Overdraft – CFPB’s “Know Before You Owe” Disclosure Prototypes
Consumers Typically Pay Almost $450 More in Fees
On August 4, 2017, the Consumer Financial Protection Bureau (CFPB) announced
. . . new Know Before You Owe overdraft disclosure prototypes designed to improve the model form that banks and credit unions already provide to consumers weighing overdraft coverage. The [CFPB] is currently testing four prototypes that each have a simple, one-page design aimed at making the costs and risks of opting in to overdraft coverage easier to understand and evaluate. People who frequently attempt to overdraw their checking accounts typically pay almost $450 more in fees if they opted in to debit card and ATM overdraft coverage, according to a new CFPB study . . . [which] found that most of these frequent overdrafters are financially vulnerable, with lower daily balances and lower credit scores than people who do not overdraft as often.
“[The CFPB’s] study shows that financially vulnerable consumers who opt in . . . risk incurring a rash of fees when using their debit card or an ATM,” said CFPB Director Richard Cordray. “Our new Know Before You Owe overdraft disclosure prototypes are designed to help consumers better understand the consequences of the opt-in decision.”
According to the CFPB’s press release:
An overdraft occurs when consumers lack the funds in their account to cover a transaction, but the bank or credit union pays anyway. Financial institutions may charge a fee for this service, typically around $34 per transaction, and require that the account deficit be repaid with subsequent deposits. In 2010, federal regulations began requiring financial institutions to obtain a consumer’s consent in advance before charging overdraft fees on most debit card transactions and ATM withdrawals. Consumers who do not opt in to overdraft coverage will generally have debit card purchases and ATM withdrawals declined with no charge if their account doesn’t have enough funds to cover the transaction at the time they attempt it.
In addition to debit card transactions and ATM withdrawals, consumers can overdraw their account through checks, online bill payments, or direct debits from lenders or other billers. Banks and credit unions can charge overdraft fees on checks or electronic payments made through the Automated Clearing House system, and on debit card payments set up on a recurring basis. Charging these fees does not require the consumer to opt in, because those fees are not covered by the 2010 rule.
CFPB Says “Know Before You Owe”
The CFPB’s announcement stated that
[b]ecause of the possibility of racking up fees, choosing whether to opt in to debit card and ATM overdraft services can be an important decision for consumers. Federal regulations already require financial institutions to give consumers certain overdraft information, and the regulations provide a model form. The four one-page prototype model forms unveiled today, like the Bureau’s Know Before You Owe disclosures for mortgages and prepaid accounts, are designed to give consumers more clarity about a key financial decision. The CFPB developed the prototypes through interviews with consumers, and is now testing them more widely. The prototypes are aimed at making it easier to:
- Understand the costs of opting in:The updated designs are aimed at helping consumers to better understand opt-in costs by clearly laying out the size of the fees and when they can be charged. They are intended to clarify the institution’s overdraft polices. They also explain that the opt-in decision applies only to one-time debit card and ATM transactions, and that it does not affect overdraft on checks and other electronic transactions.
- Evaluate the risks and benefits of opting in:The prototypes are intended to better assist consumers in making their own choice about whether they want overdraft services for most debit card transactions. They make clear that debit card and ATM overdraft is optional, and that consumers are not required to opt in.
These updated prototypes, if adopted, could also make it easier to provide customers with the disclosure form. The CFPB would make any new Know Before You Owe model overdraft form available on its website. Institutions would be able to plug their specific program information into the online form and then quickly download it for free. This new approach could make it seamless for banks and credit unions to use a new model form within their existing compliance systems, and easier to update their disclosures following future overdraft program changes. However, as the Bureau tests these prototypes further and considers changes to existing requirements, the model form provided in the 2010 rule continues to apply.
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