Director of the Consumer Financial Protection Bureau
Overdraft Report Press Call
Thank you all for joining me today for the release of the Consumer Financial Protection Bureau’s preliminary report on the overdraft practices of banks and other financial institutions. This report describes a broad variety of different overdraft practices and different consumer experiences. It also raises concerns about the ability of consumers to anticipate and avoid overdraft costs. As I indicated at a field hearing on this subject last year, we recognize that federal agencies have addressed these issues in different ways at different times, and our review is intended to help develop more consistent federal oversight of these issues across financial institutions.
An overdraft occurs when a consumer spends or withdraws more money from his or her checking account than is available in the account. If the financial institution puts the transaction through, the consumer can incur an overdraft fee. If the institution rejects the transaction, the consumer may be harmed by the consequences of having the transaction fail (as when rent or a mortgage goes unpaid). The consumer can also incur a “non-sufficient funds” or “NSF” fee for a check or automated transaction that goes unpaid because the consumer’s account does not have a sufficient balance to cover it. Since mid-2010, under a rule adopted by the Federal Reserve, the institution cannot charge an overdraft fee for ATM withdrawals or most debit card transactions unless the consumer has affirmatively opted in.
Discretionary overdraft protection programs began years ago as occasional courtesies that an institution might offer to some of its customers. Over time, these programs have become more automated and are provided to a large proportion of depositors; as a result, they have become a significant source of industry revenues. In fact, our report found that overdraft and NSF fees represent 60 percent or more of all checking account fees. But the data shows that a relatively small percentage of consumers are footing most of the total bill – roughly one out of five people with a checking account.
Our report today examined overdraft practices at some of the country’s larger financial institutions and found wide variations across them when it comes to overdraft opt-in rates and costs. At some institutions, more than 40 percent of new customers were opting in for overdraft coverage; at others, it was less than 10 percent. The gap may reflect differences in the substance of overdraft programs, or differences in customer base, or differences in marketing approaches. On this point, we are interested to dig in and learn more about the reasons why.
Many financial institutions market their overdraft services as a protective measure that offers consumers greater peace of mind and security. 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. The report also raises questions about overdraft and NSF charges, and whether some existing practices leave consumers unable to properly anticipate and avoid unnecessary charges.
The report has three major takeaways. First, the data show that opting in to overdraft coverage of ATM and debit card transactions makes consumers more vulnerable to increased costs and involuntary account closures. For example, the study looked at consumers who had been heavy overdraft users before the 2010 federal opt-in regulation took effect and found that they saved, on average, $450 during the first half of 2010 by choosing not to opt in for overdraft coverage. The study also found that consumers who opted in for overdraft coverage are at greater risk of an involuntary account closure, which can leave a black mark on their financial history that makes it harder to open another checking account. We found that at some institutions, involuntary closure rates were 2.5 times higher for opt-in accounts.
A second takeaway is that financial institutions have very different policies, procedures, and practices that can be highly complex and difficult for consumers to understand, yet greatly affect whether and how often they will incur overdraft fees. For example, banks follow a variety of different approaches about how and when they post transactions for determining whether there is an overdraft. Some process larger transactions first; others process certain types of transactions first. Some, but not all, have daily caps on the number of overdraft and NSF fees that will be imposed, and the caps may be set at different levels, up to 12 per day. Some charge no overdraft fees on items under a certain amount (say, for example, a transaction of $5 or less); others do not charge if the total amount of the net overdraft at the end of the day is under a certain amount. At still other institutions, if you miss by as little as a penny, you may incur a hefty overdraft fee. Predicting or planning around these results can be highly complex.
In addition, it is not always clear to a consumer what day a particular check, or even a debit card transaction, will be posted. When an institution processes items that exceed the available funds in an account, the consumer may get hit with one overdraft charge or many charges. It depends on the varying parts of the machinery that makes up that institution’s overdraft program and deposit systems as well as the varying parts of the machinery that make up the overall transaction processing system in the United States. This makes it very difficult for consumers to understand, anticipate, and avoid costs.
The third takeaway is how widely the outcomes for consumers vary across financial institutions. The average amount of annual overdraft charges in our study was $225. But consumers at some institutions paid an average of $147, while consumers at others paid $298, more than twice as much. Similarly, involuntary account closures because of overdraft ranged widely. Of the accounts that were open at some point in 2011, six percent were involuntarily closed by the end of the year. But the rate of involuntary closures appeared to vary by more than 14-to-1 among the financial institutions covered in our study. These wide variances raise further questions.
I think it is important to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage. Moreover, our study shows progress in some areas in recent years in protecting consumers from harm. Nonetheless, our findings raise concerns about the number of consumers who are incurring heavy overdraft fees or account closures, and the wide variations across institutions indicate that certain practices and procedures merit further analysis. We need to determine whether they are causing the kind of consumer harm that the federal consumer protections laws are designed to prevent.
Today’s study represents our first effort to ground discussion around these issues in the actual facts and data of the marketplace. We are a data-driven agency, and we will continue to examine this subject carefully before taking action through a transparent policy process. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.