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Consumer Financial Protection Bureau white paper on overdraft practices

Consumer Financial Protection Bureau white paper on overdraft practices

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Published by LakeCoNews
The Consumer Financial Protection Bureau on Tuesday, June 11, 2013, 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 Consumer Financial Protection Bureau on Tuesday, June 11, 2013, 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.

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Published by: LakeCoNews on Jun 12, 2013
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11/28/2013

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An important consumer outcome of any overdraft program is the percentage of negative
transactions that are paid (i.e., result in overdrafts) or returned unpaid (i.e., were NSFs).bb
Paying overdraft transactions may confer some benefit (in exchange for the associated fees and
other costs) to consumers by helping them make timely payments and avoid late penalty fees
and/or interest charges from a merchant or biller. In contrast, returning an item generally
confers little benefit to the consumer (other than perhaps deterring future overdrafting and any
subsequent consequences) and can result in an NSF fee as well as additional related fees, such as
a returned check fee charged by the institution to whom the check was presented or a late fee
charged by the entity to whom payment was due. At the median, study banks paid into overdraft
83% of transactions that exceeded the available balance in 2011 and returned 17%.

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Declined ATM and POS transactions are generally not considered returned items.

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CONSUMER FINANCIAL PROTECTION BUREAU STUDY OF OVERDRAFT PROGRAMS

4. Overdraft Use Following the
2010 Opt-In Requirement
Under Regulation E

In 2009, the Board amended Regulation E to require institutions to obtain the affirmative
consent of consumers before charging overdraft fees on ATM and non-recurring point of sale
(“POS”) debit card transactions.30 This section explores opt-in ratescc

among different
consumers (including heavy users of overdraft) and across banks. It then compares outcomes
for consumers who did and did not opt in to ATM/POS debit card coverage and examines the
change in overdraft items and fees experienced by consumers who did and did not opt in to
attempt to understand how overdraft use changed after the implementation of changes to
Regulation E.

cc

Throughout this paper, our discussion of opt-in rates and overdraft programs is limited to checking accounts only,
although related regulations (Regulation E and Regulation DD) apply to other types of accounts as well. Regulations E
and DD have been recodified by the CFPB.
Some institutions enable consumers to affirmatively opt out of all fee-based overdraft coverage—that is, on any type
of transaction, including checks and ACH. This option is not frequently advertised, however, and many institutions
that offer this option will charge an NSF fee on check and ACH transactions that are returned due to insufficient
funds. In addition, among those institutions that offer checking products without an opt-in option for ATM and POS
overdraft coverage, some institutions also will not pay check or ACH transactions in the absence of sufficient available
funds. Again, such institutions may charge an NSF fee on check and ACH transactions when such items are rejected.
Some of these accounts are “second chance” products for consumers with prior histories of account charge offs,
designed to limit credit risk posed by these accountholders to the institutions. These products are also intended to
prevent consumers from incurring NSF fees as well as overdraft charges by restricting check writing. A 2011 survey of
institutions supervised by the FDIC found that 44% of institutions with assets of $38 billion or more offered second
chance products, while 32% of mid-sized institutions and 20% of community banks did so. 2011 FDIC Survey of
Banks’ Efforts to Serve the Unbanked and Underbanked, p.16 (Dec. 2011).

28

CONSUMER FINANCIAL PROTECTION BUREAU STUDY OF OVERDRAFT PROGRAMS

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