28 February 2012
Exploitation of Customers by Bank Overdraft Fees
[Federal Register Volume 77, Number 39 (Tuesday, February 28, 2012)]
[Notices]
[Pages 12031-12034]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4576]
[[Page 12031]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
[Docket No. CFPB-2012-0007]
Impacts of Overdraft Programs on Consumers
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Notice and request for information.
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SUMMARY: Title XIV of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203 (the Dodd-Frank Act), charges the
Bureau of Consumer Financial Protection (the CFPB or the Bureau) with
regulating ``the offering and provision of consumer financial products
or services under the Federal consumer financial laws.'' \1\
Specifically, the Dodd-Frank Act grants regulatory authority to the
Bureau for the Electronic Funds Transfer Act,\2\ except with respect to
section 920 of that Act, and the Truth in Savings Act,\3\ which taken
together, in part, govern consumer transaction accounts. Accordingly,
the Bureau is reviewing existing regulations and supervisory guidance
issued by various regulators pertaining to the use of overdraft
programs by financial institutions. To support this review, the Bureau
seeks information from the public on the impact of overdraft programs
on consumers.
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\1\ 12 U.S.C. 5491(a).
\2\ 15 U.S.C. 1693 et seq.
\3\ 12 U.S.C. 4301 et seq.
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The Bureau encourages comments from the public, including
consumers, overdraft program processors, and financial institutions.
DATES: Comments must be received on or before April 30, 2012 to be
assured of consideration.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-
0007, by any of the following methods:
http://www.regulations.gov. Follow the instructions for
submitting comments.
Email: cfpb_overdraft_comments@cfpb.gov.
Mail: Monica Jackson, Office of the Executive Secretary,
Bureau of Consumer Financial Protection Bureau, 1500 Pennsylvania Ave.
NW., (Attn: 1801 L Street NW.), Washington, DC 20220.
Hand Delivery/Courier: Monica Jackson, Office of the
Executive Secretary, Consumer Financial Protection Bureau, 1700 G
Street NW., Washington, DC 20006.
Instructions: The CFPB encourages the early submission of comments.
All submissions must include the document title and docket number.
Please note the number of any question to which you are responding at
the top of each response (respondents need not answer each question).
In general, all comments received will be posted without change to
http://www.regulations.gov. In addition, comments will be available for
public inspection and copying at 1700 G Street NW., Washington, DC
20006, on official business days between the hours of 10 a.m. and 5
p.m. Eastern Time. You can make an appointment to inspect the documents
by telephoning 202-435-7275. All comments, including attachments and
other supporting materials, will become part of the public record and
subject to public disclosure. Sensitive personal information such as
account numbers or Social Security numbers should not be included.
Comments will not be edited to remove any identifying or contact
information.
FOR FURTHER INFORMATION CONTACT: For general inquiries, submission
process questions or any additional information, please contact Monica
Jackson, Office of the Executive Secretary, 202-435-7275.
SUPPLEMENTARY INFORMATION:
Background
Technological Advances in Transaction Accounts: With changes in
technology, the number of ways in which consumers can access funds in a
checking account has expanded over decades from paper checks to include
automated teller machine (ATM) withdrawals, point-of-sale (POS) debit
card use, preauthorized debit card use, Automated Clearing House (ACH)
payments, and online banking transactions. This expanded range of
accessing funds also means that the number and types of transactions
potentially causing an overdraft has increased as well.
When checking accounts were accessed exclusively or predominantly
through paper checks, institutions generally declined to pay an item if
there were insufficient funds in the account to cover that item;
instead, the item would be returned and the consumer would be charged a
returned check or non-sufficient funds (NSF) fee. Before returning an
item, some institutions would conduct a manual review and, as a
courtesy, pay certain items based on the institution's relationship
with the consumer.
