CFPB Looking into Overdraft Fees

I think I could write about the Consumer Financial Protection Bureau (CFPB) every week.  This agency was set up to protect consumers against unfair practices by banks and nonbanks.  It has been given a nickname of the “consumer watchdog agency”.  It recently was looking at credit payment protection products and is now targeting overdraft fees charged by big banks.

This agency plans to ask the big banks how overdraft fees affect consumers, how overdraft fees are marketed and what information consumers receive.  The purpose is to determine if consumer laws are being violated; new rules and or law suits could result.

If you have overdraft protection on your checking account and you don’t have enough funds to cover the checks you have written, you are charged a fee per check that the bank covered for you. The average overdraft fee per check is $35.00, which is similar to a short term loan.

In 2010, the banks were prohibited from automatically signing up customers for overdraft programs for debit card and ATM transactions. This didn’t apply to checks, online bill payments or recurring debits and didn’t limit how much the banks could charge. As a result, the banks were very aggressive in marketing overdraft protection.

Four Areas of Interest

The Consumer Financial Protection Bureau is interested in investigating four areas: (1) reordering of transactions, (2) missing or confusing information, (3) misleading marketing and (4) disproportionate impact on consumers.

1. Banks reorder the transactions to increase the fees customers pay them. Banks collect all transactions from the entire day and apply them in order of largest to smallest to maximize the number of transactions that trigger a fee.  There have been class action lawsuits on two banks regarding this. For example, a check for $50 could be covered by the amount in the checking account, but a check for $500 could not.  The bank processed the $500 check first, so that both checks bounced.

2. Missing or confusing information about how overdraft fees are charged. The agency wants the information easy to understand, so consumers can avoid these fees.

3. Banks use misleading marketing which impacts the decisions customers make. Some banks have used threatening language to convince customers to sign up for overdraft protection, such as they won’t be able to pay for an emergency situation.

4. There is a disproportionate impact on low-income and young consumers that pay these fees. According to a study by the Federal Deposit Insurance Corporation (FDIC), almost half of younger cardholders paid the fees.

“Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it,” CFPB Director Richard Cordray said in a statement. “We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees.”

The outcome of the investigation could be new rules, consumer education and or law suits. The Consumer Financial Protection Bureau is in the process of drafting what should be disclosed on the checking account statement regarding overdraft fees and other related fees.  Overdraft fees have been too high and banks haven’t had any restrictions, it will be great to have policies and guidelines for this.

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Report, Credit Score, Debt, Government, Money & Identity

This post was written by John Ulzheimer