March 8, 2012
CFPB Begins Looking at Overdraft Issues
The Consumer Financial Protection Bureau (CFPB) recently announced that its next initiative will involve checking accounts and overdraft fees.
At a recent town hall, consumers were encouraged to tell their stories regarding checking account overdraft practices. Topics ranged from the “$40 cup of coffee” to the optional services provided, such as overdraft protection and credit score monitoring. The overwhelming sentiment was that consumers didn’t understand the products and services they were receiving or those that were available. It was also clear that many consumers didn’t have a traditional banking relationship while complaining about the costs and fees associated with using prepaid cards for payroll.
The CFPB is soliciting stories and feedback on overdraft fees through its website as well. The bureau recently sent out an email asking consumers to tweet or share on Facebook their “debit overdraft status” so that “people can see that other people have similar experiences.”
The CFPB is also seeking input on a “penalty fee box,” which would be a prominent feature on monthly statements outlining the amount of fees paid by the consumer for that period. The CFPB found that the average overdraft fee ranged from $30-$35 in 2011 and has increased by 17 percent over the past five years, citing a 2008 Federal Deposit Insurance Corporation (FDIC) study that found consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees annually.
The CFPB’s effort includes soliciting data from “a number of banks” and a Notice and Request for Information from the public. The CFPB cites four key areas of focus:
- Transaction Re-ordering that Increases Consumer Costs: The CFPB is concerned that overdraft practices employed by some financial institutions increase consumer costs. One such practice is commingling of all checks, bill payments, debit-card transactions, and ATM withdrawals each day and processing the largest transactions first. This maximizes the number of transactions that will trigger an overdraft fee. The CFPB will examine how prevalent this practice is and how it impacts consumers.
- Missing or Confusing Information: The CFPB is exploring whether consumers can anticipate and avoid overdraft fees. The agency will examine how clearly overdraft terms are disclosed and the extent to which consumers are made aware of, qualify for, and take advantage of alternative means of covering overdraft transactions.
- Misleading Marketing Materials: The bureau is looking into reports that consumers are receiving misleading marketing materials about overdrafts. Initial data suggests that opt-in rates differ widely among institutions. The CFPB seeks to understand how differences in the ways institutions explain and promote overdraft programs may affect opt-in rates.
- Disproportionate Impact on Low-Income and Young Consumers: The CFPB is revisiting the 2008 FDIC study that found that 9 percent of checking account customers bear about 84 percent of overdraft fees. Evidence suggests that overdraft programs disproportionately impact low-income and young consumers. According to this study, 46.4 percent of young adult account holders incurred overdraft fees, and of those, 15 percent recorded more than 10 overdrafts in one year.
“With the efforts of the CFPB in full force it will be interesting to see a public response,” said Northwest Credit Union Association (NWCUA) Director of Regulatory Advocacy Jaycee Winn. “If it’s anything like the hearing, many people don’t understand the financial services available to them. The Association will be working to gather comments and input on these efforts. It’s important that credit unions be allowed the flexibility to set fees that cover costs and support their business model.”
Read more about the CFPB effort here.
Read the CFPB request for comment here.
Offer feedback to the Association here.
Association Issues Comment Letters on Key Issues
A fast-moving proposal from the National Credit Union Administration (NCUA) on troubled debt restructurings (TDRs) was met with appreciation and some concern from the Association. The NCUA issued the proposal with a 30-day comment due date and 120-day implementation in the interest of fixing concerns and confusion about current TDR accounting, which requires many credit unions to track them separately and manually.
The Association praised the NCUA for moving quickly but cautioned against seemingly counterproductive net worth-based loan modification program limits.
“With an established cap, a credit union is capping its ability to mitigate risk,” the NWCUA wrote. “We believe an internal policy should be established in the best interest of safety and soundness but believe a mandated cap is contrary to the overall goal of a loan modification program.”
The NWCUA also encouraged the NCUA to include member business loans (MBLs) in the new accounting treatment so that they would not continue to be tracked manually.
“We do not agree that MBLs should be held to a different standard than consumer loans and that credit unions should not be in any way discouraged from making modifications that will help to mitigate risk or reduce potential losses.”
The Association asked the NCUA to ensure that compliance with generally accepted accounting principles (GAAP) standards is clear and that examiners are well trained on this new accounting so that credit unions are not placed in a difficult spot between the advice of auditors and examiners. It also cautioned against a 120-day mandatory implementation and asked for at least 180 days for credit unions to make changes.
“Overall, we believe this proposal is a step in the right direction and a refreshing proactive change from the NCUA,” Winn said.
The Association also commented on a proposal from the CFPB on streamlining its inherited regulations, expressing gratitude for being involved in the process in this rulemaking and for the partnership that is growing with credit unions and the bureau.
The NWCUA asked the bureau to minimize changes to forms and disclosures and to ensure that review is done on a product basis rather than just a regulation-by-regulation basis, asking that it review mortgage regulations first.
“The Association believes mortgage-related regulations should be the first to be addressed…Combining the TILA and RESPA forms is a great first step and we would ask that the Bureau look at the SAFE Act, Fair Credit Reporting Act, Home Mortgage Disclosure Act, and Regulation B as next steps to help provide relief for lenders and consumers.”
The NWCUA went on to urge the CFPB to use caution in reviewing overdraft policies to ensure that credit unions are given the flexibility to manage their successful programs and asked the bureau to eliminate the need for external disclosures on ATMs.
The next step in this process will be to review the comments received by the CFPB and offer comments on those. This “comment on the comments” period will last 30 days and give stakeholders and the public time to help narrow priorities.
Winn said that the Association is “looking forward to hearing from credit unions on this process.”
To weigh in, click here.
Many Important Comment Periods Ending Soon
Agencies have been issuing proposals and requests for comments in a steady stream. Some of the key proposals with looming deadlines include:
- NCUA – Financial Derivatives to Offset Interest Rate Risk (closes April 3)
- CFPB – Regulatory Streamlining, Comment on the Comments (closes April 3)
- CFPB – Reg. E, Remittance Transfers (closes April 9)
To read more about the key proposals open for comment, visit the Association Regulatory Advocacy page.
The NWCUA Regulatory Advocacy team works with state and federal regulators to help reduce the regulatory burden on credit unions and protect the credit union movement. The Association encourages members to participate in the regulatory process. If you have any questions on these or any regulatory issues, please contact Director of Regulatory Advocacy Jaycee Winn at firstname.lastname@example.org, or at 800.995.9064 x209.