Overdraft Programs and Consumer Protection

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1 Filed via: Monica Jackson Office of the Executive Secretary, CFPB Bureau of Consumer Financial Protection 1700 G. Street, N.W. Washington, CA Re: Impacts of Overdraft Programs on Consumers Dear Ms. Jackson: On behalf of the California and Nevada Credit Union Leagues, I appreciate the opportunity to provide comments to the Consumer Financial Protection Bureau (Bureau) regarding its notice and request for information to determine how checking account overdraft programs and practices impact consumers. By way of background, the California and Nevada Credit Union Leagues (Leagues) are the largest state trade associations for credit unions in the United States, representing the interests of more than 400 credit unions and their 10 million members. The Leagues understand and appreciate the Bureau s stated goal to better understand and evaluate any potential consumer protection issues through this notice and request for information. Overdraft protection is a product that is desired by credit union members and other consumers, the vast majority of whom utilize this product in a responsible manner. We believe it is critical that the Bureau have up-todate, relevant information regarding this issue from all sides consumers as well as financial institutions before contemplating rulemaking in this area. The Success of Overdraft Programs Before addressing some of the Bureau s areas of inquiry, we would like to take the opportunity to suggest an alternative interpretation of the overdraft statistics provided in the notice. The Background section of the notice seems to cite data from the FDIC Study of Bank Overdraft Programs (Study) in a manner designed to cast the overdraft programs, as a whole, in a negative light. For example, the Bureau states: While not based on a representative sample of banks, the FDIC s analysis of account-level data found that the approximately 9% of accountholders who incurred 10 or more overdrafts annually bore approximately 84% of overdraft-related fees. Conversely, that means approximately 91% of accountholders incurred fewer than 10 overdrafts annually and bore only approximately 16% of overdraft-related fees. The Study also revealed that during the 12-month period examined almost 75% of customer accounts had no NSF transactions almost 12 percent of consumer accounts had 1 to 4 NSF transactions, 5.0 percent had 5 to 9 NSF transactions, 4.0 percent had 10 to 19 NSF transactions, and 4.9 percent had 20 or more NSF transactions. During the 12-month period the FDIC studied, 75% of customer accounts paid no overdraft related fees because they had no overdrafts, and 12% of customer accounts had 1 to 4 overdrafts. In other words, 87% of customer accounts had 4 or fewer NSF transactions.

2 Page 2 We respectfully suggest that these statistics show that overdraft protection programs work. According to the FDIC s statistics, the overdraft protection system in the United States is working for nearly 90% of customer accounts. The vast majority of consumers are not writing checks without funds in their account, are balancing their checkbooks, are using ACH and online bill pay appropriately, and are using their debit cards responsibly. Indeed, it is that success that skews the percentage of NSF fees paid by the 9% of accountholders that incur 10 or more overdrafts in a year. The more success that financial institutions have in increasing the number of accountholders with few or no overdrafts, the higher the percentage of fees those with more overdrafts will pay. We believe this clearer and more realistic view of overdraft programs indicates that additional, burdensome requirements are not needed. Instead, the answer lies in educating and providing clear disclosures to consumers especially the 13.9% who overdraft their accounts five or more times per year. As long-time advocates of financial literacy, transparent disclosures, and consumer empowerment, credit unions in California, Nevada, and all over the United States are the embodiment of this approach. We would like to share some examples of this in the balance of our letter, as well as our comments and concerns. Alternatives to Overdraft Programs The Bureau has requested information about lower cost alternatives to overdraft programs that are offered to consumers. The most common alternatives employed by credit unions are: Automatic Overdraft Transfers Credit unions have historically been savings-based institutions. Therefore, to become a member at most credit unions, a consumer must first open a savings account, which typically includes a small required deposit (e.g., $5.00). Therefore, most credit union members have access to overdraft protection by linking to their savings account. Some credit unions also offer linked overdraft protection from a money market or other checking account. Overdraft Protection Loans Approximately 60% of credit unions California and Nevada offer overdraft protection loans. Members may apply for an overdraft protection loan which automatically advances funds to a member s checking account to cover items presented against insufficient funds, up to the available credit limit. There may be a small fee for the transfer, and the member pays interest on the loan balance. However, federal credit unions are prohibited from charging more than 18% interest on a member loan. In addition to the options above, about half of the 432 credit unions in California and Nevada have overdraft programs of the type covered by the Bureau s notice and request for information. When a member has more than one alternative available (as stated above), many credit unions permit their member to choose the priority order of the alternatives. For example, a member may elect to transfer first from their savings account. If no funds are available in that account, then the credit may be directed to transfer from an overdraft protection loan. And, finally, if no funds are available on the overdraft protection loan, the member s transaction may be covered by the credit union s overdraft program (courtesy pay).

