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[Federal Register Volume 77, Number 39 (Tuesday, February 28, 2012)]
[Notices]
[Pages 12031-12034]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4576]

[[Page 12031]]

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BUREAU OF CONSUMER FINANCIAL PROTECTION

[Docket No. CFPB-2012-0007]

Impacts of Overdraft Programs on Consumers

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Notice and request for information.

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SUMMARY: Title XIV of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203 (the Dodd-Frank Act), charges the 
Bureau of Consumer Financial Protection (the CFPB or the Bureau) with 
regulating ``the offering and provision of consumer financial products 
or services under the Federal consumer financial laws.'' \1\ 
Specifically, the Dodd-Frank Act grants regulatory authority to the 
Bureau for the Electronic Funds Transfer Act,\2\ except with respect to 
section 920 of that Act, and the Truth in Savings Act,\3\ which taken 
together, in part, govern consumer transaction accounts. Accordingly, 
the Bureau is reviewing existing regulations and supervisory guidance 
issued by various regulators pertaining to the use of overdraft 
programs by financial institutions. To support this review, the Bureau 
seeks information from the public on the impact of overdraft programs 
on consumers.
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    \1\ 12 U.S.C. 5491(a).
    \2\ 15 U.S.C. 1693 et seq.
    \3\ 12 U.S.C. 4301 et seq.
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    The Bureau encourages comments from the public, including 
consumers, overdraft program processors, and financial institutions.

DATES: Comments must be received on or before April 30, 2012 to be 
assured of consideration.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2012-
0007, by any of the following methods:
    http://www.regulations.gov. Follow the instructions for 
submitting comments.
     Email: cfpb_overdraft_comments@cfpb.gov.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Bureau of Consumer Financial Protection Bureau, 1500 Pennsylvania Ave. 
NW., (Attn: 1801 L Street NW.), Washington, DC 20220.
     Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20006.
    Instructions: The CFPB encourages the early submission of comments. 
All submissions must include the document title and docket number. 
Please note the number of any question to which you are responding at 
the top of each response (respondents need not answer each question). 
In general, all comments received will be posted without change to 
http://www.regulations.gov. In addition, comments will be available for 
public inspection and copying at 1700 G Street NW., Washington, DC 
20006, on official business days between the hours of 10 a.m. and 5 
p.m. Eastern Time. You can make an appointment to inspect the documents 
by telephoning 202-435-7275. All comments, including attachments and 
other supporting materials, will become part of the public record and 
subject to public disclosure. Sensitive personal information such as 
account numbers or Social Security numbers should not be included. 
Comments will not be edited to remove any identifying or contact 
information.

FOR FURTHER INFORMATION CONTACT: For general inquiries, submission 
process questions or any additional information, please contact Monica 
Jackson, Office of the Executive Secretary, 202-435-7275.

SUPPLEMENTARY INFORMATION:

