By Frank A. Hirsch, Jr., Consumer Finance

On December 19, 2023, the CFPB issued a new report on OD/NSF Fees entitled “Insights From the Making Ends Meet (MEM) Survey and Consumer Credit Panel (CCP)”. Overdrafts (ODs) occur if the financial institution elects to cover the transaction – thereby extending short-term credit to the consumer – while NSF fees occur when the financial institution is requested to process a transaction but elects to decline it based on the consumer’s insufficient funds available. The MEM Survey was conducted by the CFPB in 2023 concerning consumer experiences between January 2022 and January 2023. 

The report sought to answer the following three questions:

1. How often do consumers incur OD and NSF fees?
2. When consumers overdraft their account or are charged a NSF fee, how often is the overdraft transaction or the NSF fee expected, as opposed to being a surprise?
3. How are consumers’ OD and NSF fee-related experiences compared to their socio-economic (income, educational attainment, household make-up, and credit score) and demographic characteristics (urban v. rural, age, race, ethnicity), as well as their credit and debt-related characteristics and their financial well-being?

The report focused on three separate groups of consumers – those with no OD/NSF fees during the past year, those with 1-3 OD/NSF fees (occasional overdraft users), and those with both OD and NSF fees, or with 4 or more of either fee type in the past year (frequent users).

Notably, this CFPB report follows on the heels of three previous publications concerning OD and NSF fee practices: (1) CFPB’s February 2022 blog comparing overdraft fees and policies across banks: (2) CFPB’s May 2023 Data Spotlight discussion of OD/NSF fee revenue since 2019; and (3) CFPB’s October 2023 Spotlight about financial institutions eliminating NSF fees. As of 2023, the CFPB reported that consumers were saving, on a going-forward basis, about $2 billion annually just based on the elimination of NSFs by the large, supervised banks and a few credit unions. The CFPB has not estimated the consumer savings from OD fee practice modification – such as lowered fee amounts, grace periods, de minimus exceptions, and limits on the number of fees charged per day. Those savings are most likely much more than $2 billion because NSF fees typically constitute only approximately 19% of combined overdraft/NSF fee revenues. However, the most recent report by the CFPB does nothing to assess the consumer impacts of the CFPB-driven changes to this revenue stream – disparagingly labeled as “junk fees” by press releases.

“Key Findings” of the Report

The recent report announces the following seven high-level findings:

1. 26.5% of consumers experienced either an OD fee or a NSF fee, while 8% had occasional (1-4) experience, and 18.4% had frequent experience;
2. There is substantial overlap in the populations charged either OD or NSF fees (70-85%);
3. Consumers still reported being “surprised” by OD or NSF fees, but the more frequent the consumer experience with such fees – the lower the reported “surprise” levels – just 16% of consumers with +10 OD fees reported any surprise;
4. Economically disadvantaged consumers – i.e., lower incomes, limited education or non-whites – incurred more OD-NSF fees – 34% of households with incomes of less than $65,000 incurred such fees;
5. Consumer experience with OD/NSF fees generally aligns with their overall credit and debt profiles;
6. The average credit score differs by 100 points between the no-overdraft group (744) and the frequent group (637); 49% of the frequent overdraft consumers have hit their credit card limits (meaning 51% still had room on credit cards as one alternative financing source and much less costly credit); debt more than 60 days past due correlates highly with OD/NSF fees – 42% of frequent over drafters are delinquent on bills;
7. The financial well-being of high OD/NSF fee consumers is much lower – indeed, 81% of frequent OD/NSF fee groups reported “difficulty in paying” at least one bill in the past year.

Some Additional Data Points of Note

While not designated as key findings – the report includes several other statistics worth attention. First, frequent OD/NSF fee consumers have some significant variances among protected classes. 14.4% of whites have frequent experience, while Blacks have 26.5% and Hispanics (27.2%) – this variance [+84% for Blacks, +89% for Hispanics] is pronounced. But the reasons for these disparities are not discussed.

