Letter to CPFB on Overdraft Rule Review Pursuant to the RFA

Ladies and Gentlemen:

The American Bankers Association (ABA) appreciates the opportunity to comment on the Consumer Financial Protection Bureau’s review of the rule promulgated in 2009 by the Board of Governors of the Federal Reserve System (Federal Reserve) regarding overdraft protection services (the Rule or Overdraft Rule). The Rule amended Regulation E to require that a consumer affirmatively consent — or “opt in” — to overdraft services before a bank can impose a fee for an overdraft resulting from a debit card point-of-sale or Automated Teller Machine (ATM) transaction.

The Bureau is conducting this review pursuant to section 610 of the Regulatory Flexibility Act (RFA), which requires that federal agencies conduct a review of each rule that has a “significant economic impact upon a substantial number of small entities” within 10 years of the rule’s publication in the Federal Register. The Dodd-Frank Act transferred rulemaking responsibility for the Rule from the Federal Reserve to the Bureau in 2011. The RFA requires federal agencies to review a rule to determine whether the rule “should be continued without change, or should be amended or rescinded . . . .”

I. Summary of Comment

ABA appreciates the opportunity to comment on the Bureau’s analysis of the Rule and its impacton small entities. To inform our response, ABA conducted in June 2019 a survey of member banks regarding their overdraft programs (2019 Survey). We received responses from 175 banks,87% of which had assets of $10 billion or less. The 2019 Survey results and conversations with bankers confirm ABA’s long-standing view that the Overdraft Rule was an effective, pro-consumer rule, which “should be continued without change.”

The Rule has empowered customers to make informed and responsible account managementchoices when seeking, declining, or changing overdraft coverage. The Rule requires a bank todisclose to the customer the fee charged for each overdraft transaction, additional fees imposed ifan account remains in overdraft status, and whether there are any limits on the number ofoverdraft fees that may be assessed. After receiving this information, the bank must obtain thecustomer’s affirmative consent or “opt in” before the bank can charge the customer a fee on anoverdraft resulting from an ATM or debit card transaction. In addition, to ensure that thecustomer has information about the cost of overdraft and non-sufficient fund (NSF) transactions,Regulation DD requires a bank to disclose on each monthly account statement the total of theoverdraft and NSF fees imposed that month and for the calendar year. Finally, the Rule permitsthe customer to “opt out” at any time, for any reason, and at no cost.

The regulatory framework established by the Rule ensures that consumers have the informationnecessary to make informed choices regarding overdraft. Unsurprisingly, ABA survey datademonstrate that frequent users of overdraft are well aware of fees charged for overdrafttransactions, the monthly and year-to-date fee information that is provided on their bankstatements, and their right to opt out of overdraft protection at any time. Moreover, in the yearsfollowing implementation of the Rule, banks have provided an increasing number of ways forcustomers to limit or avoid overdraft fees, such as by sending low-balance alerts, by linking thecustomer’s checking account to another account, and by imposing de minimis thresholds andcaps on total fees that the bank may charge per day. These bank practices have in many instancesreduced the number of overdrafts incurred by customers and the number of fees charged.

We support Director Kraninger’s interest in providing consumers with the tools they need tomake informed financial decisions and to preserve and expand consumers’ access to credit. Asthe Director observed when she launched the Bureau’s “Smart Small, Save Up” initiative earlierthis year, approximately “40 percent of Americans could not cover even a $400 emergencyexpense out of their own liquid savings.” ABA believes the Bureau and banking agenciesshould adopt regulatory policies that promote a variety of bank-provided options for consumersto meet short-term liquidity needs. In support of that goal, we recommend no changes to the Overdraft Rule, so that those consumers who make an informed choice to use debit cardoverdraft services continue to have this option.

II. The Rule Has Achieved Its Intended Purpose to Empower Consumers to MakeInformed and Responsible Decisions When Seeking or Declining OverdraftCoverage

The Rule was promulgated “to assist consumers in understanding how overdraft services . . .operate and to ensure that consumers have the opportunity to limit the overdraft costs” whenthose services “do not meet [the consumer’s] needs.” The Rule has achieved its intendedpurpose. It has empowered consumers to make informed and responsible account managementchoices when seeking or declining overdraft coverage that best fits their individual needs and lifestyles.

