Overdraft services are standard banking products. Life happens—and thankfully most banks offer an overdraft product to come to the rescue in these circumstances. The end of 2021 came with a cautionary tale for financial institutions from regulators: Overhaul your overdraft services or potentially face enhanced scrutiny. Banks that derive a significant portion of fee revenue from overdraft fees should heed the most recent research and statements surrounding this topic from the Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of Currency (OCC).
This is not the first time the CFPB has conducted research related to overdraft programs. Shortly after its creation in 2011, the CFPB published a semiannual report in 2012 that highlighted the pitfalls and consumer woes 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 mishandling of items, such as the methods of in large to small amounts or chronological presentment order, and secret shoppers revealed a lack of general knowledge of the parameters at branch levels. This led to an overall perception of programs that were too complex for consumers to be able to anticipate the costs associated with transactions that would be associated with that product.
In recent years, there were enforcement actions here or there related to overdraft fees. Many of these enforcement actions stemmed not from the products themselves, but from how consumers were sold or enrolled in them. More recently, in 2020, TD Bank was found to be in violation of Regulation E as it related to overdraft fees for ATM and one-time debit card transactions and was ordered to pay $112 million in fees.1 In 2018, Minnesota-based TCF National Bank was in hot water for the same type of practices and was assessed $28 million in fees.2 Regions Bank, headquartered in Birmingham, Alabama, was found to be charging consumers for overdraft fees when consumers had not opted in for overdraft coverage, and was required to pay $56.5 million in restitution and fines.3
The CFPB conducted research using call report data to determine what impact overdraft and insufficient fees had on bank revenue. It primarily looked at two data points:
- Overdraft/nonsufficient funds (NSF) fee reliance since 2015
- Checking account overdraft at financial institutions served by a core processor
The first data point showed institutions with more than $1 billion in assets totaled $11.97 billion collectively in fees in 2019. Overall market revenue for these fees was $15.47 billion in 2019. The apparent problematic statistic for advocacy groups and regulators is that overdraft and NSF fees account for about two-thirds of fee revenue for institutions, making banks heavily reliant on this revenue. The second data point looked at core processors and their data for smaller institutions, primarily data for the year 2014. This research found 92.9 percent of smaller banks and 60.9 percent of credit unions had an overdraft program, with 13 to 19 percent lower fees than large banks.4
On December 1, 2021, CFPB Director Rohit Chopra released prepared comments in conjunction with the published CFPB research. One comment emphasized that instead of being paid (in interest) for holding consumers’ money, consumers now pay large banks for this privilege, primarily through account service charges like overdraft fees. Chopra went on to liken an overdraft fee to interest paid on a short-term loan, using the example of a consumer being charged a $34 daily fee for a day or two of the bank covering the small negative balance in their deposit account, and how that would equate to an annual percentage rate (APR) of more than 10,000 percent 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 as a result, the CFPB will be “enhancing its scrutiny of banks that are heavily dependent on overdraft fees.”5 He threatens that the CFPB will take action against large banks that violate the law and is considering additional policy guidance around this topic.
CFPB’s bank examiners are to prioritize examinations of banks that rely heavily on overdraft fees, likely focusing again on call report data for this line item. “Financial institutions that have a higher share of frequent overdrafters or a higher average fee burden for overdrafting should expect us to be paying them close supervisory attention. Ultimately, we plan to inform institutions on where they stand relative to their peers with overdraft. We believe sharing that information will increase transparency and help against the race to the bottom we have seen in this market.”
On December 8, 2021, Acting Comptroller of the Currency Michael Hsu was not as direct regarding regulator scrutiny. His emphasis stands on reforming the traditional overdraft programs and seems to only threaten enforcement action if reform stalls. The OCC’s staff enumerates features of overdraft programs that would be beneficial to financial health, such as:
- Requiring consumer opt-in to the overdraft program
- Providing a grace period before charging an overdraft fee
- Allowing negative balances without triggering an overdraft fee
- Offering consumers balance-related alerts
- Providing consumers with access to real-time balance information
- Linking a consumer’s checking account to another account for overdraft protection
- Collecting overdraft or NSF fees from a consumer’s next deposit only after other items have been posted or cleared
- Not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented
As a response to the CFPB’s claim to enhanced scrutiny into overdraft-related products, multiple large institutions have begun slashing overdraft and insufficient funds fees or have drastically overhauled their overdraft products with more consumer-beneficial features. Here is a quick snapshot of just some of the changes at large institutions:
Cutting fees in these programs may be more of a challenge for smaller institutions that do not have the diversified revenue streams that larger banks have. Thankfully, most banks have more deposits on their balance sheets currently and can replace some potentially lost revenue with interest income. As your institution reviews its programs and procedures around overdraft protection and handling of insufficient funds, bear in mind the consumer protection regulations that may be applicable:
- Regulation B – Equal Credit Opportunity Act
- Regulation E – Electronic Funds Transfer Act
- Regulation V – Fair Credit Reporting Act
- Regulation Z – Truth in Lending Act
- Regulation DD – Truth in Savings Act
- Third-Party Oversight
- Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
If you have questions about changes to your institution’s overdraft services, reach out to 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 Unlawful 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 Prepared Remarks of CFPB Director Rohit Chopra on the Overdraft Press Call, December 1, 2021, https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra-overdraft-press-call/. ↩