Over the past decade or more, many institutions introduced
automated overdraft systems under which overdraft items are paid,
subject to tolerances or limits that are established at the account
level, and an overdraft fee is charged on a per item basis. A study
published in 2008 by the Federal Deposit Insurance Corporation (FDIC)
of overdraft practices among banks it supervised \4\ found that more
than two-thirds of surveyed banks with assets of $250 million or more
had automated overdraft programs.\5\ The FDIC study found that
overdraft and NSF fees accounted for 74% of the deposit service income
of banks with automated overdraft programs during the 2006 study
period.\6\
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\4\ FDIC Study of Bank Overdraft Programs (``FDIC Study'');
Washington, DC, November, 2008, available at
http://www.fdic.gov/bank/anlytical/overdraft/.
\5\ FDIC Study at Table III-1, page 5.
\6\ FDIC Study at page 56. ``NSF-related'' income included fees
for items returned due to all fees referred to as ``overdraft fees''
in this document, including fees for items declined due to
insufficient funds (``NSF fees''), paid overdraft items (``overdraft
coverage fees'') and fees for not repaying paid overdraft items for
a certain period of time (``extended overdraft fees'').
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While not based on a representative sample of banks, the FDIC's
analysis of account-level data found that the approximately 9% of
accountholders who incurred 10 or more overdrafts annually bore
approximately 84% of overdraft-related fees.\7\ Those who incurred over
20 overdrafts per year--representing 4.9% of all consumers--incurred
fees of over $1,600 per year on average.\8\ The FDIC study also
concluded that the most frequent overdrafters were disproportionately
low and moderate income and more likely to be young adults.
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\7\ FDIC Study at page 76.
\8\ FDIC Study at page iv.
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Regulatory Actions Since Completion of the FDIC Study
Amendments to Regulation DD: On January 29, 2009, the Board of
Governors of the Federal Reserve System (Board) published final
regulations amending Regulation DD, which implements the Truth in
Savings Act, effective January 1, 2010.\9\ These amendments require all
institutions to provide additional periodic statement disclosures of
overdraft fees and fees for returning items unpaid. They also restrict
institutions' ability to provide ``padded'' balance amounts (i.e.,
including amounts institutions may make available through their
overdraft coverage programs) in response to balance inquiries using
automated systems such as ATMs, online banking and voice response
units.
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\9\ 74 FR 5584 (July 29, 2009). The CFPB restated Regulation DD
at 12 CFR part 1030. 76 FR 79276 (Dec. 21, 2011).
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It is uncertain what impact these changes to Regulation DD have had
on consumer behavior or on the incidence
[[Page 12032]]
of overdrafts or related charges to consumers.
Amendments to Regulation E: On November 17, 2009, the Board
published final regulations amending Regulation E, which implements the
Electronic Fund Transfer Act, effective January 19, 2010.\10\ These
amendments prohibit financial institutions from charging fees for
transactions that overdraw an account by use of a debit card at an ATM
and point-of-sale unless the consumer opts in to permitting the
institution to authorize and pay overdrafts on these transactions. In
so doing the Board noted that ``the cost to consumers of overdraft fees
assessed in connection with ATM and debit card overdrafts is
significant'' and ``may substantially exceed the amount[s] overdrawn.''
\11\ And based upon research that it conducted, the Board found that
``many consumers may not be aware that they are able to overdraft an
ATM or POS'' and may therefore ``unintentionally overdraw their
account.'' \12\ Based on consumer testing, the Board further found that
many consumers ``would prefer to have ATM withdrawal and debit card
transactions declined if they had insufficient funds, rather than incur
an overdraft fee.'' \13\
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\10\ 74 FR 59033 (Nov. 17, 2009). The rule had a delayed
mandatory compliance date of July 1, 2010. The CFPB restated
Regulation E at 12 CFR part 1005, 76 FR 81020 (Dec. 27, 2011).
\11\ Id. at p. 59038.
\12\ Id. at pp. 59038-59039.
\13\ Id. at p. 59039.
