---

Published: April 2010

Banks must be closely supervised as they implement overdraft opt-in rules

Coalition: Overdraft

In letters to both Sheila C. Bair, Chairman of the Federal Deposit Insurance Corporation and Acting Director of the Office of Thrift Supervision John Bowman, Consumer Action and its coalition partners asked that these agencies closely monitor the implementation of new overdraft opt-in rules.

Below is an excerpt from the letter to the FDIC and the OTS:

The state-chartered banks under your supervision will soon implement changes to their overdraft programs to comply with the new Federal Reserve Regulation E rules that require affirmative consent from consumers before banks charge an overdraft fee for debit card purchases and ATM withdrawals.  We write to urge the FDIC to closely supervise bank implementation of overdraft opt-in rules. 

FDIC Policies Needed on Soliciting Opt-Ins for Overdraft Programs

Specifically, we request that the FDIC work with state banking commissioners to:

• Require banks to submit their training manuals, scripts provided to bank employees, communications to customers, and advertising materials and promotions used to solicit opt-in for fee-based overdraft coverage, in order to monitor whether bank practices and messages are deceptive or inconsistent with the Federal Reserve’s rule.
• Prohibit banks from using scare tactics or deceptive or misleading statements in materials and messages soliciting consumer opt-in.
• Closely examine overdraft opt-in programs for disparate impact and take action against any bank that targets vulnerable consumers who are heavy users of overdrafts.
• Consider sustained overdraft fees, i.e. multiple fees for a single violation, to be an unfair practice because the fee is not reasonable or proportional to the overdraft.
• Urge banks to deny overdrafts when funds are not sufficient to cover debit card purchases and ATM withdrawals.  Bank of America has announced that it will deny unfunded debit card purchases while Citibank denies both debit purchases and ATM withdrawals on insufficient funds.  Rather than solicit customers to pay $35 for small overdrafts, responsible banks should simply deny these transactions.

Given that consumers spent almost $24 billion on overdraft fees in 2008 and knowing from the FDIC’s study that overdrafts triggered by debit cards are the leading form of payments that cause overdrafts, banks have a strong incentive to persuade consumers to opt-in to fee-based overdraft coverage for one-time debit card purchases and ATM withdrawals.  We are already seeing aggressive marketing campaigns promoted by the consultants who design and sell overdraft programs to financial institutions.

Overdraft Opt-In Marketing Targeted at Vulnerable Consumers

We are especially concerned that financial institutions are targeting the most frequent overdrafters and steering them to opt into fee-based overdraft, the most expensive overdraft option. A New York Times columnist quotes the head of JPMorgan Chase’s consumer banking as describing the sort of person who would best benefit from overdraft coverage as a person who runs low on funds the weekend before payday and needs money to pay for groceries or a prescription or to take a pet to the vet.   In other words, consumers who use overdrafts are cash-strapped families, struggling to make ends meet who can least afford to pay $34 for a $20 “cash advance” on a debit card.  

Targeting the most vulnerable segment of bank customers – the small minority with repeated overdrafts per year -- raises safety and soundness concerns for the institution, since it encourages high levels of unsustainable debt among these accountholders.  Research  has repeatedly found that overdraft fees have a disparate impact on lower income consumers and communities of color, raising fair lending concerns under the Equal Credit Opportunity Act (ECOA).

Lead Organization

Consumer Federation of America

Other Organizations

Consumer Federation of America | National Consumer Law Center (On behalf of its low income clients) | U.S. Public Interest Research Group | National Association of Consumer Advocates | Consumers Union | Center for Responsible Lending

More Information

Related comments submitted to the Federal Reserve

Download PDF

No Download Available