Consumer Bureau Finds Little To Like About Bank Overdraft Protection

The Record ( — Wednesday, June 12, 2013

The Record

A report released Tuesday by the Consumer Financial Protection Bureau said bank and credit union customers who sign up for checking account overdraft protection may be finding it hard to avoid the fees that come with the service, and they are much more likely to run negative balances and have their accounts closed involuntarily.

The study raises the prospect of further tightening of regulations on overdraft protection services, something that banks, already facing profit squeezes because of tighter margins, hope to avoid.

The bureau said those customers who paid overdraft protection and insufficient fund fees, which run as high as $35 per transaction, paid an average of $225 in such fees over the course of a year.

The study found that at some banks involuntary closure rates were more than 2 1/2 times higher for account holders who that had opted for debit and ATM overdraft coverage. Those who have had accounts closed involuntarily can be barred from opening new accounts at any bank.

The agency also found that banks' overdraft fee structures vary widely, are often complicated, and can be very difficult for consumers to understand.

"Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts," Richard Cordray, the bureau's director, said in a statement. "But we are concerned that overdraft programs at some banks may be increasing consumer costs. What is often marketed as overdraft protection may actually be putting consumers at greater risk of harm."

Since 2010 banks have been required to get customers' consent before charging fees for covering overdrafts on ATM withdrawals and most debit-card transactions.

The study found that opt-in rates varied. At some banks, more than 40 percent of all new customers signed up in 2011, while other banks saw only single-digit opt-in rates.

Banks rely heavily on overdraft fees and other checking account fee income, especially since margins on lending have been squeezed by low interest rates. Most of the largest U.S. banks have added monthly checking account service fees over the past several years while raising the minimum balances required to avoid those fees.

Covering an overdraft used to be "an occasional courtesy" but is now "a significant source of industry revenues," said the bureau. The agency estimates that overdraft and non-sufficient fund fees represent 60 percent or more of banks' consumer checking account fee income.

An overdraft occurs when consumers spend or withdraw more money from their checking accounts than is available. The financial institution can choose to cover the payment and charge a fee for doing so. The institution can also choose to return the payment if it is a check, online bill payment or direct debit, and then charge a non-sufficient fund fee. In recent years, most banks have adopted automated systems for making these decisions.

The agency said it plans to do more studies on checking accounts and may decide to use its authorities to strengthen consumer protections in that area, as it seeks to make accounts "more fair, transparent, and competitive."


"It seems the study is somewhat inconclusive," said John McWeeney, president of the New Jersey Bankers Association, who defended banks' use of overdraft protection services.

McWeeney is concerned the bureau could impose more regulations that "could limit consumer choices and the level of service," he said. "There are fees incurred but you are getting a service. You are avoiding the embarrassment or inconvenience of having checks returned," he said.

Also, the service can help account holders avoid fees that merchants would charge for a returned check, McWeeney said.

"I have overdraft protection on my personal checking account," he said. "It's nice to know it's there."

Phyllis Salowe-Kaye, executive director of consumer watchdog New Jersey Citizen Action, said the fees are too high and should be reduced. "These are really exorbitant fees for the average person," she said. "Our goal is to get unbanked people into banks and away from expensive check-cashing services, but these fees make it almost prohibitive for these persons."

Even though account holders must sign up to receive overdraft protection, the customer may not have a clear understanding of how the service works, she said.

"The big question is, what do they really know about it?"

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