverage end up with more costs and more involuntary account closures.

“Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that overdraft programs at some banks may be increasing consumer costs,” said CFPB Director Richard Cordray. “What is often marketed as overdraft protection may actually be putting consumers at greater risk of harm.”

The overdraft report is available at: http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf

The CFPB study raises questions about whether overdraft costs can be anticipated and avoided. The agency asserts that a bank’s complex and often unique overdraft policies, procedures, and practices can be very difficult for a consumer to understand. These complexities include:

  • Complex transaction postings: The order in which transactions are posted to an account can influence the number of transactions that incur an overdraft fee. The study found wide variation in posting practices, from institutions debiting transactions at periodic intervals throughout the day to debiting them in nightly batches. Banks also differ in how they combine, sort, or order the transactions.
  • Overdraft coverage limits that often depend on many factors: The overdraft coverage limit is the amount of money the institution is willing to advance to an accountholder when his or her funds are insufficient to cover a pending payment. Some institutions have limits of fixed amounts, others vary limits based on the accountholder’s individual circumstances, such as his or her deposit patterns. Smaller limits reduce the opportunities for overdraft but can result in more non-sufficient fund fees. Higher limits can result in more overdraft fees because the consumer may keep drawing from his or her account.
  • Complicated fee structures that are not standardized: Institutions have different fee structures when it comes to capping the number of overdrafts that can be incurred in a single day. Some banks, for example, limit the number of overdraft charges in a day to two; other banks have no cap on fees or caps that allow as many as 12 overdrafts and non-sufficient fund fees in a day. Similarly, some banks will not charge an overdraft fee for any item that overdraws the account by less than $5 while other banks charge fees on every overdraft transaction regardless of size.

Because bank and credit union overdraft policies, procedures, and practices are so different, the CFPB believes the outcomes for consumers at the various banks in the study also varied. The CFPB study found:

  • Average annual overdraft charges vary among institutions: The average consumer who overdrew his or her account paid $225 in overdraft and insufficient funds charges over the course of one year. Among the banks in the study, consumers at some banks paid an average of $298 while consumers at others paid only $147.
  • Involuntary account closures vary widely: Among the banks in the study the rate of involuntary closures appears to have varied by nearly 9 percentage points across the banks in the study.

A factsheet about overdraft practices is available at: http://files.consumerfinance.gov/f/201306_cfpb_factsheet_overdraft-practices.pdf