Background

    Technological Advances in Transaction Accounts: With changes in 
technology, the number of ways in which consumers can access funds in a 
checking account has expanded over decades from paper checks to include 
automated teller machine (ATM) withdrawals, point-of-sale (POS) debit 
card use, preauthorized debit card use, Automated Clearing House (ACH) 
payments, and online banking transactions. This expanded range of 
accessing funds also means that the number and types of transactions 
potentially causing an overdraft has increased as well.
    When checking accounts were accessed exclusively or predominantly 
through paper checks, institutions generally declined to pay an item if 
there were insufficient funds in the account to cover that item; 
instead, the item would be returned and the consumer would be charged a 
returned check or non-sufficient funds (NSF) fee. Before returning an 
item, some institutions would conduct a manual review and, as a 
courtesy, pay certain items based on the institution's relationship 
with the consumer.
    Over the past decade or more, many institutions introduced 
automated overdraft systems under which overdraft items are paid, 
subject to tolerances or limits that are established at the account 
level, and an overdraft fee is charged on a per item basis. A study 
published in 2008 by the Federal Deposit Insurance Corporation (FDIC) 
of overdraft practices among banks it supervised \4\ found that more 
than two-thirds of surveyed banks with assets of $250 million or more 
had automated overdraft programs.\5\ The FDIC study found that 
overdraft and NSF fees accounted for 74% of the deposit service income 
of banks with automated overdraft programs during the 2006 study 
period.\6\
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    \4\ FDIC Study of Bank Overdraft Programs (``FDIC Study''); 
Washington, DC, November, 2008, available at http://www.fdic.gov/bank/anlytical/overdraft/.
    \5\ FDIC Study at Table III-1, page 5.
    \6\ FDIC Study at page 56. ``NSF-related'' income included fees 
for items returned due to all fees referred to as ``overdraft fees'' 
in this document, including fees for items declined due to 
insufficient funds (``NSF fees''), paid overdraft items (``overdraft 
coverage fees'') and fees for not repaying paid overdraft items for 
a certain period of time (``extended overdraft fees'').
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    While not based on a representative sample of banks, the FDIC's 
analysis of account-level data found that the approximately 9% of 
accountholders who incurred 10 or more overdrafts annually bore 
approximately 84% of overdraft-related fees.\7\ Those who incurred over 
20 overdrafts per year--representing 4.9% of all consumers--incurred 
fees of over $1,600 per year on average.\8\ The FDIC study also 
concluded that the most frequent overdrafters were disproportionately 
low and moderate income and more likely to be young adults.
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    \7\ FDIC Study at page 76.
    \8\ FDIC Study at page iv.
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Regulatory Actions Since Completion of the FDIC Study

    Amendments to Regulation DD: On January 29, 2009, the Board of 
Governors of the Federal Reserve System (Board) published final 
regulations amending Regulation DD, which implements the Truth in 
Savings Act, effective January 1, 2010.\9\ These amendments require all 
institutions to provide additional periodic statement disclosures of 
overdraft fees and fees for returning items unpaid. They also restrict 
institutions' ability to provide ``padded'' balance amounts (i.e., 
including amounts institutions may make available through their 
overdraft coverage programs) in response to balance inquiries using 
automated systems such as ATMs, online banking and voice response 
units.
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    \9\ 74 FR 5584 (July 29, 2009). The CFPB restated Regulation DD 
at 12 CFR part 1030. 76 FR 79276 (Dec. 21, 2011).
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    It is uncertain what impact these changes to Regulation DD have had 
on consumer behavior or on the incidence

[[Page 12032]]

