Federal study finds overdraft fees are complex and costly
Overdraft programs associated with high fees
A new report by the Consumer Financial Protection Bureau (CFPB) finds that overdraft fees continue to pose high risks to consumers, despite recent regulatory changes. The report focuses on the dreaded overdraft charge — the fees banks and credit unions collect for covering customer transactions that exceed checking account balances.
Sounds simple; but many times the terms that accompany these fees are complex, and too often the costs are out of proportion to the overdrawn amount. Variations in how transactions are posted to checking accounts and limits or the lack thereof on the number of fees allowed in a single day can be confusing and harmful to consumers. Even though practices vary among institutions, one thing is particularly clear: consumers lose tens of billion to overdraft fees every year.
For customers with only marginal bank balances, the costs incurred by overdraft fees can remove available funds for other household needs.
“What is marketed as overdraft protection can, in some instances put consumers at greater risk of harm,” said CFPB’s Richard Cordray. “Consumers need to be able to control their costs and expenses, and they deserve clarity on those issues.”
The CFPB found that overdraft fees on debit card and ATM transactions in particular are associated with higher rates of involuntary account closure. As a result, the affected consumers become less able to open a checking account at another institution.
The new CFPB report follows a 2010 rule by the Federal Reserve that required financial institutions for the first time to secure customer approval before enrollment in overdraft coverage for debit and ATM transactions. Wide variations in the number of “opt-ins” by institutions indicate that some are more aggressive than others in obtaining consent forms from their customers.
Following the announcement of the 2010 rule, the Center for Responsible Lending (CRL) noted that the rule did not address clear abuses that customers experience once they are enrolled, including the exorbitant cost of debit card overdraft coverage or re-ordering transactions to maximize fees. And because the size or frequency of the fees was not addressed, financial institutions have the incentive to secure as many opt-in forms as possible.
Previous research by CRL has found that:
- Most debit card transactions that trigger overdrafts are far smaller than the size of the overdraft itself;
- Most consumers surveyed would rather have their debit card transaction declined than have it covered in exchange for an overdraft fee;
- In 2008, Americans aged 55 and over paid $6.2 billion in overdraft fees; and
- Also in 2008, Americans aged 18-24 paid nearly $1.3 billion in overdraft fees.
CRL along with others including Pew Charitable Trusts have also called for banning institutions from processing transactions from the largest to smallest. This change would diminish the number of overdraft fees charged and thereby free-up consumer monies for other items.
In reaction to the CFPB report, CRL said, “We remain concerned about financial institutions that deliberately trigger overdraft fees by re-ordering daily transactions from the highest to lowest, often resulting in more fees from customers. This deceptive practice remains far too common despite fueling widespread litigation. . .”
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at: Charlene.firstname.lastname@example.org.