Insights

The dog days of summer have brought about several important reports regarding bank overdraft practices. The most prominent of the developments was the publication of a Data Point: Checking Account Overdraft by the CFPB. Published at the end of July, the Data Point is a follow-up to the CFPB's 2013 Study of Overdraft Programs and parses transaction-level data on roughly 2 million accounts over an 18-month period of time. The contributors of this data were the same CFPB-regulated institutions that provided aggregate data regarding their overdraft programs that resulted in the 2013 study.

A fair amount of the Data Point focuses on distinctions in overdraft occurrences between customers who "opted in" to permit their financial institutions to assess a fee when an overdraft occurred in connection with an ATM or non-recurring debit card point-of-sale ("POS") transaction, compared to those who did not opt-in. This opt-in requirement became effective in August of 2010, pursuant to revisions to Regulation E (which implements the Electronic Fund Transfers Act). Among the key findings highlighted by the Data Point report:

• Most consumers did not opt-in to have ATM and one-time POS transactions paid to create an overdraft and have a fee assessed (14.3% of consumers were in an opt-in status). Once made, opt-in elections were subject to very little change.
• Overdraft and non-sufficient funds ("NSF") fees made up most of the total checking account fees paid by customers. For those customers who "opted-in" to ATM and POS overdraft, overdraft and NSF fees accounted for nearly three quarters of their total checking account fees.
• Customers who opted-in were three times as likely to have more than 10 overdrafts per year as compared to customers who did not opt-in. Nearly 20% of customers who opted-in incurred more than 10 overdraft items per year.
• Accounts that are subject to the ATM / POS opt-in have seven times as many overdrafts that result in fees when compared to accounts that are not subject to the opt-in.
• Most transactions that lead to overdrafts are relatively small. For debit card transactions, the median transaction amount that leads to an overdraft fee is $24 (compared to a median amount of $50 for all types of debits).
• Among opted-in accounts, the probability of incurring an overdraft is significantly higher across all transaction types (such as checks, ACH, etc.), not just ATM and one-time POS.

The Data Point also noted that overdrafts were more prevalent among younger customers (age 18 to 25) as compared to older customers whose finances presumably would be more stable. Similar to the 2013 study, the Data Point noted that a small number of bank customers account for the vast majority of all overdraft fees. The Data Point also found that overdrafts generally are brought back into positive balance territory fairly quickly (about a half of accounts experiencing an overdraft are brought into a positive balance within 3 days, and three quarters of such accounts become positive within a week).

The CFPB Data Point publication came on the heels of a report, issued in June, by the Pew Charitable Trusts. The Pew report (entitled "Overdrawn: Persistent Confusion and Concern About Bank Overdraft Practices") is based on a survey of just over 1,800 individuals that was conducted in December of 2013. Similar to the CFPB study, the focus of the Pew survey was on customers who overdrew their checking account through the use of a debit card - meaning that they had "opted-in" under the Reg E rule.

Although the methodology was different from (and the sample size much smaller than) CFPB approach, there are consistencies between the two reports. For example, the Pew report also found that:

• Most transactions causing overdrafts were relatively small ($ 50 or less);
• Younger consumers (defined in the Pew survey as those 25 or younger) were significantly more likely to pay an overdraft penalty than consumers 65 or older; and
• Most individuals experiencing an overdraft had a negative account balance for a relatively limited period of time (4 or fewer days, per the survey finding).

However, due to the nature of the survey, the Pew report also uncovered additional findings regarding consumer experiences with overdrafts. Some involved the nature of the consumer. For example, the survey found that consumers earning less than six figures are 105% more likely to pay an overdraft as compared to those earning more than $100,000. It also uncovered that nonwhites are 83% more likely to pay an overdraft penalty than are whites.

Coupled with these demographic findings were several additional findings regarding consumer experiences with overdraft programs. Two of the findings are worth highlighting. The first was that survey respondents indicated that there was a delay between the occurrence of the overdraft and their becoming aware of its occurrence, with most being made aware of the overdraft through their account statement.

More troubling was the fact that just over half of the Pew survey respondents who experienced an overdraft did not recall enrolling for the service - despite the fact that affirmative consent is required for ATM and POS overdrafts under Reg E. Did the banks holding these accounts simply enroll them in the service without their consent? Almost certainly not. There may be something else in play here.

That "something else" just might be the fact that the manner in which checking accounts work is deceptively complicated. Deposits and debits can happen throughout the course of a day, but usually are not posted to an account until the end of the day. When that occurs they are often put into a certain order, sometimes within certain priority groups. Layer on top of that the fact that most types of transactions seeking to debit funds from an account involve some degree of "float" (the period of time between when the consumer writes a check or steps up to a POS terminal to make a purchase and the date on which that transaction arrives at the bank to be paid) and it becomes very difficult to understand and very difficult to explain.

This degree of difficulty may help to explain the last piece of the overdraft puzzle to drop in recent days. In July, the results of a mystery shopping project were released. The project was a joint effort of four non-profit organizations (the California Reinvestment Coalition, the New Economy Project, Reinvestment Partners, and the Woodstock Institute). The mystery shopping program was designed to focus on the manner in which financial institutions located in selected parts of the country (Chicago, Durham, N.C., New York, and Oakland) sell overdraft services to customers.

The findings of this mystery shopping program revealed some interesting data points:

• Bank employees' explanation of overdraft programs was inconsistent, with responses often being unclear and incorrect.
• Explanations of how overdraft fees are triggered were often not clearly or correctly explained.
• Mystery shoppers also reported that bank employees often did not explain to customers that they must opt-in to ATM and POS overdraft.

Again, the complexity with which checking accounts operate likely accounts for some of the confusion at branch employee level with precisely how and when an overdraft charge may be assessed.

While it would be folly to predict precisely what will result from these related reports, one thing is clear: overdrafts remain an area of focus for regulators and consumer advocates. This makes sense. While the country continues to dig itself out of the Great Recession, so do consumers. As a matter of consumer protection policy, regulators will keep a close eye on those areas where the road to recovery for consumers and financial services companies intersect. Overdrafts and debt collection (also an area of recent CFPB focus) are two such points. Financial institutions should continue to maintain - or perhaps enhance - prudent controls on overdraft services and promote prudent account use by their customer base. A failure to do so will almost surely result in additional regulatory measures.

Thomas P. Quinn, Jr. is a partner in the Fall River, MA office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at tquinn@hudco.com.