Restrictions on Overdraft Not Protecting Consumers: CFPB

WASHINGTON — Consumers are still being gouged by high overdraft fees and abrupt account closures despite new restrictions on banks designed to protect depositors, according to a study released Tuesday by the Consumer Financial Protection Bureau.

Consumers who chose to participate in overdraft programs paid high fees at some banks and were more likely to have their accounts closed than customers who declined to enroll, the study said.

Although the CFPB said the study was not necessarily a precursor to further regulations on overdraft, the findings make it more likely the agency will act in some capacity.

"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," CFPB Director Richard Cordray said in a conference call with reporters Monday. "We need to determine whether they are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent."

Many banks have significantly changed their overdraft programs and lowered fees since a 2010 rule required institutions to get customers' permission before enrolling them. But the CFPB report found wide variations amongst banks that continue to offer overdraft protection programs.

For example, the report showed that the annual average overdraft charge was $225 per account but some consumers paid as much as $298 at certain banks while others paid as low as $147.

The rate of involuntary closures was also vastly different. For example, one unnamed bank was 14 times more likely to shut an account in 2011 than the bank with the lowest involuntary closure rate.

"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," Cordray said.

He called for a more consistent approach amongst banks and regulators.

"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," he said.

The report comes at the same time that other regulators recently delayed a proposal that would have required banks to break out overdraft fee income, among other new data reporting mandates. Consumer groups have also been pushing for more scrutiny of overdraft protection programs.

"I'm hoping that this report will be the basis for new rules," said Susan Weinstock, director of Safe Checking in the Electronic Age Project of Pew Charitable Trusts, in an interview last month with American Banker. "We'd like to see the CFPB look at what it is actually costing banks, and see [to it] that the fees are actually reasonable."

Pew released a report last month highlighting best overdraft protection practices at some of the largest banks. But the report also found disclosure problems as well as significant fees for depositors who had repeat overdrawn transactions within a week.

Similarly, the CFPB found that certain banks have a strong dependence on overdraft charges with related fees constituting 61% of consumer checking accounts and 37% of total deposit account service charges in 2011, based on the banks under review.

"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," Cordray said.

As overdraft systems became more automated and the program was offered to a larger amount of depositors, it generated a significant source of revenue for banks, Cordray added. It also generated more confusion, he said.

"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," Cordray said. "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."

However, other reports show overdraft revenues have severely declined since their peak in 2009, before the new rules went into effect that banned banks from charging fees on ATM withdrawals and debit card transactions unless a consumer opted in.

A recently released study by the economic research firm Moebs Services shows revenue from overdrawn accounts at financial institutions was relatively flat for the past year with only 20% of banks increasing their fees.

"In most markets, banks are about as high as they can reasonably get," said Lynn David, the CEO of Community Bank Consulting Services, in a recent interview with American Banker. "I'm not seeing many increases."

Overdraft revenues were estimated at $31.1 billion in the first quarter compared with $31 billion a year ago, according to Moebs. Michael Moebs, the firm's CEO, recently said he expects overdraft revenue to begin picking up as consumer spending increases. But revenues could be easily halted if regulators take stronger action against overdraft fees and protection programs that appear more lucrative for the bank than for the consumer.

Cordray declined to say whether the agency would act, but didn't rule it out.

"We are a data-driven agency, and we will continue to examine this subject carefully before taking action through a transparent policy process," Cordray said.

The agency is closely watching a proposal by three other bank regulators that would include requiring banks to report overdraft fee revenue in their financial reports. The proposal was delayed last month after the banking industry argued the requirement could be used to draft new consumer policies rather than assessing their financial position.

"The call report is designed to reflect a financial institution's financial position," said Anne Wallace, senior director of consumer financial services for the Financial Services Roundtable, in a recent interview with American Banker. "There is a structure there that has been used for years for a specific purpose. It is well known in the industry, the public and the investor public as a tool for evaluating the financial institution's financial health. This seems like an addition that simply is out of character."

Though the proposal has been delayed, it would help the CFPB broaden its own research since the agency's overdraft report was mostly limited to institutions it oversees, which are banks with more than $10 billion of assets. To help augment its study, the agency put out a request for information to attract smaller banks and pulled data by external researchers who work with regulators.