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There is disagreement about the impact that this regulatory change
has had. For example, a 2011 industry survey of 18 large banks found
that only 16% of consumers had opted in for overdraft coverage on ATM
and debit card transactions.\14\ In contrast, Moebs Research estimated
that, as of March 2011, 75% of consumers had opted in for such
overdraft coverage.\15\ Further, consumer groups have raised concerns
about the manner in which some institutions promoted the opt-in option
to their existing checking account customers. For example, one group's
survey of consumers found that ``only 33 percent of accountholders
opted-in to overdraft coverage, and most who did based their decision
on information that was deceptive.'' \16\
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\14\ Consumer Bankers Association Press Release, October 27,
2011, which can be viewed at
http://www.cbanet.org/news/PRdetail.cfm?ItemNumber=19595.
\15\ Moebs Services press release, March 8, 2011 which can be
viewed at
http://moebs.com/PressReleases/tabid/58/ctl/Details/mid/380/ItemID/199/
Default.aspx.
\16\ Center for Responsible Lending: Banks Collect Overdraft
Opt-ins Through Misleading Marketing; April 2011, page 2, available
at
http://www.responsiblelending.org/overdraft-loans/policy-legislation/
regulators/CRL-OD-Survey-Brief-final-2-4-25-22.pdf.
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Recent FDIC and OCC Supervisory Guidance: Subsequent to the
amendments to Regulations DD and E taking effect, the prudential
regulators have expressed ongoing concern about overdraft programs.\17\
In November 2010, the FDIC issued supervisory guidance to ``assist
FDIC-supervised institutions in identifying, managing and mitigating
risks associated with overdraft payment programs.'' \18\ The FDIC
guidance addresses, among other things, the marketing and disclosure
practices surrounding automated overdraft and alternatives to overdraft
and also the basis on which overdraft charges are assessed, including
check-clearing procedures.
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\17\ The prudential regulators had previously expressed concerns
about overdraft programs in 2005. See 70 FR 8428 (Feb. 18, 2005)
(OTS overdraft guidance) and 70 FR 9127 (Feb. 24, 2005) (OCC, FDIC,
Board, and NCUA joint overdraft guidance).
\18\ FIL-81-2010: Overdraft Payment Programs and Consumer
Protection Final Overdraft Payment Supervisory Guidance, November
24, 2010, available at
http://www.fdic.gov/news/news/financial/2010/fil10081.html (FDIC Final
Guidance).
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In August 2010, the FDIC also issued guidance stating that
overdraft payment programs are subject to the requirements of the Equal
Credit Opportunity Act (ECOA) as implemented through Regulation B.
Specifically, the FDIC adopts the 2005 joint Guidance on Overdraft
Protection Programs, stating that ``steering or targeting certain
consumers on a prohibited basis for overdraft protection programs while
offering other consumers overdraft lines of credit or other more
favorable credit products or overdraft services, will raise concerns
under the ECOA.'' \19\
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\19\ FDIC, Financial Institution Letter, (August 11, 2010)
(citing the 2005 Joint Guidance on Overdraft Protection Programs
adopted by the Office of the Comptroller of the Currency; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; National Credit Union Administration).
http://www.fdic.gov/news/news/financial/2010/fil10047a.html.
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In June 2011, the Office of the Comptroller of the Currency (OCC)
proposed guidance to ``detail[] the principles that the OCC expects
national banks to follow in connection with any deposit-related
consumer credit product.'' \20\ The OCC's proposed guidance includes an
appendix that ``illustrate[s] application of these principles to * * *
automated overdraft protection products.'' \21\ The proposed guidance
states that the ``OCC is concerned with several practices that have
developed'' with respect to overdraft programs including ``potentially
misleading statements'' in marketing; ``failure to assess a customer's
ability to manage and repay overdraft protection before it is made
available to the customer''; ``failure to * * * identify excessive
usage''; and ``payment processing intended to maximize overdraft and
related fees.'' \22\
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\20\ Guidance on Deposit-Related Consumer Credit Products 76 FR
33409 (June 8, 2011) (OCC Proposed Guidance).
\21\ Id. p. 33409.
\22\ Id. p. 33411.
