Sunday, December 15, 2019

Let’s Talk About Overdrafts!

Posted by OnCourse Staff July 25, 2013 4:57pm

Photo Credit: scottchan

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation, the account is said to be "overdrawn".  Overdrafts are a leading compliance concern due to lost revenue, heightened compliance risk, and threats of UDAAP violations.

In a news release on June 11th, the Consumer Financial Protection Bureau (CFPB) announced the release of an initial report on bank and credit union overdraft practices, saying that the report "raises concerns about whether the overdraft costs on consumer checking accounts can be anticipated and avoided." The Bureau reported the following:

  • Consumers who opt in to overdraft coverage for ATM and debit card transactions end up with more costs
  • Consumers who opt in to overdraft coverage are more likely to have their accounts involuntarily closed
  • Complex transaction posting practices make it difficult for consumers to anticipate overdraft costs
  • Overdraft coverage limits depend on multiple factors and can vary greatly between institutions
  • Non-standard, complex fee structures also vary among institutions
The data for the report comes principally from the large institutions subject to the Bureau's direct oversight for consumer compliance issues, amplified by information from a Bureau consumer survey. The CFPB also posted a factsheet on overdraft practices.

I have seen many different ways that institutions adopt their overdraft practices.  Some charge fees per overdraft item with no maximum daily aggregate fee.  This could get very costly especially for account holders who use a lot of checks to make payments.  Others may charge per overdraft item, but then will have a maximum daily fee (i.e., $30 per overdraft with maximum fee not to exceed $150).  In some cases, banks may pay the check item and charge the customer the overdraft fee, some might return the check to the maker for unavailable funds and charge the customer anyway, some may pay the item against unavailable funds and waive the fee, while others may return the check and not charge the customer.  These decisions (to pay or not pay, to charge or not charge) are usually left up to the individual branch managers.  There are no regulations that govern a Bank’s daily overdraft decisions.

The FDIC issued a financial institution letter in November 2010 to discuss guidance relating to its regulatory expectations of FDIC supervised Banks.  The guidance suggests that it's an expectation that Banks take “meaningful and effective follow-up action” if a customer overdraws an account on more than six occasions where a fee is charged in a rolling 12-month period.

Then there’s another way to look at how the Bank pays overdraft items.  Do they pay them largest amount to smallest amount, smallest amount to largest amount, as they come in, or in numerical sequence?    The laws permit Banks to pay items drawn on accounts in any order.  If the smallest items are paid first, the customer may have fewer overdraft fees, but the large bills that might be more important, such as a mortgage payment, might not be paid.  If the largest items are paid first, the more important bills might be paid, but the smaller items might be returned and the customer is charged more in overdraft fees.  Bank of America and JP Morgan Chase paid $410 million and $110 million, respectively, to settle class-action charges relating to this practice.

Whichever method you choose, it should be consistent and probably a good idea to choose a method that is in the customer’s favor.  In any event, it should be the consumer’s responsibility to keep track of the funds in their account and ensure that they do not overdraw it. 

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