The CFPB's enforcement action against Minnesota-based TCF National Bank is the latest chapter in the American consumer's love hate relationship with "overdraft protection."
Leaving aside the the handful of people who kite checks as a profession, checking account customers, particularly those who maintain low balances, worry about bouncing checks. It's embarrassing. And, it's expensive. Banks offered "overdraft protection" as a form of automatic short term credit. The bank pays the otherwise bouncing check, book a loan to the customer in the amount of the check and charge an "overdraft fee" for the service. For customers with a linked savings account, the bank automatically transfers funds from the savings account to cover the overdraft, usually for free (depending on minimum balance) or at a nominal account transfer fee.
Overdraft protection was truly a deep backup in case of a mistake about an account balance, or an emergency. Customers who used paper checks learned to record each check in the register, deduct the amount of the check from the account balance, and reconcile the register balance with their paper bank statement when it arrived in the monthly mail. (Shout out to my mother who took pride in this anxiety-packed monthly ritual until I just recently persuaded her to stop).
Then came the debit card as a deposit account access device. Unlike a checkbook, a debit card has no register. New debit card customers, particularly young customers who never used paper checks for payment, had no habit of maintaining account balance records. Banks continued to offer overdraft protection as a standard and automatic account feature, in the package along with stop payment services, for a per transaction fee. But,the expensive consequence of bouncing a check came as a surprise to debit account customers (and their parents), who in retrospect, would have preferred the embarrassment of a declined transaction to a $35 overdraft charge on a $5 transaction at Taco Bell. With the rise in debit card use among consumers, overdraft transactions rose and overdraft fees became a significant revenue source for banks. Outraged consumers complained to their elected representatives, and consumer advocate groups took the view that banks were fiendishly using overdraft protection on debit cards to exploit low-balance customers by hiding both the existence and the cost of the service they provided.
In 2010, federal regulations were enacted to prohibit banks from charging overdraft fees on ATM wintdrawals and debit card point of sale (POS) transactions unless the bank obtained the consent of the customer to the overdraft protection. To impose a charge for an overdraft, the bank had to show that the customer "opted in" to the service. Banks responded by informing existing and new customers about overdraft protection and requiring the customer to click to "opt in."
According to the CFPB, TCF National Bank responded by implementing an aggressive sales program to induce customers to "opt in" to overdraft protection. According to the CFPB's press release issued yesterday, 66% of TCF's customers opted in, about 3 times more than the opt in rate at other banks. The CFPB alleges that TCF tricked its customers into opting in, by deliberately obscuring the optional nature of overdraft protection among other mandatory "I agree" boxes on the account opening online forms, by obscuring what "opting in" would mean (fees) and by over-emotionalizing the value of overdraft protection by explaining it as an emergency source of funds. The CFPB's case seems to be that TCF sold overdraft protection too hard. The key evidence seems to be TCF's impressive success in getting customers to "opt in."
I don't think consumers are quite as gullible as CFPB presumes when it comes to bank services and the fees that come with them. The CFPB, in 2015, posted a two page Consumer Advisory explaining "You've got options when it comes to overdraft." Not that complicated.