CFPB Initiates Inquiry, Requests Information Regarding Overdraft Practices
Director Richard Cordray recently announced that the Consumer Financial Protection Bureau (the "Bureau") is initiating an inquiry into overdraft practices. A final action plan is expected by the end of the year. Cordray stated that the inquiry is for fact-finding purposes, rather than investigation of any alleged wrongdoing. However, according to Cordray, "The bureau plans to take action against financial institutions that exploit consumers with deceptive marketing about opting in to overdraft or other unlawful practices." While the Bureau seeks facts at this point, it is clear that the Bureau is ready to take enforcement action if warranted.
Form of Inquiry
The Bureau will use several avenues to gather feedback and data to support any future action. It plans to request data from a number of undisclosed financial institutions about their overdraft practices, including how overdraft fees affect consumers, how overdraft services are marketed, and what information consumers receive. In addition, the Bureau will seek input on a newly developed "penalty fee box" detailing the amounts overdrawn and penalty fees on checking account statements. Finally, the Bureau will launch a "What's your overdraft status?" campaign to educate consumers on avoiding penalty fees and discovering whether they have opted in for overdraft protection for their ATM and point-of-sale debit transactions.
On February 28, 2012, the Bureau published a Request for Information ("RFI") seeking input from "consumers, third party processors, and financial institutions" regarding a variety of overdraft-related issues. Cordray stated that the Bureau's inquiry will build on prior actions taken by the Federal Reserve Board (the "Federal Reserve"), Office of the Comptroller of the Currency (the "OCC"), Office of Thrift Supervision, and Federal Deposit Insurance Company (the "FDIC"). A specific point of the inquiry, as demonstrated in the RFI, is to identify the impact of prior regulation and guidance. For example, the Bureau requested information concerning the impact on customer behavior from the Federal Reserve's 2010 changes to Regulation DD (requiring a fee box on monthly statements) and Regulation E (prohibiting the charging of overdraft fees on ATM and certain debit card transactions without consumer opt-in). Similarly, the Bureau seeks information on the impact of certain practices identified in the February 2005 Joint Guidance on overdraft practices from the Federal Reserve, OCC, FDIC, and National Credit Union Administration.
Specifically, the Bureau requests information by April 30, 2012 regarding the following six topics:
Lower Cost Alternatives. The Bureau seeks information regarding the alternative overdraft products offered by financial institutions, whether consumers use these products, and whether customers who overdraft often would qualify for alternative products.
Consumer Alerts, Balance Information, and Overdraft Triggers. The Bureau seeks information regarding technology that informs a customer at the time of a transaction that the transaction will result in negative funds. In addition, the Bureau seeks information regarding how balances are presented to customers at ATMs or on telephone calls and whether actual or available balances are used to determine overdrafts. Finally, the Bureau seeks to determine the extent to which financial institutions inform customers that the interaction of posting order, funds availability, and other policies affect overdraft fees and whether customer behavior changes based on such information.
Impact of Reg. DD, Reg. E, and Overdraft Opt-in Rates. The Bureau is interested in the impact of changes to Reg. E, specifically whether marketing practices affect the opt-in rate differences among financial institutions or among types of customers. The Bureau also seeks information regarding "outreach" programs to customers who overdraft repeatedly.
Impact of Changes in Operating Policies. The Bureau seeks information regarding changes to financial institutions' posting orders, i.e., moving from high-to-low to "purely chronological," or changes in posting buckets (e.g., separation for posting by type of transaction). One specific area of interest is whether these changes affect the frequency of overdraft fees or whether certain transactions will no longer be paid. Similarly, the Bureau seeks information regarding other changes to overdraft practices such as no longer authorizing electronic transactions into overdraft.
Economics of Overdraft Programs. The Bureau is interested in whether the 2008 FDIC study on overdraft services is still accurate today or whether certain findings, e.g., distribution of overdraft fee revenue among groups, has changed. In addition, the Bureau asked for specific information regarding the cost to administer overdraft services and charge-offs related to those services.
Long-Term Impact on Customers. The Bureau seeks information regarding the long-term impact to customers of overdraft services, including whether the services assist customers with short-term liquidity needs or whether negative balances from frequent overdrafts result in more unbanked consumers.
Jones Day's Consumer Financial Products and Services team advises clients on regulatory issues, investigations, and enforcement actions or civil litigation related to their retail banking products.
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