of overdrafts or related charges to consumers.
    Amendments to Regulation E: On November 17, 2009, the Board 
published final regulations amending Regulation E, which implements the 
Electronic Fund Transfer Act, effective January 19, 2010.\10\ These 
amendments prohibit financial institutions from charging fees for 
transactions that overdraw an account by use of a debit card at an ATM 
and point-of-sale unless the consumer opts in to permitting the 
institution to authorize and pay overdrafts on these transactions. In 
so doing the Board noted that ``the cost to consumers of overdraft fees 
assessed in connection with ATM and debit card overdrafts is 
significant'' and ``may substantially exceed the amount[s] overdrawn.'' 
\11\ And based upon research that it conducted, the Board found that 
``many consumers may not be aware that they are able to overdraft an 
ATM or POS'' and may therefore ``unintentionally overdraw their 
account.'' \12\ Based on consumer testing, the Board further found that 
many consumers ``would prefer to have ATM withdrawal and debit card 
transactions declined if they had insufficient funds, rather than incur 
an overdraft fee.'' \13\
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    \10\ 74 FR 59033 (Nov. 17, 2009). The rule had a delayed 
mandatory compliance date of July 1, 2010. The CFPB restated 
Regulation E at 12 CFR part 1005, 76 FR 81020 (Dec. 27, 2011).
    \11\ Id. at p. 59038.
    \12\ Id. at pp. 59038-59039.
    \13\ Id. at p. 59039.
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    There is disagreement about the impact that this regulatory change 
has had. For example, a 2011 industry survey of 18 large banks found 
that only 16% of consumers had opted in for overdraft coverage on ATM 
and debit card transactions.\14\ In contrast, Moebs Research estimated 
that, as of March 2011, 75% of consumers had opted in for such 
overdraft coverage.\15\ Further, consumer groups have raised concerns 
about the manner in which some institutions promoted the opt-in option 
to their existing checking account customers. For example, one group's 
survey of consumers found that ``only 33 percent of accountholders 
opted-in to overdraft coverage, and most who did based their decision 
on information that was deceptive.'' \16\
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    \14\ Consumer Bankers Association Press Release, October 27, 
2011, which can be viewed at http://www.cbanet.org/news/PRdetail.cfm?ItemNumber=19595.
    \15\ Moebs Services press release, March 8, 2011 which can be 
viewed at http://moebs.com/PressReleases/tabid/58/ctl/Details/mid/380/ItemID/199/Default.aspx.
    \16\ Center for Responsible Lending: Banks Collect Overdraft 
Opt-ins Through Misleading Marketing; April 2011, page 2, available 
at http://www.responsiblelending.org/overdraft-loans/policy-legislation/regulators/CRL-OD-Survey-Brief-final-2-4-25-22.pdf.
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    Recent FDIC and OCC Supervisory Guidance: Subsequent to the 
amendments to Regulations DD and E taking effect, the prudential 
regulators have expressed ongoing concern about overdraft programs.\17\ 
In November 2010, the FDIC issued supervisory guidance to ``assist 
FDIC-supervised institutions in identifying, managing and mitigating 
risks associated with overdraft payment programs.'' \18\ The FDIC 
guidance addresses, among other things, the marketing and disclosure 
practices surrounding automated overdraft and alternatives to overdraft 
and also the basis on which overdraft charges are assessed, including 
check-clearing procedures.
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    \17\ The prudential regulators had previously expressed concerns 
about overdraft programs in 2005. See 70 FR 8428 (Feb. 18, 2005) 
(OTS overdraft guidance) and 70 FR 9127 (Feb. 24, 2005) (OCC, FDIC, 
Board, and NCUA joint overdraft guidance).
    \18\ FIL-81-2010: Overdraft Payment Programs and Consumer 
Protection Final Overdraft Payment Supervisory Guidance, November 
24, 2010, available at http://www.fdic.gov/news/news/financial/2010/fil10081.html (FDIC Final Guidance).
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    In August 2010, the FDIC also issued guidance stating that 
overdraft payment programs are subject to the requirements of the Equal 
Credit Opportunity Act (ECOA) as implemented through Regulation B. 
Specifically, the FDIC adopts the 2005 joint Guidance on Overdraft 
Protection Programs, stating that ``steering or targeting certain 
consumers on a prohibited basis for overdraft protection programs while 
offering other consumers overdraft lines of credit or other more 
favorable credit products or overdraft services, will raise concerns 
under the ECOA.'' \19\
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    \19\ FDIC, Financial Institution Letter, (August 11, 2010) 
(citing the 2005 Joint Guidance on Overdraft Protection Programs 
adopted by the Office of the Comptroller of the Currency; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation; National Credit Union Administration). http://www.fdic.gov/news/news/financial/2010/fil10047a.html.
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    In June 2011, the Office of the Comptroller of the Currency (OCC) 
proposed guidance to ``detail[] the principles that the OCC expects 
national banks to follow in connection with any deposit-related 
consumer credit product.'' \20\ The OCC's proposed guidance includes an 
appendix that ``illustrate[s] application of these principles to * * * 
automated overdraft protection products.'' \21\ The proposed guidance 
states that the ``OCC is concerned with several practices that have 
developed'' with respect to overdraft programs including ``potentially 
misleading statements'' in marketing; ``failure to assess a customer's 
ability to manage and repay overdraft protection before it is made 
available to the customer''; ``failure to * * * identify excessive 
usage''; and ``payment processing intended to maximize overdraft and 
related fees.'' \22\
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    \20\ Guidance on Deposit-Related Consumer Credit Products 76 FR 
33409 (June 8, 2011) (OCC Proposed Guidance).
    \21\ Id. p. 33409.
    \22\ Id. p. 33411.
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    The FDIC and OCC based their supervisory guidance on safety and 
soundness concerns, but raised significant consumer protection issues 
as well.\23\ The FDIC Final Guidance expressly noted that overdraft 
programs ``include[d] risks that could result in serious financial harm 
to certain consumers.'' Similarly, the OCC predicated its proposed 
guidance ``on the premise that bankers should provide their customers 
with products they need, and that bankers should not use their products 
to take advantage of their customer relationship.'' \24\
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    \23\ Separately from the FDIC and OCC, the Office of Thrift 
Supervision (OTS) specifically addressed consumer financial 
protection concerns in proposed supplemental guidance it issued in 
April 2010 to OTS guidance issued in 2005 on overdraft programs. For 
example, the OTS noted that savings associations should avoid 
practices it labeled as deceptive, such as marketing an account 
``without informing consumers of significant overdraft fees 
associated with an account'' or failing to disclose certain 
transaction ordering policies and the effect they may have on the 
frequency with which overdrafts might occur. The OTS also suggested 
that failing to ``limit fees for consumers who frequently overdraw 
their accounts'' could be unfair as ``these consumers may not be 
able to avoid the harm caused by high overdraft fees;'' for example, 
``those who frequently overdraw accounts may simply not have other 
options in the market, as they may have credit histories and other 
characteristics that prevent them from obtaining less expensive 
services.'' 75 FR 22681 (April 29, 2010).
    \24\ OCC Proposed Guidance, 74 FR at 33410.
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    While the OCC document has not been finalized, the proposal is 
materially different from the FDIC guidance. Indeed, after the OCC 
issued its proposed guidance, the American Bankers Association wrote to 
the Bureau and to the prudential regulators (including the OCC) urging 
the development of a ``uniform set of supervisory expectations'' \25\ 
and forwarding comments urging ``consistent regulatory treatment for 
similar products.'' \26\
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    \25\ American Bankers Association letter to FDIC, OCC, Federal 
Reserve Board of Governors, and CFPB, August 24, 2011 viewable 
online at http://www.aba.com/aba/documents/news/OverdraftLetter82511.pdf.
    \26\ American Bankers Association letter in response to OCC 
proposed guidance August 4, 2011 viewable online at http://www.aba.com/aba/documents/news/OCCGuidanceLetter8411.pdf.
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Request for Information

