On Aug. 4, the Consumer Financial Protection Bureau (CFPB) released the results of its study into frequent overdrafters and four overdraft disclosure model forms as part of its Know Before You Owe initiative. The CFPB designed these one-page prototypes to help consumers understand the costs associated with opting into overdraft coverage and in an effort to improve the model form that financial institutions currently use. As of 2010, consumers must “opt in” to coverage so that when the consumer attempts to use his/her debit card or retrieve money from an ATM in an amount that exceeds his/her account balance, the bank allows the transaction and the consumer pays a fee after the fact. If the consumer has elected not to opt in, such a transaction will be declined and no fee will be incurred.
The CFPB has concluded that frequent overdrafters are a vulnerable population, with low daily balances and poor credit scores, but the opt-in overdraft coverage available tends to bring with it high fees. The CFPB’s study found that consumers who frequently overdraft (more than 10 times annually) and opt in pay about $450 more in overdraft fees than do frequent overdrafters who do not opt in. Further, the CFPB has found that the average fee incurred with overage coverage is $34, but the transaction that triggers the overdraft coverage is, on average, only $24 more than the amount in the consumer’s account. Therefore, when consumers opt in to overdraft coverage, in effect they are paying financial institutions $34 for a short-term loan of $24.
The CFPB contends that the four model forms are aimed at making the opt-in selection process more transparent for consumers and easier for financial institutions. The forms are designed to communicate how the overdraft process works, including the amount of the fees and when the consumer can be charged such fees. The forms also make it clear that consumers are not obligated to opt in. In addition to helping consumers, the prototypes are also easier for financial institutions to use, as they allow institutions to plug their information into an online form, download the customized form for free, and print and distribute it to consumers deciding whether to opt in.
The CFPB is seeking public comment on the forms as consumers and financial institutions test them. While there are no plans to propose stricter regulations, the CFPB acknowledged that it is in the “pre-rule” stage.
The full CFPB release is available here.