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Overdraft protection policies exceed the limit


When the Consumer Financial Protection Bureau (CFPB) sued TCF National Bank in January, it charged that the Wayzata, Minn.-based bank was “tricking consumers into costly overdraft services.”

According to the CFPB suit, the alleged “trick” involved an application process designed to obscure overdraft fees and make them seem mandatory for new customers opening an account. In fact, banks cannot charge overdraft fees on one-time debit purchases and ATM withdrawals without a consumer’s consent.

And while the prevailing winds in Washington D.C. point to regulatory rollbacks for the banking industry, banks should be aware that claims in lawsuits filed by parties other than regulators continue to evolve, says Kurt Stertz, senior attorney at Wolters Kluwer in St. Cloud, Minn.

“Whereas before there was litigation about banks paying transactions with higher amounts first—which led to more overdrafts—there is now a fair amount of litigation that addresses deposit authorization holds and how they affect overdrafts,” Stertz says.

No matter what D.C. does one way or the other, outside groups will continue to raise the issue. In December, the Pew Charitable Trusts released a report whose title may raise alarm bells: “Consumers Need Protection from Excessive Overdraft Costs.”

The exhaustive report cited statistic after statistic, including one from the CFPB: “Less than one-fifth of account holders—those who incur three or more overdraft fees per year—pay more than 90 percent of all overdraft fees triggered by debit cards, checks, and ACH electronic transactions.”

That one-fifth, the Pew report notes, “generally have incomes below the U.S. average, and overdraft fees consumed nearly a full week’s worth of their household incomes on average during the past year.”

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For now, provisions in the opt-in requirements for overdraft programs that involve ATMs and debit cards highlight growing industry awareness of the issue. If customers commit frequent overdrafts, banks must now notify them that financial counseling is available to help with money management, says Kevin Kane, founder and president of Financial Regulatory Consulting Inc. in New York City.

“The regulation has actually moved in the direction of protecting customers from themselves,” Kane says. “Now at least with ATMs and debit cards, a customer has to opt-in for the service. Second, a bank is now required to offer financial counseling if a customer has too many overdrafts.”

Meanwhile, other issues continue to impact the regulatory landscape as it pertains to overdrafts.

For starters, regulators worry about the accuracy of overdraft protection marketing disclosures. In particular, this becomes an issue if banks erroneously lead people to believe that all of their overdrafts would be paid—when, in fact, banks have discretionary approval.

This ranks among many ongoing concerns for regulators as outlined more than a decade ago in 2005 interagency guidance, which also cautions that overdraft programs aren’t marketed as short-term credit. Another hot topic involves the continuous fees customers rack up if they stay overdrawn for a certain number of days.

“They’re particularly concerned if customers aren’t able to make an additional deposit to correct the overdraft before being charged again,” says Linda A. Albrecht, a principal at Eide Bailly LLP accounting firm in Mankato, Minn. “It’s very important how banks communicate their policies to customers: how they calculate continuous overdraft fees and when they actually assess them.”

That issue is top of mind for the Federal Deposit Insurance Corp., says Tim Tedrick, a partner at the Wipfli CPA and consulting firm. In 2014, the Kansas City FDIC office posted concerns via the internet about continuous overdraft policies; last year the Chicago FDIC office began to scrutinize the practice during field exams.

“Examiners are telling banks to either stop the practice or disclose it properly, and they’re doing this under Section 5 UDAP—Unfair, Deceptive and Abusive Practices–[as defined by] the Federal Trade Commission,” Tedrick says. “The disclosures must be explicitly clear about exactly when the overdraft charge will be imposed at the end of X days—and whether are those are business or calendar days.”

He adds that there’s an “explicit expectation” to go beyond the general Truth in Savings Regulation DD description of which items could incur overdraft fees. To that end, the FDIC expects banks to explain in their “uniform disclosures” that continuous overdraft fees will be imposed if overdrafts occur due to service charges or non-sufficient funds fees.

The CFPB also wants banks to offer no-fee accounts, or accounts that don’t allow overdrafts, Albrecht says. But that can prove difficult when a customer’s account is accessed online, or their debit card used back-to-back.

Here, it’s all in the timing: In an account balance doesn’t get updated in real time because merchants wait to process transactions (a common practice on weekends) it can drive the customer’s account balance into the red. “So would banks not be able to charge an overdraft fee for that?” she asks.

Much could hinge on regulatory easing expected in the months ahead, as well as the relaxed enforcement of current regulations. Until then, the CFPB is initiating a consumer testing process related to the opt-in requirement for overdraft plans that involve ATMs and debit cards, Stertz says.

“Among other things, I expect the CFPB is researching the degree to which the existing model for opt-in disclosure is effective, and which consumers understand what that disclosure means,” he says.

The FDIC “strongly suggests” banks create a daily limit on overdraft charge. Its guidance doesn’t give any particular limit.

But as Albrecht puts it, another agency known by four letters could enter the picture: “I could see the CFPB creating some sort of limit on charging on a daily basis.”

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A BAI Banking Strategies contributor, Katie Kuehner-Hebert has more than two decades experience writing about retail and commercial banking products and services; payments systems: mergers and acquisitions; and security/fraud issues. She is based in Running Spring, Calif.