    The Bureau seeks additional and updated information from the 
public,

[[Page 12033]]

including consumers, third party processors, and financial 
institutions, regarding overdraft programs and their costs, benefits 
and risks to consumers. This information will enable the Bureau to 
better understand and evaluate any potential consumer protection issues 
raised by overdraft programs.
    In the questions that follow, we use the terms ``overdraft'' and 
``overdraft fee'' broadly to refer to practices followed and fees 
charged when a consumer initiates a transaction for which there are 
insufficient funds in the consumer's checking account. Specifically, 
the term overdraft fee includes fees charged for a returned check 
(e.g., an NSF fee), fees charged when an overdraft item is paid (i.e., 
an overdraft coverage fee), and fees charged if an overdraft is not 
repaid within a specified period of time. The questions are grouped 
into six broad categories: (a) Lower cost alternatives to overdraft 
protection programs offered by financial institutions, (b) consumer 
alerts and information provided regarding balances and overdraft 
triggers, (c) impact of changes to Regulation DD and Regulation E and 
overdraft opt-in rates, (d) impact of changes in financial 
institutions' operating policies, (e) the economics of overdraft 
programs, and (f) the long-term impact of overdraft programs on 
consumers. Please feel free to respond to all of the questions or only 
those that interest you, but please be sure to indicate in your 
comments which questions you are answering.

Lower Cost Alternatives to Overdraft Protection Programs

    1. What alternatives do institutions offer to overdraft protection 
programs and how much do consumers make use of these alternatives? 
Among other things, comments could address the availability and 
utilization of alternatives to traditional overdraft fees--for example, 
linked savings accounts or overdraft lines of credit--especially among 
those who incur overdraft charges on their checking accounts.
    2. To what extent do consumers avail themselves of alternatives to 
incurring overdraft fees?
    3. How are consumers informed of alternatives to overdraft 
protection programs and how are such alternatives marketed to new 
customers, existing customers, and to particular customer segments?
    4. What portion of the most frequent overdrafters--those who would 
benefit the most from alternatives--would qualify for a linked savings 
account (i.e., have a savings account) or line of credit (i.e., pose 
acceptable credit risk)?

Consumer Alerts and Information Provided Regarding Balances and 
Overdraft Triggers

    5. What opportunities do financial institutions offer consumers to 
sign up for alerts via text message and/or email that inform consumers 
when their balances are low and, thus, when payment transactions might 
put them at risk of incurring an overdraft? The Bureau is interested in 
programs and technologies that make consumers aware at the time they 
engage in a transaction that they may incur an overdraft fee. Among 
other things, comments could address:
    a. The extent, if any, to which consumers are given the opportunity 
to be alerted to and avoid a transaction that would cause an overdraft 
fee;
    b. The marketing of, participation rates in, and impact on 
consumers, of such alert programs, particularly among those who are 
likely to incur overdraft fees;
    c. The way account balances are communicated generally in response 
to routine ATM or telephone inquiries;
    d. The extent to which communicated balances differ from available 
balances and whether these differences affect consumers' ability to 
avoid incurring overdrafts; and
    e. The balance calculations--e.g., available vs. actual balances--
used to determine when an overdraft has occurred in end-of-day batch 
processing.
    6. Whether a particular transaction will incur an overdraft fee 
depends upon the interaction of various terms, rules, and practices, 
including those governing funds availability, the posting order of 
debits and credits, the amount by which an account must be overdrawn to 
trigger an overdraft fee, the number of overdraft fees that can be 
incurred in a single day, and whether the fee is one-time or for each 
day the account remains in overdraft status. Comments could include 
information regarding how these are communicated to consumers and the 
extent to which consumers understand them. For example:
    a. In what ways are consumers informed of the rules and practices 
that determine which transactions will cause overdraft fees to be 
incurred? When they enroll in an account? As part of notices that they 
have incurred an overdraft?
    b. Is there any customer research available that documents 
consumers' perceptions regarding how transactions are processed, when 
overdrafts are incurred, and when related fees are charged?
    c. What changes in consumer behavior or understanding of overdrafts 
have resulted from the changes that took effect in Regulation DD in 
2010?

Impact of Changes to Regulation DD, Regulation E, and Overdraft Opt-In 
Rates

    7. The Bureau is interested in the impact of the changes to 
Regulation E that took effect in 2010 on consumers. Among other things, 
comments could address:
    a. What were the variations across institutions in opt-in rates 
among consumers with accounts as of July 1, 2010? What variations in 
opt-in rates occur now among institutions? What differences in 
marketing and disclosures practices may be responsible for differences 
in opt-in rates?
    b. How did opt-in rates vary based upon prior usage of overdraft? 
Were there significant variations between non-overdrafters, occasional 
overdrafters, and frequent overdrafters (e.g., those who incurred 10 or 
more overdrafts in a year)?
    c. How did the opt-in rates vary based upon average account balance 
or demographic characteristics, such as income, age, or education 
level?
    d. How do the overdraft frequencies of consumers who opted in 
differ from those who did not?
    8. The Bureau is interested in learning how institutions are 
conducting outreach to customers who incur overdrafts repeatedly, what 
policies have been implemented to manage both the risks and needs such 
customers may present, and which options are given to such customers. 
The Bureau is aware that some institutions may charge fees based on 
accounts being overdrawn, notwithstanding the customer's request to 
close the account, and would like to understand what impact this 
practice may have. Among other things, the Bureau is particularly 
interested in hearing more about:
    a. The extent to which consumers are permitted to close existing 
accounts when there are outstanding overdraft fees;
    b. The consequences to consumers of keeping accounts open that have 
outstanding overdraft fees and what additional fees consumers accrue; 
and
    c. The practices that can best serve consumers who have incurred 
negative balances while protecting institutional safety.

Impact of Changes in Financial Institutions' Operating Policies

    9. The Bureau is aware that some institutions have recently changed 
their order of processing transactions in various ways, including, for 
example, adoption of a purely chronological

[[Page 12034]]

system of posting debit transactions; adoption of a system that 
separates different types of debit transactions (e.g., ATM and point of 
sale debit, ACH, check, and various account fees) and applies different 
rules to order transactions in discrete buckets; and adoption of a 
system which orders debit transactions from smallest to highest dollar 
amount. The Bureau is interested in learning how these changes have 
affected consumers. Comments could include information regarding:
    a. The different ways in which institutions currently group and 
order different types of transactions;
    b. How institutions disclose the ways in which they currently group 
and order transactions;
    c. The consequences in practice of different grouping and ordering 
policies for the frequency with which consumers may incur overdrafts 
and related fees. Or the consequences for whether certain overdraft 
items will or will not be paid; or
    d. The impact of funds availability policies on when overdrafts are 
determined to have occurred.
    10. In addition to transaction ordering policies, the Bureau is 
also aware that some institutions have adopted other new policies with 
respect to overdrafts. For example, some institutions have declined to 
permit consumers to opt in to overdraft coverage of electronic debits 
and instead reject those transactions or allow consumers to opt in at 
the point of the transaction. Other institutions have adopted cushions 
on the amount by which an account must be overdrawn to incur an 
overdraft fee; caps on the number of fees that may be incurred in a 
given day; tiered overdraft fees; a grace period to cover an overdraft 
item without incurring a fee; or a waiver of fees on a certain number 
of overdraft items per month. In what way do such changes--or other new 
policies with respect to overdraft--affect the incidence and/or 
severity of overdraft charges?

The Economics of Overdraft Programs

    11. The Bureau is interested in the economics of overdraft 
programs, including their contribution to overall costs and revenues 
associated with checking accounts. There is concern based on the FDIC 
study's data from 2006 that many institutions are reliant on fees from 
a small group of frequent overdrafters for a disproportionate share of 
revenue from checking accounts, while many other accountholders benefit 
as ``free riders.'' \27\ The Bureau is interested to learn the extent 
to which the FDIC study's findings from 2006 are representative of the 
market today. At the same time, the Bureau also seeks to learn what 
costs regulations affecting overdrafts might impose on institutions. 
Comments may address, among other things:
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    \27\ For example, one consulting firm estimated that the 26 
percent of checking accounts in which overdraft fees occur and the 
23 percent of accounts with balances over $3000 are responsible for 
the vast majority of bank revenue (the former based on overdraft 
fees and the latter based on interest earned on deposits) while the 
remaining 51 percent of accounts were unprofitable, earning less in 
fee income and interest than it cost the banks to service them. 
(Celent blog posted March 10, 2010, viewable at http://bankingblog.celent.com/?p=1261).
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    a. How the distribution of overdraft revenue from consumers may 
have evolved since the FDIC study and the implementation of changes in 
Regulations DD and E;
    b. The distribution of overdraft fees by type of transaction 
(check, ACH, debit, ATM, etc.) today relative to what the FDIC found in 
its study;
    c. The extent to which different groups of consumers incur 
overdrafts and related fees disproportionately (for example, the FDIC 
study suggested that young adults and consumers with low or moderate 
incomes might incur overdrafts more frequently than other groups);
    d. The share of deposit service fees charged to consumer accounts 
that are attributable to overdrafts and NSFs today;
    e. The costs to institutions of administering overdraft programs; 
and
    f. The losses (e.g., charge-offs) that occur as a result of 
extending overdraft coverage.

Long-Term Impact on Consumers

    12. The long term impact of overdraft programs on consumer behavior 
and options is of particular interest to the Bureau. Some have argued 
that overdraft programs allow consumers to meet liquidity challenges 
while others argue that overdraft eventually adds to liquidity issues 
because of the high recurring fees that frequent overdrafters must pay. 
Further, there is concern that heavy use may lead a significant 
percentage of users to damage their credit records in databases 
institutions use to qualify consumers for checking accounts and thereby 
to lose access to the services of competing providers or to the banking 
system altogether. To what extent are these various perspectives valid?

    Dated: February 22, 2012.
Meredith Fuchs,
Chief of Staff, Consumer Financial Protection Bureau.
[FR Doc. 2012-4576 Filed 2-27-12; 8:45 am]
BILLING CODE 4810-AM-P
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