As described above, the Overdraft Rule provides that depository institutions may not impose anoverdraft fee for ATM and one-time, point-of-sale debit card transactions unless the customerexpressly consents or “opts in” to the overdraft program. Importantly, the Rule did not impose asimilar opt-in requirement with respect to the recurring debit card transactions, AutomatedClearing House (ACH) transfers, or checks that, if paid, would overdraw the customer’s account.This measured approach ensures that ACH transfers and checks are paid, thus preventing thecustomer from incurring an NSF fee for non-payment of these items.

The conclusion that the Rule has empowered consumers to make informed decisions about theiruse of overdraft is most evident from the experience of customers who know the product best:frequent users of overdraft. Data from ABA’s 2019 Survey reveal that that 82% of respondingbanks monitor customers’ overdraft usage, and 81% attempt to initiate contact with frequentusers by telephone, text message, e-mail, or postal mail, or by having the customer speak with ateller at a bank branch. Banks seek to contact these customers to provide education on managinga deposit account, to discuss less costly alternatives for small dollar credit, and in appropriatecircumstances, to end access to overdraft services and to enroll the customer in a repayment plan.

Although banks seek to communicate with frequent overdraft users to advise them of alternatedeposit account options, ABA members report that frequent users rarely switch (willingly) to adeposit account product that does not provide overdraft protection. For 7 in 10 banks thatresponded to ABA’s 2019 Survey, 10% or fewer of the bank’s frequent overdraft users who wereoffered the option to enroll in an account without an overdraft feature or a short-term, smalldollar loan, actually enrolled in the alternate product. This underscores that customers value andbenefit from the short-term liquidity provided by overdraft services and are making an informeddecision when seeking overdraft coverage.

An ABA-sponsored research paper published in 2017 (which ABA previously shared withBureau staff) affirms the conclusion that customers value and benefit from overdraft. The paperfound the monetary value of the typical transaction paid into overdraft is 7.6 times the size of theeffective fee (i.e., the fee once adjusted for waivers and refunds). This finding demonstratesthat overdraft protection provides customers with substantial purchasing power.

Moreover, few bank customers with access to overdraft have their account closed as a result ofusage of the product. For 7 in 10 banks that responded to ABA’s 2019 Survey, 10% or fewer ofthe bank’s customers with access to overdraft had their account closed because the account wasoverdrawn. This low level of account closure is unsurprising because lower-income customers— i.e., those customers who may be at greatest risk of having their account closed from frequentoverdraft use — opt in to overdraft protection at lower rates than do higher-income customers.The ABA research paper found that lower-income customers opted in to debit card and point-of-sale overdraft at rates of approximately 50%. For example, 51% of customers with monthlydeposits of up to $500 opted in; 49% of customers with monthly deposits of $500-$1,000 optedin. By contrast, 60% of customers with more than $5,000 in monthly deposits opted in; 61% ofcustomers with monthly deposits of $4,500-5,000 opted in.

III. Banks Have Developed Sustainable and Transparent Overdraft ProtectionOptions Since the 2009 Rule Was Promulgated

Under the RFA, the Bureau must consider the “degree to which technology, economicconditions, or other factors have changed” since the rule under review was promulgated. In thenotice announcing its review of the Rule, the Bureau observed that, since issuance of the Rule,financial institutions have made a number of changes to their overdraft practices.

ABA agrees that the market for overdraft services and bank overdraft practices have evolvedsignificantly since the Federal Reserve promulgated the Rule. Data from ABA’s 2019 Survey confirm the Bureau’s observation that banks have adopted thresholds and caps intended to reduce overdraft fees. Of banks that responded to the survey, 69% waive fees for overdraftamounts below a certain threshold, 79% impose a cap on the total fees that the bank may chargeper day, and 58% provide courtesy fee waivers. One ABA member provides a 24-hour “grace”period during which the bank notifies the customer of the overdraft but refrains from charging afee if the customer brings the account to within $5 of a positive balance by the close of the nextday. The bank reports that more than 50% of customers transfer the necessary funds within thegrace period and are not charged an overdraft fee.

Banks also offer their customers alternatives for covering transactions that would result in anegative balance to the customer’s account. Banks permit customers to link their checkingaccount to a savings account (92% of responding banks), to another checking account (72%), toa money market account (69%), and for those that qualify, to an overdraft line of credit (68%).