3 Page 3 Disclosures and Notifications The recent amendments to Regulation E have assured that consumers have a clear choice with regard to whether or not their occasional debit card or electronic transaction is subject to overdraft protection. Model debit card disclosures, coupled with best practices suggestions from regulators for overdraft programs, generally provide consumers with clear explanations of what is and is not covered, along with the cost. In addition to overdraft program disclosures, members typically receive the following disclosures regarding their new checking accounts: A description of the credit union s practices when an item is presented against insufficient funds and overdraft protection is not available (i.e., that the credit union may pay or reject the item, at their discretion). A description of the credit union s practices when there are sufficient and available funds to pay some but not all items presented (i.e., that the credit union may pay those items for which there are sufficient available funds and return others). That each item presented against insufficient funds and returned unpaid will incur an NSF fee or paid against insufficient funds will incur an overdraft fee. The credit union s funds availability policy regarding deposits made to their checking account. Once an account is opened, members have multiple methods for checking their balances or receiving notifications on a regular basis, such as online banking, voice response systems, and and text alerts. The following comments from a California credit union are typical of the credit union philosophy of transparency towards and education of its member-owners: Our credit union makes every effort to ensure that our members understand their options we have separate informational brochures that give simple-to-read explanations of the credit union s [courtesy pay] program. Further, a segmentation of members whom we have identified to be heavier users of this program are forwarded an additional educational piece on a periodic basis, addressing the fact that they have incurred higher than average fees for the [courtesy pay] program, and focusing on tools/practices they could employ to lower the fees they are experiencing. Farmers Insurance Group Federal Credit Union Data Processing and Technology Challenges While the Bureau has requested information seeking to understand how the rules, policies, and practices of institutions may impact overdrafts, we believe it is also important to include information about how current technologies, payment channels, and consumer actions can affect their occurrence. Online and mobile banking services give consumers more choice and more ways to manage their accounts. Consumers may dial in to sophisticated voice response programs to get the latest information on their account balances. And Check 21 certainly has resulted in more accurate and timely balance information related to deposits made by checks. However, these changes also present new challenges regarding overdrafts.

4 Page 4 First, it is important to realize that at some automated teller machines (ATMs), the participating financial institution may handle its transactions in real time or in batch mode (non-real time). Also, whether or not transactions can be handled in real time will depend on whether the consumer is using their financial institution s proprietary ATM or a foreign one. This real time vs. batch mode issue may also occur between a financial institution and its own data processor, as some may have the capacity to identify debit card transactions in real time, but some may only operate in batch mode. This challenge is more common with smaller credit unions, which may not be able to afford more sophisticated systems or processes but want to ensure their members are provided the products and services they need and expect. Moreover, instances may arise where the data processor is providing stand-in authorization. This type of authorization occurs when there is a problem in the telecommunications network. For example, if a power outage damages the network, a credit union s data processor will stand in for the credit union and approve transactions up to a pre-agreed limit. However, because the credit union and the data processor cannot communicate, the data processor cannot obtain the account balance to determine whether the member s transaction will result in an overdraft situation. The debit card process is subject to system or network rules as well as the limitations of a variety of data processing protocols. When a merchant swipes a card, the transaction is transmitted for preauthorization. The amount of the transaction is compared to the consumer s available funds. If the amount can be covered, then the transaction is preauthorized. At this point, the issuing institution must pay the transaction even if the account is later overdrawn. The preauthorized transaction is placed in a pending status. Some data processors clear or drop pending items at the end of the business day, whether or not they have actually paid. Typically, however, the transaction will not post for several days. Thus, even though the consumer may have had adequate funds for the transaction when it was preauthorized, the account balance is inadequate to cover the full transaction when it is presented for posting to the account. As noted above, regardless of available funds, the institution must pay the item. Economic Framework In the notice, the Bureau states their concern that many institutions are reliant on overdraft fees from a small group of frequent overdrafters for a disproportionate share of their revenue. Recent studies have shown that the cost to a financial institution to maintain a checking account is approximately $200 to $350 per year. As the Bureau no doubt knows, credit unions are known as low-fee financial service providers. While overdraft fee income is not reported separately by credit unions on their call reports, we know anecdotally that most of our credit unions do not view overdraft fees as a significant source of income and many credit union accounts are not even breaking even at this time. Therefore, as far as credit unions are concerned, the estimate cited in the Bureau s notice that a significant proportion of institutions revenue may come from overdraft fees is unfounded. In conclusion, we believe it is clear that further rules imposing limits and prohibitions regarding overdrafts programs are not needed at this time. However, we strongly support education initiatives for such programs, and urge the Bureau to consider issuing guidance addressing this important aspect of overdraft programs. This would include not only information and initiatives provided to consumers prior to opting in to such a program, but ongoing education and assistance for those who temporarily or not become heavier-than-average users. This may also include a fresh start loan approach to consumers with overdraft protection programs who do not bring their accounts current, or second chance checking programs that many credit unions voluntarily offer to educate members and provide incentives for better

5 Page 5 managing their personal finances. The Leagues welcome the opportunity to work with the Bureau to provide examples of credit union best practices. I thank you for the opportunity to provide our concerns and recommendations. Sincerely, Diana Dykstra President/CEO California and Nevada Credit Union Leagues