The World of Overdraft

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

For some time now, I have been saying in seminars that the federal government will not rest until there are no overdraft fees. On February 3, 2016, the Consumer Financial Protection Bureau (CFPB) stated that they wish to improve checking account access. They sent a letter to the 25 largest retail banks encouraging them to make available and widely market lower-risk deposit accounts that help consumers avoid overdrafts. Of course, anyone can avoid overdrafts by managing the account properly, but this was not mentioned in the letter.

As a companion item, the CFPB also issued a bulletin warning banks and credit unions that failure to meet accuracy obligations when they report negative account histories to credit reporting companies could result in Bureau action. For the industry, this seems to be of more interest.

The CFPB reminded all banks to “establish and implement reasonable written policies and procedures regarding the accuracy of the deposit account information provided to the consumer reporting companies.” Make sure that you can show an accurate and fully functioning system to your examiners at their next visit. This means policies, procedures, and practices to accurately report information and also a system to handle consumer disputes about these issues.

This is not a new requirement – just a reminder of existing requirements. Mistakes do happen, but we need to be very careful with all reports to all types of credit reporting agencies. This is obviously something that the CFPB is going to be pushing very hard. They are all about the consumer, and do not spend much time worrying about the financial services industry. But if we do our jobs correctly, there really is no issue here. If the correct information results in a decline of a deposit account, the consumer will have to deal with the result.

The CFPB is providing consumers with resources to help navigate the deposit account system. CFPB Director Richard Cordray stated, “Consumers should not be sidelined out of the basic banking services they need because of the flaws and limitations in a murky system. People deserve to have more options for access to lower-risk deposit accounts that can better fit their needs.” Many bankers would find fault with that statement, as there is a percentage of customers who just cannot manage their checking account. But this seems to be the direction the CFPB is going. Their notice on this issue stated, “the CFPB is weighing what additional consumer protections are necessary for overdraft and related services.”

This following section is a direct quote from the CFPB’s notice about these issues, and is something that we should keep in mind for the future.

Screening Accuracy Improvements
The bulletin issued by the CFPB today warns banks and credit unions that they must have systems in place regarding accuracy when they pass on information, such as negative account histories, to checking account reporting or other credit reporting companies. The consumer reporting companies focused on checking accounts typically generate reports on charge-off amounts, past non-sufficient funds activity, unpaid or outstanding bounced checks, overdrafts, involuntary account closures, and fraud.The CFPB is concerned about inaccuracies and inconsistent information provided by the financial institutions to the reporting companies. In a recent Supervisory Highlights, the CFPB noted that examiners found that one or more financial institutions failed to “establish and implement reasonable written policies and procedures regarding the accuracy of the deposit account information provided to the consumer reporting companies.” Examiners also found that at least one entity violated its federal obligation to handle consumer disputes about these issues.Banks should expect accurate information from checking account reporting companies to make fair assessments of deposit account applicants. If the system is tainted with incomplete, inconsistent, and inaccurate information, banks and credit unions cannot make informed decisions.”

This is one of the many areas that is concerning the CFPB, which means that it needs to concern us as well. If you need any assistance in this or any other area of compliance, contact us at 1.800.525.9775 or compliance@younginc.com.