On August 4, 2017, the Consumer Financial Protection Bureau (CFPB) published four prototypes of model overdraft disclosure forms the Bureau is testing as part of its broader “Know Before You Owe” efforts. The prototypes are an important indicator that the CFPB is still actively paying attention to issues concerning overdraft fees, and that regulatory changes on the subject may be coming.
Overdraft coverage comes into play when a consumer attempts to complete a transaction but lacks the necessary funds in their account to cover the purchase. If a consumer is enrolled in an overdraft coverage program, the consumer’s bank or credit union pays the difference so that the transaction can go through, and then the consumer repays the bank or credit union through subsequent deposits and generally incurs an overdraft fee. If the consumer is not enrolled in overdraft coverage, debit card purchases and ATM withdrawals will be declined. While many view overdraft coverage as an important tool for consumers in meeting their short-term financial needs, the CFPB has published a report showing that “frequent” overdrafters incur substantial fees in connection with their overdrafts. Based on this and other studies, the CFPB has taken the position that overdraft coverage can be disadvantageous for consumers and that clearer disclosures about overdraft coverage may be needed.
According to the CFPB’s announcement on the prototypes, the prototypes it has released attempt to clarify the costs and risks associated with opting in to the overdraft coverage offered by many banks and credit unions. Specifically, the CFPB indicated that it is trying to make clearer that overdraft coverage is not mandatory and to make it easier for consumers to understand what types of overdrafts are covered by these programs and how much the service costs. Each of the prototypes presents the information in different formats or with different wording; the CFPB is testing these prototypes to determine whether they are more effective than the model disclosure currently used by banks and credit unions, and if so, which of the prototype layouts is most effective.
The release of the disclosure prototypes is important for several reasons. First, it may mean financial institutions will need to change their disclosure forms in the near future, though the CFPB assures industry members in its announcement that any transition to a new model form should be relatively seamless. Second, the release of the prototypes signals continued focus on overdrafts by the CFPB, which has previously indicated that it may engage in formal rulemaking on overdraft issues at some point in the future. And third, the prototypes may provide interesting insight into what formatting or wording features the CFPB believes make disclosures the most effective. Financial institutions thinking about how to make their own documents and disclosures as clear and conspicuous as possible might consider looking to these prototypes as examples: though they certainly are not authoritative and are not definitive evidence of what an acceptably clear disclosure looks like, they may provide some guidance on what layouts, fonts, and wording choices may be most likely to meet with CFPB approval.