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The FDIC and OCC based their supervisory guidance on safety and
soundness concerns, but raised significant consumer protection issues
as well.\23\ The FDIC Final Guidance expressly noted that overdraft
programs ``include[d] risks that could result in serious financial harm
to certain consumers.'' Similarly, the OCC predicated its proposed
guidance ``on the premise that bankers should provide their customers
with products they need, and that bankers should not use their products
to take advantage of their customer relationship.'' \24\
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\23\ Separately from the FDIC and OCC, the Office of Thrift
Supervision (OTS) specifically addressed consumer financial
protection concerns in proposed supplemental guidance it issued in
April 2010 to OTS guidance issued in 2005 on overdraft programs. For
example, the OTS noted that savings associations should avoid
practices it labeled as deceptive, such as marketing an account
``without informing consumers of significant overdraft fees
associated with an account'' or failing to disclose certain
transaction ordering policies and the effect they may have on the
frequency with which overdrafts might occur. The OTS also suggested
that failing to ``limit fees for consumers who frequently overdraw
their accounts'' could be unfair as ``these consumers may not be
able to avoid the harm caused by high overdraft fees;'' for example,
``those who frequently overdraw accounts may simply not have other
options in the market, as they may have credit histories and other
characteristics that prevent them from obtaining less expensive
services.'' 75 FR 22681 (April 29, 2010).
\24\ OCC Proposed Guidance, 74 FR at 33410.
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While the OCC document has not been finalized, the proposal is
materially different from the FDIC guidance. Indeed, after the OCC
issued its proposed guidance, the American Bankers Association wrote to
the Bureau and to the prudential regulators (including the OCC) urging
the development of a ``uniform set of supervisory expectations'' \25\
and forwarding comments urging ``consistent regulatory treatment for
similar products.'' \26\
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\25\ American Bankers Association letter to FDIC, OCC, Federal
Reserve Board of Governors, and CFPB, August 24, 2011 viewable
online at
http://www.aba.com/aba/documents/news/OverdraftLetter82511.pdf.
\26\ American Bankers Association letter in response to OCC
proposed guidance August 4, 2011 viewable online at
http://www.aba.com/aba/documents/news/OCCGuidanceLetter8411.pdf.
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Request for Information
The Bureau seeks additional and updated information from the
public,
[[Page 12033]]
including consumers, third party processors, and financial
institutions, regarding overdraft programs and their costs, benefits
and risks to consumers. This information will enable the Bureau to
better understand and evaluate any potential consumer protection issues
raised by overdraft programs.
In the questions that follow, we use the terms ``overdraft'' and
``overdraft fee'' broadly to refer to practices followed and fees
charged when a consumer initiates a transaction for which there are
insufficient funds in the consumer's checking account. Specifically,
the term overdraft fee includes fees charged for a returned check
(e.g., an NSF fee), fees charged when an overdraft item is paid (i.e.,
an overdraft coverage fee), and fees charged if an overdraft is not
repaid within a specified period of time. The questions are grouped
into six broad categories: (a) Lower cost alternatives to overdraft
protection programs offered by financial institutions, (b) consumer
alerts and information provided regarding balances and overdraft
triggers, (c) impact of changes to Regulation DD and Regulation E and
overdraft opt-in rates, (d) impact of changes in financial
institutions' operating policies, (e) the economics of overdraft
programs, and (f) the long-term impact of overdraft programs on
consumers. Please feel free to respond to all of the questions or only
those that interest you, but please be sure to indicate in your
comments which questions you are answering.
Lower Cost Alternatives to Overdraft Protection Programs
1. What alternatives do institutions offer to overdraft protection
programs and how much do consumers make use of these alternatives?
Among other things, comments could address the availability and
utilization of alternatives to traditional overdraft fees--for example,
linked savings accounts or overdraft lines of credit--especially among
those who incur overdraft charges on their checking accounts.
2. To what extent do consumers avail themselves of alternatives to
incurring overdraft fees?
