The Consumer Financial Protection Bureau ("CFPB"), created by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, announced on Wednesday, February 22, 2012 that it was beginning an investigation of banks’ checking account overdraft practices. The CFPB’s investigation will include three components: (1) gathering information from both banks and consumer advocates on current overdraft fee practices; (2) educating consumers on overdraft fee practices, starting with a consumer advisory on the CFPB website; and (3) suggesting a "penalty fee box" to highlight overdraft fees on bank statements. The CFPB’s new investigation follows recent regulatory changes and scores of class action lawsuits challenging overdraft fee programs in recent years.
In his remarks announcing the new investigation, CFPB Director Richard Cordray specifically addressed posting order issues:
One of the practices that may contribute to consumer costs is transaction ordering. Some banks do not process transactions in chronological order. Instead, they collect the transactions from a specified period, such as a calendar day, and then process that set of transactions from highest amount to the lowest amount. This approach can conceivably benefit consumers if it results in making certain that more significant payments – such as mortgage payments or student loan installments – get made. The down side is that this approach also tends to maximize the number of transactions that trigger overdraft fees.
Mr. Cordray also argued that many consumers did not understand the effect of overdraft protection despite recent amendments to Regulation E that required customers to affirmatively opt-in for overdraft protection on one-time debit card and ATM transactions. He speculated that consumers may not understand the overdraft terms in their account agreements, or that consumers may have fallen victim to misleading or one-sided marketing materials. Mr. Cordray also raised questions about banks' overdraft fee disclosures, asserting that "[o]verdraft provisions are often masked by the fine print of complex checking account agreements."
Of course, the CFPB’s new inquiry into overdraft fee practices will only heighten the already-intense scrutiny by the media, consumer advocates, bank examiners and the plaintiffs' bar. Our financial institutions attorneys are experienced both in advising financial institutions on their overdraft fee practices and in defending financial institutions against class action litigation based on those practices. We will continue to monitor the developments in overdraft fee regulation and litigation and provide updates as appropriate.