By: Laura Pringle
Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203 (the Dodd-Frank Act), charges the Bureau of Consumer Financial Protection (the CFPB or the Bureau) with regulating “the offering and provision of consumer financial products or services under the Federal consumer financial laws.” Specifically, the Dodd-Frank Act grants regulatory authority to the Bureau for the Electronic Funds Transfer Act, except with respect to section 920 of that Act, and the Truth in Savings Act, which taken together, in part, govern consumer transaction accounts. Accordingly, the Bureau is reviewing existing regulations and supervisory guidance issued by various regulators pertaining to the use of overdraft programs by financial institutions.
Over the past decade or more, many institutions introduced automated overdraft systems under which overdraft items are paid, subject to tolerances or limits that are established at the account level, and an overdraft fee is charged on a per item basis. A study published in 2008 by the Federal Deposit Insurance Corporation (FDIC) of overdraft practices among banks it supervised found that more than two-thirds of surveyed banks with assets of $250 million or more had automated overdraft programs. The FDIC study found that overdraft and NSF fees accounted for 74% of the deposit service income of banks with automated overdraft programs during the 2006 study period. The FDIC study also concluded that the most frequent overdrafters were disproportionately low and moderate income and more likely to be young adults.
On January 29, 2009, the Board of Governors of the Federal Reserve System (Board) published final regulations amending Regulation DD, which implements the Truth in Savings Act, effective January 1, 2010. These amendments require all institutions to provide additional periodic statement disclosures of overdraft fees and fees for returning items unpaid. They also restrict institutions’ ability to provide “padded” balance amounts (i.e., including amounts institutions may make available through their overdraft coverage programs) in response to balance inquiries using automated systems such as ATMs, online banking and voice response units.
On November 17, 2009, the Board published final regulations amending Regulation E, which implements the Electronic Fund Transfer Act, effective January 19, 2010. These amendments prohibit financial institutions from charging fees for transactions that overdraw an account by use of a debit card at an ATM and point-of-sale unless the consumer opts in to permitting the institution to authorize and pay overdrafts on these transactions. In so doing the Board noted that “the cost to consumers of overdraft fees assessed in connection with ATM and debit card overdrafts is significant” and “may substantially exceed the amount[s] overdrawn.” And based upon research that it conducted, the Board found that “many consumers may not be aware that they are able to overdraft an ATM or POS” and may therefore “unintentionally overdraw their account.” Based on consumer testing, the Board further found that many consumers “would prefer to have ATM withdrawal and debit card transactions declined if they had insufficient funds, rather than incur an overdraft fee.”
In August 2010, the FDIC also issued guidance stating that overdraft payment programs are subject to the requirements of the Equal Credit Opportunity Act (ECOA) as implemented through Regulation B. Specifically, the FDIC adopts the 2005 joint Guidance on Overdraft Protection Programs, stating that “steering or targeting certain consumers on a prohibited basis for overdraft protection programs while offering other consumers overdraft lines of credit or other more favorable credit products or overdraft services, will raise concerns under the ECOA.”
FDIC, Financial Institution Letter, (August 11, 2010) (citing the 2005 Joint Guidance on Overdraft Protection Programs adopted by the Office of the Comptroller of the Currency; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; National Credit Union Administration). http://www.fdic.gov/news/news/financial/2010/fil10047a.html.
Some have argued that overdraft programs allow consumers to meet liquidity challenges while others argue that overdraft eventually adds to liquidity issues because of the high recurring fees that frequent overdrafters must pay. Further, there is concern that heavy use may lead a significant percentage of users to damage their credit records in databases institutions use to qualify consumers for checking accounts and thereby to lose access to the services of competing providers or to the banking system altogether. To what extent are these various perspectives valid?
The CFPB is continuing to evaluate overdraft regulations including those relating to marketing, disclosures, fees, and practices. On February 28, 2012, the CFPB published a notice regarding the impacts of overdraft programs on consumers requesting comments and on April 25, 2012, the CFPB extended the comment period to June 29, 2012. The CFPB requested comment specifically regarding the following:
- Lower cost alternatives to overdraft protection programs;
- Consumer alerts and information provided regarding balances and overdraft triggers;
- Impact of changes to Regulation DD, Regulation E, and Overdraft opt-in rates;
- Impacts of changes in financial institutions’ operating policies;
- The economics of overdraft programs; and
- Long-term impacts on consumers.
The specific questions being asked and issues raised by the CFPB are set forth for comment in this publication. We have revised Audit Question No. 73 in these Audit Procedures from the subtitle “Supervisory Overdraft Guidance” to “Supervisory Overdraft Guidance and Impact of Overdraft Programs on Consumers” and have added a new corresponding Note to include this information.
On April 13, 2012, the CFPB released a bulletin which clarified that financial institutions under Consumer Financial Protection Bureau (“CFPB”) supervision may be held responsible for the actions of the companies with which they contract. The CFPB stated that it will take a close look at service providers’ interactions with consumers and hold all appropriate companies accountable when legal violations occur. CFPB explained that using outside vendors can pose additional risks, particularly if a service provider is unfamiliar with consumer financial protection laws or has weak internal controls. The CFPB stated that it wants to ensure that consumers are protected from irresponsible service providers and that institutions are contracting with honest third parties. This Institution may use Exhibit “E” to this Policy to document steps and findings for managing the risks of service provider relationships. This bulletin can be found at the following address: www.consumerfinance.gov/pressreleases/test-release/.
This Article was also published at Wolters Kluwer’s Compliance Headquarters™ website: www.complianceheadquarters.com.