A small percentage of checking account holders are heavy overdraft offenders, incurring more than 10 overdraft or non-sufficient funds (NSF) fees annually, but could regulatory concerns for a handful of repeat offenders result in new overdraft rules for the whole industry?
That information came out in a recent Consumer Finance Protection Bureau (CFPB) report on overdraft practices. The agency launched a two-pronged inquiry into the subject in February 2012, relying on data gathered from responses to a Request for Information published in the Federal Register at that time and aggregate institution-level data from a sample of large banks that hold a substantial percentage of domestic checking accounts and operate in all 50 states.
According to the CFPB’s findings, released earlier this month, nearly 28 percent of consumer accounts in 2011 incurred overdraft or NSF fees. One in five accounts incurred between one and 10 overdraft or NSF fees, and 7.7 percent of accounts were heavy overdrafters, racking up more than 10 overdraft or NSF fees during the year.
Account holders who incurred at least one overdraft or NSF fee paid an average of $225 in fees across the year, but accountholders at the two study banks with the lowest fees paid an average of $147, while account holders at the two banks with the highest fees paid close to $300 on average.
While the agency has made clear that its findings should not preclude banks from offering overdraft protection and has not indicated which areas it might target in a new round of overdraft regulation, the report does offer a few clues as to where the agency might set its sights if it decides to act.
Flood Of Fees
A common consumer complaint is that some banks process larger transactions before smaller ones, resulting in a waterfall of overdraft and NSF fees. Another target could be disclosures to customers.
But as consumer advocacy groups fret that current overdraft regulations are not enough, another study, from the economic research firm Moebs Services, found that overdraft revenues fell 2.8 percent during the first quarter of 2013 to $31.1 billion, from the fourth quarter of last year.
Economist and CEO Michael Moebs, however, chalks that up to consumer behavior. Bank customers recovering from the holiday spending season were watching their checking accounts a little more closely, he told Banker & Tradesman. Moebs also attributed some of the increased vigilance to the end of the Bush tax cuts and the beginning of Affordable Health Care tax charges.
Moebs also noticed a “very striking difference” between the typical overdraft fees charged by mega banks versus community banks and credit unions – $35 per overdraft fee versus $25, respectively.
That echoes the Independent Community Bankers Association’s findings in its own study of overdraft practices, in whichthe association surveyed a random sampling of 3,000 consumers, as well as 575 community banks.
On the whole, the ICBA’s report shows that customers of community banks overdraw their accounts less frequently than customers of big banks and that community banks do a better job of informing their customers about their options concerning overdraft protection. More than three-quarters of the consumers the ICBA surveyed, for example, did not incur an overdraft over the prior year.
Furthermore, the ICBA and other banking associations point out that many consumers want overdraft protection. They would rather incur the overdraft fee than have their rent check returned unpaid, bankers say.
And while the CFPB says its report is not necessarily a precursor to impending overdraft regulation, some bankers are nonetheless concerned about how the agency may wind up regulating the practice.
“We’re slightly concerned that the CFPB could take a direction that would force folks to stop offering overdraft,” said David R. Pommerehn, senior counsel and assistant vice president at the Consumer Bankers Association.
One unintended consequence, he said, is that too much overdraft regulation could push consumers into unbanked or underbanked territory, where they’ll lean more heavily on services like payday lenders and pawn shops.
And the ICBA urged regulators to distinguish between ad hoc and automated overdraft payment programs and to avoid unreasonable customer contact requirements.
“There is already a lot of consumer communication through the banking relationship,” ICBA Vice President and Regulatory Counsel Elizabeth Eurgubian said. “That shouldn’t be micromanaged by the regulatory agencies.”
For his own part, Moebs says that overdraft practices could generally do with a good deal more transparency, meaning more complete disclosures, greater clarity of wording and faster conveyance of information.
“The flip side of this is we are seeing more banks, thrifts and credit unions lowering prices than ever before. This is meaningful for the consumer’s pocket book especially if the consumer pays more attention to managing their financial affairs,” he said. “The key to balance of revenue and affordability is much more information and faster delivery of information to the consumer. Let the consumer make decisions about their checking account.”
Email: lalix@thewarrengroup.com