Second, men incur frequent OD-NSF fees at a rate of 13.8%, but women experience them at the higher rate of 22.1%. 

Third, frequent OD/NSF fee consumers are much higher in households with children – 13.9% for no children, compared with 25.9% for those with children.

Fourth, educational attainment is not a keen predictor for experiencing OD/NSF fees – people with four-year college or post-graduate degrees are only “about half as likely as all other education groups (high school or less, some college – no degree, two-year college or vocational degree) to be in the frequent OD/NSF experience category. (This is not a great statistic for the financial literacy level of the college educated).

Report Conclusions

The report concludes without an analysis of the many material changes to OD/NSF fee practices since 2020. The report simply states, “despite many financial institutions making changes to their OD/NSF fee policies in recent years, we find that consumers continue to be affected by these fees.” But why not analyze the positive effects on consumers recently created by the largest fee generators’ – modifications to their practices – including the reduction or elimination of OD fees by 35% of institutions in 2021-2022? The report acknowledges only that market changes “include the eliminations or reduction of NSF and OD fees; limits on the number of fees consumers can be charged in a day, the introduction of grace periods for consumers to bring account balances positive before being charged a fee, and the introduction of de minimus thresholds below which consumers are not assessed fees.” In sum, “nearly two-thirds of banks and one-quarter of credit unions have eliminated NSF fees.” 

The report acknowledges that many “consumers appear to have some credit available on a credit card during the period these fees are assessed,” but does not explore in any material way why this cheaper credit alternative was not utilized. Obvious potential reasons could be the intentional preservation of some credit card room for handling large emergency costs (payment shocks), consumer unawareness of comparative costs of OD/NSF fees and credit card cash advances, or consumers too busy or unable to focus on their personal finances. Instead of exploring such possibilities the report simply concludes “credit card payments may not be a feasible option for all potential consumer expenditures,” and consumers “might prefer to avoid or delay the transactions”… “or to use alternative payment methods to cover the transactions.”  These speculations are posited without data cited in support.

The report concludes that “NSF fees continue to affect consumers… despite not providing consumers any particular benefit.” Yet, the report also finds that 56% of consumers charged OD fees on more than 10 occasions were not surprised by the fees and “expected their most recent overdraft.” Indeed, “some consumers appear to use overdrafts often and intentionally as a source of credit, even with their high cost.” The reasons are not disclosed. It could be because frequent over drafters value the credit and choose it rather than payday loans, title loans, pawn shop loans, or even credit card cash advances.

Finally, without context or the citation to legal authority, the report includes the following jab as the penultimate sentence: “Despite their use as credit, most account overdrafts are exempt from the Truth in Lending Act’s Regulation Z, which is designed to promote the informed use of credit and make it easier for consumers to compare the cost of credit products.” It seems the Bureau would prefer to add Reg. Z’s detailed disclosure to all overdraft products. Aside from the fact that TILA does not regulate overdrafts, what is the logic for detailing the cost of such when consumers knowingly prefer the product over less costly forms of funding and when they clearly have alternatives which they have elected not to utilize?

In the financial world of OD/NSF fees much has changed to lower the cost of these transaction services for consumers. And yet, the CFPB is clearly continuing its crusade against all such fee-income, by asserting that “consumers continue to be affected by” them negatively. Banks and credit unions should remain vigilant as to the landscape of OD/NSF fee practices, including any disparate impacts on protected classes, and ensure they are not market outliers compared to their peers. The majority of credit unions which still charge NSF fees should expect elevated regulatory scrutiny. Litigation over OD/NSF fee practices – such as ordering high to low transactions, APSN – authorized positive, settle negative transactions, “extended” overdraft fees for negative account balances, and using “available” balances rather than the actual or ledger balance – all should be monitored regularly for nuanced legal determinations which may necessitate changes to policies as well as account agreements and disclosures.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.