After taking on payday lending, debt collections and mortgage practices, the Consumer Financial Protection Bureau (CFPB) is launching an investigation into banks’ overdraft protection programs and fees.
Richard Cordray, director of the CFPB, says the fees have increased 17 percent over the past five years and are hitting young, inexperienced consumers, as well as the poor, the hardest.
“Nine percent of the people incur about 84 percent of the overdraft fees,” he says.
The overdraft debate
Overdraft fees are a source of controversy. They are charged when account holders spend more than what they have in their accounts. In 2010, a Federal Reserve Board ruling changed the game when it comes to the overdraft fees for debit card purchases and ATM withdrawals — customers are no longer able to overdraw on their accounts unless they’ve voluntarily opted in to their bank’s overdraft protection program.
If the consumer does not opt in, the debit card will be declined if the account has insufficient funds — and the consumer doesn’t get charged a fee. Consumers who do opt in will be able to overdraw — the bank temporarily covers the purchase, and the consumer must pay it back, plus an overdraft fee.
‘It just crushes them’
Despite the risks of opting in, many consumers do so to avoid the inconvenience of declined debit cards. And banks, whose hands have been increasingly tied with financial reform, depend on overdraft fees to help make up for losses. The CFPB estimates that, in 2011, banks made between $15 billion and $22 billion on them.
The problem, according to advocates, is that overdraft fees, which averaged $30 to $35 per occurrence in 2011, can quickly add up for consumers. A 2008 study by the Federal Deposit Insurance Corporation (FDIC) found that people who overdrew at least 20 times per year paid an average of $1,610 in overdraft fees annually.
Stephen Stetson, policy analyst with Arise Citizens’ Policy Project, a nonprofit advocacy group for low-income people in Alabama, says the fees can blow the budgets of families without a financial safety net.
“You’ve got a lot of people who are skating by on a razor’s edge, and when you have these fees, it just crushes them,” Stetson says, noting that an overdraft fee of $35 may be what a family was counting on to buy food for the week.
Stetson says part of the problem is that the poor often don’t have the resources to instantly check their balances and stay on top of when payments are being cashed.
“If I’m sitting here at work, I can connect to my laptop and my wireless network and can check my balance. …I have the ability to be in total control of my bank account,” Stetson says.
But low-income people are more likely to rely on checks. Once the check goes in the mailbox, it’s not clear exactly when it will be cashed — and what the account balance will be when the account holder goes to the grocery store.
Another problem: big checks cashed first
The Fed rule for opting in to overdraft protection doesn’t apply to checks — which creates challenges for those who rely on them. That’s why, in addition to looking into the fairness and clarity of overdraft protection programs, the CFPB is looking into a problem called check reordering.
Many banks determine how checks are deducted from an account not by the time they were posted, but by size; the biggest get withdrawn first. Banks say this ensures that crucial checks, such as those for mortgage, insurance and rent payments get taken care of first.
But many customers aren’t aware the reordering is happening, says Consumer Action spokeswoman Ruth Susswein. When the big check goes first, the account is overdrawn and the fee kicks in — and then kicks in again for each smaller check. In other words, instead of getting hit with one overdraft fee per day, the account holder will accrue several.
Moreover, the “opt in” rule doesn’t apply to recurring automatic bill payments like membership fees and utility bills, Susswein notes. So customers who don’t opt in might be surprised that their accounts can still be overdrawn after a gym membership payment is automatically taken out. Without consistency, the opt-in feature is unfair and confusing, Susswein says.
Susswein says she hopes the CFPB will come up with policies that would make overdraft fees reasonable and proportional. Some banks, she notes, are changing their practices and have stopped overdraft fees from kicking in until the overdrawn amount reaches a particular threshold.
“If you overdraw your account by $4 or $5 because you went and got a cup of coffee on your debit card, you shouldn’t have to pay another $35 in an overdraft fee,” she says.
Yet a larger problem lies in how much consumers know — and don’t know — about overdraft fees, even when they opt in for overdraft protection.
To address the education part of the equation, the CFPB has proposed and developed a prototype for a “penalty box.” This penalty box would show up prominently on a checking account statement, listing what a consumer paid in avoidable fees.
Susswein says this box has promise, based on the success of the minimum-payment-disclosure box required on credit card statements as part of the Credit CARD Act of 2009. That box shows how long it would take a consumer to pay off debt if he or she paid only the minimum.
The CFPB wants to know what you think about the “penalty box.” You can register your comments until April 30, 2012, by sending an email to email@example.com.
Should I opt in?
Consumer Action recommends that account holders not opt in to overdraft protection. That could result in the embarrassment of having a card declined if you spend more than you have, but that’s better than having to pay the fee, Susswein says. One of the best ways to avoid a fee is to link a debit card to a savings account or small line of credit so that, if you overdraw, the transaction would still be covered.
“In some cases, you can still be charged a fee to use your line of credit or linked savings account, but the fee would be much smaller than an overdraft fee,” Susswein says.