CFPB Releases Initial Overdraft Study Results

Full disclosure and transparency remain standard requirements for overdraft programs

After months of speculation regarding regulatory oversight of consumer financial products, the Consumer Financial Protection Bureau (CFPB) released the initial results of its 2012 inquiry into overdraft programs in June 2013. Based on information received from banks in its initial study survey, along with feedback from the public, the CFPB announced that it will continue to study the issue before addressing any policy changes.

And while CFPB Director Richard Cordray affirmed that overdrafts can provide consumers with needed access to funds, he expressed concern about program policies and procedures that can be “highly complex and difficult for consumers to understand, yet greatly affect whether and how often an account holder will incur overdraft fees.”

According to the CFPB, there is a significant difference in the procedures used by the banks in its study to determine when a transaction might overdraw a consumer’s account and whether or not the account holder would be charged an overdraft fee. These include:

  • when the bank provides funds availability on deposits;
  • how the bank treats holds on funds in connection with debit card transaction authorizations;
  • what transaction posting order is used;
  • how overdraft limits are set;
  • whether the bank offers waivers or delays in assessing overdraft fees to accounts for de minimis transactions or short negative balance periods;
  • how the bank promotes enrollment in automatic transfers from linked deposit accounts or credit lines to avoid overdrafts; and
  • how the bank screens new account applicants.

While nothing in the report implies that banks and credit unions should be precluded from offering overdraft coverage for account holders, the CFPB plans further analysis of its findings regarding the number of consumers who are incurring heavy overdraft fees or account closures – along with the wide variations in practices and procedures used by financial institutions – to determine whether they are harming consumers.

Compliant financial products provide a valuable consumer resource

While some may view the frequent tendency to overdraw a checking account as a lack of financial sophistication or even lack of judgment, it is important to remember that many Americans struggle financially and rely on alternative financial services regularly to accommodate unexpected expenses – or merely to make it until the next pay day.

According to a survey released by, nearly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings. Fewer than one in four surveyed had enough of a cushion to cover unexpected medical expenses or other emergency situations.

A fully disclosed overdraft program that clearly defines the rules by which an account holder may access an overdraft service establishes a straightforward approach of responsible use and helps account holders avoid less attractive choices of meeting their liquidity needs, such as deferring bill payment or resorting to payday lenders.

Protecting your members and your credit union with full disclosure

In today’s highly regulated environment, maintaining compliance requirements can be challenging; but it must remain a priority to avoid increased regulatory scrutiny.

While the NCUA has yet to release any new regulations or supervisory guidance related to the CFPB’s position on consumer protection, credit unions should expect examiners to have a heightened awareness of overdraft processes and procedures that could harm members. To ensure that your overdraft program is compliant with all regulatory and consumer protection concerns, make sure it provides the following:

  • complete transparency regarding fees and program procedures;
  • clearly established overdraft limits;
  • transaction clearing policies that avoid maximizing overdrafts and related fees created by the clearing order;
  • the ability to easily monitor excessive usage; and
  • communication materials that outline alternative financial products that more appropriately fit the needs of excessive overdraft users.

This simple combination will result in fewer regulatory concerns and stronger member relationships; along with the ability to maintain a healthy bottom line without having to raise fees or initiate new service charges.