3. How are consumers informed of alternatives to overdraft
protection programs and how are such alternatives marketed to new
customers, existing customers, and to particular customer segments?
4. What portion of the most frequent overdrafters--those who would
benefit the most from alternatives--would qualify for a linked savings
account (i.e., have a savings account) or line of credit (i.e., pose
acceptable credit risk)?
Consumer Alerts and Information Provided Regarding Balances and
Overdraft Triggers
5. What opportunities do financial institutions offer consumers to
sign up for alerts via text message and/or email that inform consumers
when their balances are low and, thus, when payment transactions might
put them at risk of incurring an overdraft? The Bureau is interested in
programs and technologies that make consumers aware at the time they
engage in a transaction that they may incur an overdraft fee. Among
other things, comments could address:
a. The extent, if any, to which consumers are given the opportunity
to be alerted to and avoid a transaction that would cause an overdraft
fee;
b. The marketing of, participation rates in, and impact on
consumers, of such alert programs, particularly among those who are
likely to incur overdraft fees;
c. The way account balances are communicated generally in response
to routine ATM or telephone inquiries;
d. The extent to which communicated balances differ from available
balances and whether these differences affect consumers' ability to
avoid incurring overdrafts; and
e. The balance calculations--e.g., available vs. actual balances--
used to determine when an overdraft has occurred in end-of-day batch
processing.
6. Whether a particular transaction will incur an overdraft fee
depends upon the interaction of various terms, rules, and practices,
including those governing funds availability, the posting order of
debits and credits, the amount by which an account must be overdrawn to
trigger an overdraft fee, the number of overdraft fees that can be
incurred in a single day, and whether the fee is one-time or for each
day the account remains in overdraft status. Comments could include
information regarding how these are communicated to consumers and the
extent to which consumers understand them. For example:
a. In what ways are consumers informed of the rules and practices
that determine which transactions will cause overdraft fees to be
incurred? When they enroll in an account? As part of notices that they
have incurred an overdraft?
b. Is there any customer research available that documents
consumers' perceptions regarding how transactions are processed, when
overdrafts are incurred, and when related fees are charged?
c. What changes in consumer behavior or understanding of overdrafts
have resulted from the changes that took effect in Regulation DD in
2010?
Impact of Changes to Regulation DD, Regulation E, and Overdraft Opt-In
Rates
7. The Bureau is interested in the impact of the changes to
Regulation E that took effect in 2010 on consumers. Among other things,
comments could address:
a. What were the variations across institutions in opt-in rates
among consumers with accounts as of July 1, 2010? What variations in
opt-in rates occur now among institutions? What differences in
marketing and disclosures practices may be responsible for differences
in opt-in rates?
b. How did opt-in rates vary based upon prior usage of overdraft?
Were there significant variations between non-overdrafters, occasional
overdrafters, and frequent overdrafters (e.g., those who incurred 10 or
more overdrafts in a year)?
c. How did the opt-in rates vary based upon average account balance
or demographic characteristics, such as income, age, or education
level?
d. How do the overdraft frequencies of consumers who opted in
differ from those who did not?
8. The Bureau is interested in learning how institutions are
conducting outreach to customers who incur overdrafts repeatedly, what
policies have been implemented to manage both the risks and needs such
customers may present, and which options are given to such customers.
The Bureau is aware that some institutions may charge fees based on
accounts being overdrawn, notwithstanding the customer's request to
close the account, and would like to understand what impact this
practice may have. Among other things, the Bureau is particularly
interested in hearing more about:
a. The extent to which consumers are permitted to close existing
accounts when there are outstanding overdraft fees;
b. The consequences to consumers of keeping accounts open that have
outstanding overdraft fees and what additional fees consumers accrue;
and
c. The practices that can best serve consumers who have incurred
negative balances while protecting institutional safety.
Impact of Changes in Financial Institutions' Operating Policies
9. The Bureau is aware that some institutions have recently changed
their order of processing transactions in various ways, including, for
example, adoption of a purely chronological
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system of posting debit transactions; adoption of a system that
separates different types of debit transactions (e.g., ATM and point of
sale debit, ACH, check, and various account fees) and applies different
rules to order transactions in discrete buckets; and adoption of a
system which orders debit transactions from smallest to highest dollar
amount. The Bureau is interested in learning how these changes have
affected consumers. Comments could include information regarding:
a. The different ways in which institutions currently group and
order different types of transactions;
b. How institutions disclose the ways in which they currently group
and order transactions;
c. The consequences in practice of different grouping and ordering
policies for the frequency with which consumers may incur overdrafts
and related fees. Or the consequences for whether certain overdraft
items will or will not be paid; or
d. The impact of funds availability policies on when overdrafts are
determined to have occurred.
10. In addition to transaction ordering policies, the Bureau is
also aware that some institutions have adopted other new policies with
respect to overdrafts. For example, some institutions have declined to
permit consumers to opt in to overdraft coverage of electronic debits
and instead reject those transactions or allow consumers to opt in at
the point of the transaction. Other institutions have adopted cushions
on the amount by which an account must be overdrawn to incur an
overdraft fee; caps on the number of fees that may be incurred in a
given day; tiered overdraft fees; a grace period to cover an overdraft
item without incurring a fee; or a waiver of fees on a certain number
of overdraft items per month. In what way do such changes--or other new
policies with respect to overdraft--affect the incidence and/or
severity of overdraft charges?
The Economics of Overdraft Programs
11. The Bureau is interested in the economics of overdraft
programs, including their contribution to overall costs and revenues
associated with checking accounts. There is concern based on the FDIC
study's data from 2006 that many institutions are reliant on fees from
a small group of frequent overdrafters for a disproportionate share of
revenue from checking accounts, while many other accountholders benefit
as ``free riders.'' \27\ The Bureau is interested to learn the extent
to which the FDIC study's findings from 2006 are representative of the
market today. At the same time, the Bureau also seeks to learn what
costs regulations affecting overdrafts might impose on institutions.
Comments may address, among other things:
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\27\ For example, one consulting firm estimated that the 26
percent of checking accounts in which overdraft fees occur and the
23 percent of accounts with balances over $3000 are responsible for
the vast majority of bank revenue (the former based on overdraft
fees and the latter based on interest earned on deposits) while the
remaining 51 percent of accounts were unprofitable, earning less in
fee income and interest than it cost the banks to service them.
(Celent blog posted March 10, 2010, viewable at http://bankingblog.celent.com/?p=1261).
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a. How the distribution of overdraft revenue from consumers may
have evolved since the FDIC study and the implementation of changes in
Regulations DD and E;
b. The distribution of overdraft fees by type of transaction
(check, ACH, debit, ATM, etc.) today relative to what the FDIC found in
its study;
c. The extent to which different groups of consumers incur
overdrafts and related fees disproportionately (for example, the FDIC
study suggested that young adults and consumers with low or moderate
incomes might incur overdrafts more frequently than other groups);
d. The share of deposit service fees charged to consumer accounts
that are attributable to overdrafts and NSFs today;
e. The costs to institutions of administering overdraft programs;
and
f. The losses (e.g., charge-offs) that occur as a result of
extending overdraft coverage.
Long-Term Impact on Consumers
12. The long term impact of overdraft programs on consumer behavior
and options is of particular interest to the Bureau. Some have argued
that overdraft programs allow consumers to meet liquidity challenges
while others argue that overdraft eventually adds to liquidity issues
because of the high recurring fees that frequent overdrafters must pay.
Further, there is concern that heavy use may lead a significant
percentage of users to damage their credit records in databases
institutions use to qualify consumers for checking accounts and thereby
to lose access to the services of competing providers or to the banking
system altogether. To what extent are these various perspectives valid?
Dated: February 22, 2012.
Meredith Fuchs,
Chief of Staff, Consumer Financial Protection Bureau.
[FR Doc. 2012-4576 Filed 2-27-12; 8:45 am]
BILLING CODE 4810-AM-P
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