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Overdraft Changes Impact Smaller Institutions
Wednesday, June 24, 2015 6:45 AM

Banks and credit unions with less than $5 billion in assets showed the greatest reliance on overdraft fee income and could be hardest hit by any rule or guidance the Consumer Financial Protection Bureau publishes on the practice.

The rules, slated for release later this year, are now expected to focus on disclosures or transaction ordering as opposed to potentially harsher rules that would limit the amount of a charge or the number of times it could be incurred.

Overdraft Chart

Beginning in the first quarter, banks with more than $1 billion in assets were required to report overdraft fees charged to consumers on transaction and non-transaction deposit products intended primarily for individuals. The 600-some banks that fit in that group collected $2.51 billion in overdraft fees. Overdraft service charges and fees comprised more than 2 percent of operating revenue at banks with less than $5 billion in assets, compared to 1.64 percent at $50 billion banks. In the analysis, 17 of the top 20 banks had less than $5 billion in assets.

At Woodforest National Bank, a unit of The Woodlands, Texas-based Woodforest Financial Group Inc., overdraft service charges and fees were 81 basis points of average deposits, comprising 33.65 percent of operating revenue. Woodforest branches are primarily found in Wal-Mart and other discount stores.

Also on the top of the list was First National Bank Texas. Its branches are primarily on or around military bases. It primary on-base branch is Fort Hood National Bank. Competing with them is Armed Forces Bank out of Kansas. It appeared third on the list, pointing to the possibility that lower income individuals and military personnel are more susceptible to overdraft fees than the average portion of the population.

Overdraft Chart 2

The CFPB may be sensitive to the fact that small banks would bear the brunt of any changes to overdraft fees or disclosures. The agency is leaning toward opposing rules that would cap the fee size or limit the frequency. Possible rules would focus on prohibiting transaction reordering that maximizes potential overdrafts and better disclosures to help consumers avoid fees.

Another concern the CFPB must weigh when it comes to potential changes to overdraft rules is that the product is popular with consumers who would rather pay a fee than bounce a check. Those concerns could be one reason behind the agency's narrow focus toward disclosures and reordering.


Sources:  SNL Financial and Cornerstone Research, 17 June 2015