Overdraft services are a standard banking product. Life happens, and thankfully, most banks offer an overdraft product to come to the rescue when you are on vacation and forgot to do a savings transfer, or transpose numbers when balancing your checkbook. The end of 2021 came with a cautionary tale for financial institutions from regulators: Overhaul your overdraft services or potentially face enhanced scrutiny.

History

This is not the first time the Consumer Financial Protection Bureau (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 concerning overdraft programs, alluding to complex parameters.

In recent years, there would be an enforcement action here or there related to overdraft fees. Many of these actions stemmed not from the products themselves but how consumers were sold or enrolled for participation 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 ordered to pay $112 million in fees.ⁱ In 2018, Minnesota-based TCF National Bank was in hot water for the same practices and was assessed $28 million in fees.ⁱⁱ

Regulator Research

The CFPB conducted research using call report data to determine overdraft and insufficient fees on bank revenue. It primarily looked at two data points:

1. Overdraft/NSF fee reliance since 2015
2. Checking account overdraft at financial institutions served by core processors

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 nonsufficient funds 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 2014. This research found 92.9% of smaller banks and 60.9% of credit unions had an overdraft program with 13 to 19% lower fees than large banks.ⁱⁱⁱ

Research Reactions

On Dec. 1, 2021, CFPB Director Rohit Chopra published prepared comments in conjunction with the published CFPB research. One comment emphasized that instead of being paid (in interest) for banks 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 for 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% on a loan.

Chopra also said CFPB bank examiners will prioritize examinations of banks heavily reliant on overdraft fees, likely focusing again on call report data for this determination. “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.”^iv

Industry Response

In response to the CFPB’s claim to enhanced scrutiny into overdraft-related products, multiple large banks have begun slashing overdraft and insufficient fees or have drastically overhauled their overdraft products with more consumer-beneficial features. Here is a quick snapshot of some recent changes at large institutions: