CFPB pitches new disclosure form for overdraft fees

Following a new study that claims frequent overdrafters typically pay nearly $450 each year in checking account fees, the Consumer Financial Protection Bureau this week unveiled new “Know Before You Owe” overdraft disclosure prototypes.

The model disclosures are “designed to improve the model form that banks and credit unions already provide to consumers weighing overdraft coverage” The Bureau is currently testing four prototypes that “each have a simple, one-page design aimed at making the costs and risks of opting in to overdraft coverage easier to understand and evaluate” it says.

According to a newly released study on overdrawn checking accounts, most are “financially vulnerable, with lower daily balances and lower credit scores than people who do not overdraft as often.” The disclosure prototypes are “designed to help consumers better understand the consequences of the opt-in decision," Director Richard Cordray said in a statement.

Financial institutions may charge a fee for covering overdrafts, typically around $34 per transaction, and require that the account deficit be repaid with subsequent deposits. In 2010, federal regulations began requiring financial institutions to obtain a consumer’s consent in advance before charging overdraft fees on most debit card transactions and ATM withdrawals.

The four one-page prototype model forms unveiled by the CFPB, like its Know Before You Owe disclosures for mortgages and prepaid accounts, “are designed to give consumers more clarity about a key financial decision,” the agency says.

The CFPB developed the prototypes through interviews with consumers, and is now testing them more widely. The prototypes are aimed at making it easier to understand the costs of opting in; clarifying the institution’s overdraft police; and evaluate the risks and benefits of opting in.

“These updated prototypes, if adopted, could also make it easier to provide customers with the disclosure form, the bureau says.

The CFPB would make any new Know Before You Owe model overdraft form available on its website. Institutions would be able to plug their specific program information into the online form and then quickly download it for free.

“This new approach could make it seamless for banks and credit unions to use a new model form within their existing compliance systems, and easier to update their disclosures following future overdraft program changes,” the CFPB says. “However, as the Bureau tests these prototypes further and considers changes to existing requirements, the model form provided in the 2010 rule continues to apply.”

The new study based on data from several large banks that together account for well over 40 million consumer checking accounts, spotlights consumers who attempted to overdraw their accounts more than 10 times in a 12-month period. It found that 9 percent of accounts are frequent overdrafters and they incurred 79 percent of overdraft fees.