On Wednesday, July 31, 2014, the Consumer Financial Protection Bureau (CFPB) published a study of customer experiences with overdrafts at several large banks with over $10 billion in assets. Note that no credit unions or thrifts were included in the study. The absence of these smaller, regional banks from the study may fail to provide the CFPB with a good appreciation for the utilization of overdrafts and fees by smaller banks.
The results of the study were not surprising. They indicate that consumers that opt in to overdraft protection programs often use the service, even if the amount of the underlying transaction is small relative to the cost of the overdraft. This may suggest to the agency that consumers who need access to credit will take advantage of it even if the cost is high.
The CFPB looked at a random sampling of transaction-level data from bank account holders during an 18-month timeframe from January 2011 to June 2012. The review considered the transaction dollar amount, type, posting date, and whether the transaction resulted in an overdraft or was returned for insufficient funds.
The CFPB also considered account-level data for 30 months from January 2010 to June 2012. The account-level review considered such factors as volume of deposits, end of month balances, etc.
In all, the CFPB reviewed approximately two million accounts.
APRs in the Thousands
In CFPB Director Richard Cordray’s remarks related to the release of the study, he noted that an overdraft “loan” of $24 for three days with a cost of $34 has an APR of 17,000%. That sounds about right.
Despite consumer advocate and regulator concern over the size of the APR in small dollar transactions, it is a nearly useless tool when considering the cost of credit with a duration of less than one year. Small dollar values plus short duration will always equal a shockingly large APR.
With the CFPB poised to issue regulations for the small dollar industry next spring, this is a good time to consider the role that the APR plays in shopping for credit. It is important to remember that unlike the interest rate, the APR is a derived – not an applied – value. This means the APR is a calculation based upon the amount of credit offered, the cost of the credit, and the term of the credit. When dealing with small dollar, short-term credit products, the APR reveals more about the size of the underlying loan and the term of the loan than it does about its cost. In fact, if a consumer is looking to pay off a small dollar loan as quickly as possible, he would need to choose a loan product with the highest APR rather than the lowest.
Given the lack of utility that the APR has for small dollar, short-term credit products such as loans and overdrafts, we anticipate that the APR will not be a component of any disclosure requirements that the CFPB imposes.
Key Findings of the Report
- Checking Account Fees. Overdraft and NSF fees constitute the majority of checking account fees incurred. A customer who has opted in to overdraft fees pays approximately $250 per year in such fees.
- Small Population. Eight percent of bank customers pay 75%of all overdraft fees.
- Age. The propensity to overdraft declines with age.
- Opt In. Opting in to overdrafts increases the likelihood of number of overdrafts (10 per year).
- Small Transactions. The median debit card amount that leads to an overdraft fee is $24.
- Short Duration. Customers typically bring their accounts positive within one week of overdraft.
The CFPB is concerned that, despite recent regulatory changes to impose greater protections for consumers related to overdrafts, consumers are still paying too much for the service.
This may signal that the CFPB will look to impose greater protections via additional amendments to Regulation E. Additional protections may include: (i) changing the opt-in process to make it more clear to consumers that they have opted in; and (ii) imposing transaction order restrictions that prohibit banks from manipulating payment order of transactions to maximize fees through overdrafts.