The Consumer Financial Protection Bureau (CFPB) is taking a fresh look at costly overdraft fees and is considering imposing new rules on the controversial practice.
Last week, the CFPB released a detailed report on overdraft protection and concluded that for many checking account customers, opting into overdraft is more expensive than it’s worth. For example, when a consumer opts into overdraft protection, they agree to pay a fee any time they spend more than what’s in their account. In exchange, the bank fronts their purchase so they aren’t caught empty-handed at the store. The problem is the fee is usually steep — typically around $34 — and often costs more than the purchase itself.
“Consumers who opt into overdraft put themselves at serious risk when they use their debit card,” said CFPB director Richard Cordray in a press release. “Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error.”
Bloomberg BusinessWeek reported that a senior CFPB official told reporters on the condition of anonymity that the agency is considering limiting how banks can process debit card transactions. It’s also thinking about weighing in on the fees banks can levy when consumers overdraw their account, said BusinessWeek, and is trying to think of better ways to inform consumers of the costs they might incur if they opt in.
The CFPB hasn’t publicly announced any upcoming changes or spelled out what exactly it wants to do, however. But it’s made clear it doesn’t like how overdrafts are being handled and is especially suspicious of the hefty fees banks are still charging for the optional service.
In prepared remarks to reporters, Cordray underscored just how fat these fees really are by comparing overdraft fees to the rates that are charged for a typical loan. “Some consumers are essentially paying $34 — which is the typical overdraft fee — to have the bank spot them less than $24 for just a few days,” he said. “If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent.” Not even a payday lender would charge that much.
What’s changed; what’s stayed the same
The CFPB concedes that overdrafts are safer than they used to be. For example, checking account customers now have to affirmatively opt-in to overdraft protection. Before 2010, when the Federal Reserve rule that limits overdrafts went into effect, banks automatically charged customers a steep fee any time they spent more than what they had available.
I personally remember paying a huge number of $35 fees to Bank of America when I was still in college and routinely drained my account. Nine times out of 10, I would look at what spurred the overdraft and it would be a small-dollar purchase that I could have paid for with a handful of quarters, such as a $2 subway ticket or a $3 cup of coffee.
Many large banks have recently stopped reordering transactions so that a consumer’s largest transactions are processed first. When banks do that, people often get hit with multiple fees for small dollar purchases that quickly add up. However, according to a July 2014 Wall Street Journal survey of approximately 2,000 banks and credit unions, around 16 percent are still processing consumers’ largest purchases first and charging multiple fees for their smallest purchases, despite the fierce controversy surrounding the practice.
In addition, the CFPB reports that a number of banks and credit unions are no longer charging people for minor overdrafts, such as a $5 purchase that overdraws the account. Others have also capped how many fees they’ll charge in a single period.
However, the CFPB also reports that overdraft protection is still costing some customers dearly for the privilege of a temporary loan. People are relying on their debit cards more heavily, said the CFPB, and that’s creating even more opportunities to accidentally overspend.
A significant percentage of bank customers who have opted in — 18 percent — overdraw their accounts 10 or more times a year, said the CFPB. That means they could be paying more than $340 a year in fees alone. And, in many cases, those fees are for purchases that cost far less than the fee itself. Most debit card transactions that result in an overdraft are for purchases that cost less than $24, said the CFPB.
In prepared remarks to reporters, Cordray stressed that the CFPB isn’t against overdraft protection completely. It just doesn’t like how costly it is to consumers — and is ready to take action if it finds that the damage to consumers’ pocketbooks is too steep. “I want to take pains to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage,” said Cordray. “But we need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”