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CFPB study raises new concerns about ATM, debit overdrafts

Despite regulatory changes, the agency still frets about overdraft fees, saying they "should not be 'gotchas' when people use their debit cards."

August 1, 2014

The Consumer Financial Protection Bureau has released a report that raises concerns about the impact of opting in to overdraft services for debit card and ATM transactions, a news release from the bureau said.

The study found that the majority of debit card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days.

A consumer can overdraw his or her account through checks, ATM transactions, debit card purchases, automatic bill payments, or direct debits from lenders or other billers.

Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate, the release said.

"Today's report shows that consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card," said CFPB Director Richard Cordray. "Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be 'gotchas' when people use their debit cards."

In 2010, federal regulators put in place a new "opt in" requirement that depository institutions obtain a consumer's consent before charging fees for allowing overdrafts on most ATM and debit card transactions.

Financial institutions also have updated their overdraft policies; some do not charge an overdraft fee if the consumer is only overdrawing on his or her account by a small amount. Some institutions also cap the number of overdraft and NSF fees they will charge on an account on a single day.

However the study raises concerns that despite these recent changes, a small number of consumers are paying large amounts for overdraft, often for advances of small amounts of money for short periods of time. Specifically, the report found:

Majority of debit card overdraft fees incurred on transactions of $24 or less: When consumers use their cards, it is typically for smaller purchases than when they write checks or use a bank teller. Consumers who opt in for overdraft services incur the majority of their debit card overdraft fees on transactions of $24 or less. Most overdraft transactions for which a fee is charged — including debit overdraft transactions — are $50 or less.

More than half of consumers pay back negative balances within three days: Most consumers who overdraw on their accounts bring their accounts to a positive balance quickly. More than half become positive within three days; and more than 75 percent become positive within a week.

Nearly one in five opted-in consumers overdrafts more than ten times per year: The study found that 18 percent of opted-in accounts overdraft more than ten times per year, compared to 6 percent for non-opted-in accounts. In addition, opted-in accounts are nearly twice as likely to have at least one overdraft transaction per year. Not all of these overdrafts incur overdraft fees, but many do.

The CFPB plans further studies on how overdraft works and how it is affecting consumers, the release said. The bureau is also weighing what consumer protections are necessary for overdraft and related services.

The Overdraft Data Point is available at: http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf