Focusing on overdrafts, the Consumer Financial Protection Bureau (CFPB) released a new report as well as prototypes of “Know Before You Owe” disclosures for banks and credit unions offering overdraft protection.

What happened

In its third report on overdrafts—following a June 2013 white paper and a “Data Point” report in July 2014—the Consumer Financial Protection Bureau’s (CFPB) Office of Research published a new study on frequent overdrafters, defined as accounts with more than 10 overdrafts and non-sufficient funds (NSF) combined in a 12-month period.

Using a de-identified data set of credit record data joined with transaction and account-level data from several large banks for an 18-month period between January 2011 and June 2012, the CFPB analyzed information on roughly 240,000 active accounts, including about 48,000 accounts belonging to frequent overdrafters.

“Data Point: Frequent Overdrafters” found that frequent overdrafters account for 9 percent of all accounts at the banks that were studied for data—but paid 79 percent of all overdraft and NSF fees.

Very frequent overdrafters (defined as those accounts with more than 10 overdrafts and NSF in a 12-month period) constituted about 5 percent of overall accounts but paid more than 63 percent of all overdraft and NSF fees.

The CFPB tried to build a more complete picture of frequent overdrafters, finding that they carry low daily account balances (typically less than $350, as compared with non-overdrafters, who have an average end-of-day balance of more than $1,550), tend to be more credit constrained than non-overdrafters or infrequent overdrafters, generally have lower credit scores (with a median score of 563), and are less likely to have a general-purpose credit card.

“Neighborhood income and credit scores decrease as overdraft frequency increases,” according to the report. “Similarly, the share of consumers who have a general purpose credit card decreases as overdraft frequency increases, as does the median available credit on such cards among those consumers who have general purpose credit cards.”

Account usage characteristics and circumstances of frequent overdrafters vary considerably, but the dollar amount of monthly deposits into a checking account is not strongly correlated with the number of overdrafts or NSFs incurred, the CFPB said.

Frequent overdrafters who are opted in “differ markedly” in the number of overdraft fees they incur as compared with frequent overdrafters who are not opted in, according to the report. A typical opted-in frequent overdrafter has 22 overdrafts per year and incurs 18 overdraft fees per year, as compared with a non-opted-in frequent overdrafter, who pays an average of five fees. With an average overdraft fee of $34, this means a difference of $450 more in fees for opt-ins, the CFPB found.

“Thus, opted-in consumers pay significantly more overdraft fees but incur only slightly more overdrafts than consumers who are not opted-in,” according to the report.

To address the findings of the study, the CFPB released four prototype options of “Know Before You Owe” disclosures for banks and credit unions offering overdraft protection.

Each one-page disclosure has the goal of making the costs and risks of opting in to overdraft coverage easier for consumers to understand and evaluate, the CFPB said.

The disclosures clarify the institution’s overdraft policies, lay out the amounts of the fees and when they can be charged, and explain what the opt-in decision applies to (one-time debit card and ATM transactions) and what it does not apply to (overdraft on checks and other electronic transactions).

To read “Data Point: Frequent Overdrafters,” click here.

To view the overdraft disclosure prototype, click here.

Why it matters

“Our study shows that financially vulnerable consumers who opt in to overdraft risk incurring a rash of fees when using their debit card or an ATM,” Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), asserted in a statement about the report. “Our new ‘Know Before You Owe’ overdraft disclosure prototypes are designed to help consumers better understand the consequences of the opt-in decision.” Currently in the process of testing the prototypes—which were developed through interviews with consumers—the CFPB will make its model overdraft disclosure form available on its website so that institutions can plug in their specific program information and download it, making it “seamless for banks and credit unions to use a new model form within their existing compliance systems.” While the CFPB tests the prototypes, the model form found in the 2010 rule continues to apply.