In addition, the 2019 Survey findings confirm the Bureau’s observation that, over the pastdecade, many banks have changed the order by which transactions are posted, which has resultedin a diminution in the number of overdraft transactions.17 Many banks have adopted policies topost transactions in “low to high” order or have made other changes to their posting order. Ofbanks that responded to the 2019 Survey and use the amount of the debit as one factor indetermining posting order, 68% post debits in low to high order.

The sweeping technological changes that have occurred since 2009 has provided banks with newways and opportunities to communicate with their customers. Today, 81% of American adultsreport owning a smartphone, and, according to a Federal Reserve study, 62% of mobilebanking users with smartphones reported using their smartphone to check account balances oravailable credit before making a large purchase. Of those who checked their balance oravailable credit, “50 percent reported that they decided not to buy an item because of the amountof money in their bank account or the amount of [their] available credit.” Consumers can — and do — use the information available to them to make informed financial decisions, includingthe decision to rely upon overdraft protection.

Banks take advantage of these advances in technology by increasingly providing low-balancealerts to help customers avoid a transaction that would overdraw an account. Of banks thatresponded to the 2019 Survey, 69% provide low-balance text alerts to customers that have agreed to receive them, 68% provide such alerts by e-mail, 49% provide an alert at the teller linethat proceeding with the transaction will overdraft the account, and 45% provide such an alert atthe bank’s ATM. For example, one large bank provides an alert to its customers each time thebank receives an ACH request that the bank is scheduled to process that night. The alert gives thecustomer the opportunity to deposit funds into the account, in order to avoid an overdraft whenthe ACH is paid.

Collectively, the bank practices described above have in many instances reduced the number ofoverdrafts incurred by customers and the number of fees charged. The data obtained throughABA’s 2019 Survey strongly suggest that bank overdraft practices fairly and transparentlyrespond to consumer needs. As the Bureau reviews the Rule, the Bureau should be mindful thatthe imposition of additional regulatory obligations on overdraft may stifle innovation andcustomer choice in overdraft product design.

IV. The Bureau Should Provide Examples in the Rule’s Official Commentary ofPermissible Modifications to the Model Form A-9

Under the RFA, the Bureau must assess the “complexity” of the Rule and the “nature of publiccomplaints or comments” concerning the Rule, as the Bureau determines whether to continue theRule without change or to amend or rescind it. The Rule has empowered customers to makeinformed decisions regarding their use of overdraft in large part because of the simplicity of theModel Form, which advises customers of their option to seek or decline overdraft services. Theconsumer-tested Model Form requires the disclosure of the fee charged for each overdrafttransaction; any additional fees imposed if an account remains in overdraft status, if applicable;and whether there are any limits on the number of overdraft fees assessed. In addition, the ModelForm requires the disclosure of other alternatives the bank offers for covering overdrafttransactions, including the statement that these alternatives “may be less expensive than ourstandard overdraft practices.”

As the Bureau is aware, the Rule establishes a safe harbor from liability for institutions that usethe Model Form or a form that is “substantially similar” to the Model Form. Thus, the Rulelimits a bank’s ability to deviate from the Model Form in its own disclosure. Some ABAmembers have expressed an interest in understanding the additions and modifications that may be made to the Model Form without losing safe harbor status. We recommend that the Bureaurevise the Official Commentary to the Rule to include examples of permissible modifications tothe Model Form that would not result in the institution falling outside of the safe harbor.

Conclusion

There is ample evidence that in the ten years that the Rule has been in effect, it has worked asintended to promote informed consumer choice about overdraft services. Consequently, the Ruleshould not be amended.

Frequent users of overdraft are well aware of the fees they incur to use overdraft, the monthlyand year-to-date fee information that is provided on their bank statements, and their right to optout of overdraft protection at any time. Banks also provide an increasing number of ways forcustomers to limit or avoid overdraft fees, through sending low-balance alerts, linkingcustomers’ accounts, and imposing de minimis thresholds and caps on total fees that may becharged per day.

To expand customers’ options for accessing short-term liquidity, we encourage the Bureau toremove barriers that prevent banks from offering or expanding small dollar loan programs. Wealso ask that the Bureau revise the Official Commentary to the Rule to provide examples ofpermissible modifications to the Model Form that banks may make without losing protectionfrom liability under the Rule’s safe harbor.

Sincerely,

Jonathan Thessin
Senior Counsel
Consumer & Regulatory Compliance
Regulatory Compliance and Policy