July 2014 Newsletters
The Pew Charitable Trusts (Pew), which is an independent non-profit, non-governmental organization that has a stated mission of serving the public interest by “improving public policy, informing the public and stimulating civic life” has recently released the results of a study on consumers’ experiences with debit card and ATM overdrafts, as well as consumer knowledge, understanding and attitudes about overdraft fees. According to Pew, consumers are still confused and unhappy about overdraft practices and fees.
According to their report, “the key 2013 survey findings are:
- Younger, lower-income and nonwhite account holders, as well as those who did not have a credit card, are among those who were more likely to pay an overdraft penalty;
- More than half of those who incurred a debit card overdraft penalty fee do not believe that they opted in to overdraft coverage;
- Ten percent of Americans paid at least one overdraft penalty fee in 2013, and another 5 percent paid an overdraft transfer fee;
- On average, people who paid an overdraft penalty also incurred additional fees, for a total of $69 the last time their account was overdrawn;
- Thirteen percent of people who paid an overdraft penalty say they no longer have a checking account; 19 percent report responding to overdraft fees by discontinuing overdraft coverage; and 28 percent report closing a checking account in response to overdraft fees;
- More than three-quarters of the people who paid an overdraft penalty fee express concern about specific overdraft policies, including the high cost of a penalty and the practices of charging “extended” overdraft fees — additional charges for failing to repay a negative balance on time — and of reordering withdrawals from highest to lowest dollar amount, which have the effect of increasing overdraft fees;
- Large majorities of those who paid an overdraft penalty prefer that a transaction be declined rather than overdraw an account, and they support greater regulation of overdraft products; and
- Four groups of consumers surveyed: “overdrafters,” “transferers,” “decliners” and “never-negatives” all expressed similar concerns about overdraft policies, in spite of their differing experiences.
Based on those findings, Pew made a few recommendations, urging the CFPB to require that all financial institutions:
- Provide account holders with clear, comprehensive and uniform pricing information for all available overdraft options;
- Make overdraft penalty fees reasonable and proportional to the bank’s costs in covering the overdraft; and
- Stop the practice of reordering transactions to maximize fees, and post deposits and withdrawals in a fully disclosed, objective and neutral manner.
Why is this study important to us, and does it have a part in what the CFPB will require banks to do? Well, it is certainly no secret that overdraft practices have been on the CFPB’s radar for some time now. If the CFPB has had complaints in these areas, most assuredly they will appear in some manner in the final regulation. Also, currently, there is an overdraft regulation that continues to be listed in the “pre-rule stage” even though it was listed on the CFPB’s Spring 2014 regulatory agenda. Also remember back in June of 2013, the CFPB issued its own Study of Overdraft Programs. Some of the areas highlighted in the CFPB’s study as potential areas of concern include opt-in processes, fee structures, involuntary account closures and transaction posting order. The CFPB indicates that the agency is considering whether additional regulations are needed, which could include additional disclosure requirements or the regulation of specific acts or practices. Stay tuned on this one, because despite the amendment to Regulation E several years ago requiring affirmative consumer opt-in before charging a fee for one-time debit and ATM overdrafts (implemented in section 1005.17(b) of Regulation E), this is an issue that doesn’t look to be going away anytime soon.
Have you been watching and waiting for the CFPB to issue the long awaited prepaid card proposed rule and model disclosures? Well, Director Cordray has advised that the CFPB’s prepaid card proposed rule likely will not come until the end of the summer, despite the fact that last month the CFPB stated the proposal would be released in July. That being said, Cordray went onto explain that the delay does not indicate any particular problem about the rulemaking, only that many of the issues that have been raised in the comment period are “hard to work through.”
Despite the delay, the CFPB has offered some insight into the substance of the prepaid card regulations. For example, Cordray informed the House Committee on Financial Services that the packaging for most prepaid cards is too small to provide the types of disclosures that the CFPB believes consumers need. In a March blog post, the CFPB released model disclosures for prepaid card packaging being considered in connection with the proposed rulemaking.
The CFPB’s intention for the model disclosures is to enable consumers to make side-by-side comparisons of the different prepaid cards. Cordray stated this “apples-to-apples” comparison is necessary for the consumers to be able to make informed decisions on their purchase. Cordray also suggested that consumers do not fully understand that prepaid general purpose cards are not protected by existing consumer financial protection laws, and that they represent “a hole in the fabric” of consumer financial protection.
We believe the statement referring to the fact that the prepaid cards represent a “hole in the fabric” refers to the Regulation E protections. This statement leads us to believe that our industry will see an extension of Regulation E protections, to include the prepaid card industry. We anticipate that coverage might be in the form of permitting alternative periodic statements, modified error resolution procedures and limited initial disclosures, along with an annual error resolution notice and limited cardholder liability. Even though many prepaid card issuers already offer these types of protections to their prepaid cardholders, it’s on a voluntary basis. Cordray promised that the CFPB’s proposed regulations “will provide new protections” for all of these types of cards. One final note: Cordray also stated that overdraft treatment on these cards would not be overlooked.
We will continue to follow the regulatory developments concerning prepaid cards, and will report on the proposed prepaid card rule when it is (finally) issued.
Over the past several years it seems as if bank processes have gone through major technology changes. That being said, these changes continue through each area of the bank, even privacy is being affected. Regulation P currently requires banks to provide initial and annual privacy notices to their customers by mail. The CFPB has proposed an alternate delivery method (like posting it to your website) for the annual privacy notice. We believe this will be helpful to banks, as it is very expensive and in most cases, does not provide any new information to the customers. In fact, most customers toss the notice without even opening it to see what the notice has to say. This proposal would provide some banks with the ability to avoid the costly annual mailing process of a notice.
In order for your bank to take advantage of the proposed alternative to the mailing of annual privacy notices, the bank would have to ensure that none of the following conditions exist:
- Sharing customer/member information with nonaffiliated third parties in a manner that triggers an opt-out right;
- Including an opt-out notice on the annual privacy notice that is triggered by the affiliate sharing requirements under section 603(d)(2)(A)(iii) of the Fair Credit Reporting Act;
- Providing your annual privacy notice, as required by Reg P, as the sole means of satisfying any notice requirement you may have under section 624 of the Fair Credit Reporting Act, which deals with sharing information with affiliates;
- The information disclosed since the customer/member last received a privacy notice has changed; or
- Using a privacy form other than the model form provided in Reg P
If none of the above conditions have disqualified the bank, then instead of providing the annual privacy notice by mailing out to each customer, the bank could do the following:
- Insert a clear and conspicuous statement at least once a year on a notice or disclosure you are providing in accordance with another regulatory requirement announcing that the annual privacy notice is available on your website, that it will be mailed to any customer/member who requests it by calling a toll-free number, and including a statement that the information contained in your privacy notice has not changed;
- Continuously post your annual privacy notice in a clear and conspicuous manner on a page of your website that does not require a login or similar steps to access; and
- Promptly mail annual notices to customers who request them by phone.
And remember, if you want to comment on this change in requirements for the annual mailing of the privacy notice, comments are due by July 14, 2014.