By: Michelle Patana
The Consumer Financial Protection Bureau's examination of overdraft program compliance among banks and credit unions has prompted many financial institutions and consumers to voice their concerns. While the CFPB and new regulations of the Dodd-Frank Act intend to curb unfair practices by re-writing overdraft rules, many segments of the population and industry professionals agree that an institution's overdraft privilege helps, rather than hurts, consumers.
The CFPB recently cited a 2008 FDIC report, which suggests that overdraft policies primarily target low-income and young consumers. The study reveals that 9 percent of checking account customers bear 84 percent of overdraft fees, which were mostly accrued by young or low-income adults. However, supporters of overdraft protection show that this information is out of date and is only a small representation of studies regarding overdraft protection.
For example, a March 2011 study conducted by Pinnacle Financial Strategies found that consumers of all income levels rely on overdraft protection for short-term solutions. The online poll reveals that 53 percent of consumers have intentionally or unintentionally used their institution's overdraft protection service at some point in their banking relationship. In addition, the income levels of consumers who reported using overdraft protection was not extremely disproportionate. The results show that 57 percent of consumers who answered "yes" to intentionally or unintentionally using overdraft protection had incomes of $25,000 or less, while 45 percent of overdraft protection users had incomes that amounted of $150,000 or higher.
Industry professionals agree that while unfair practices, such as changing the order of transactions to charge the biggest fees, should be outlawed and avoided, overdraft protection can be beneficial to consumers who may face financial shortfalls.
"There's a right way and a wrong way to do overdrafts," said Pinnacle CEO and founding partner Joe Gillen. "A lot of good programs work well and consumers like them."
In a separate testimony before the Subcommittee on Financial Institutions and Consumer Credit, Commerce Bank president Ignacio Urrabazo also spoke out against tightened restrictions on overdraft programs, which he said provided a safety net to consumers. Further, new opt-in rules give consumers the decision and flexibility to participate in these programs if they want and provide disclosures regarding fees and services.