Government Bureau Targets Overdraft Fee Practices

The Consumer Financial Protection Bureau announced yesterday that it has launched an inquiry into checking account overdraft fee practices. Citing concerns regarding misleading marketing and payment processing procedures, the board has sent a data request to a number of banks. In addition, the CFPB is asking for public input on a proposed "penalty fee box" to highlight fees on bank statements.

Overdraft practices questioned

Although federal regulations enacted in 2010 were intended to increase transparency of overdraft fees, the CFPB is concerned financial institutions are misleading consumers and disproportionately impacting younger and low-income individuals.

"With today's technologies, consumers have more opportunities to access their checking accounts and cause overdrafts," said CFPB Director Richard Cordray in a statement. "But overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it. We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees."

The CFPB inquiry focuses on four areas:

  • Transaction re-ordering: Some financial institutions commingle all daily transactions and then process the largest one first. This serves to maximize the number of transactions that may trigger overdraft fees.
  • Confusing fee information: The CFPB is reviewing whether financial institutions are clearly and completely disclosing the terms of their overdraft policies.
  • Misleading marketing: Under the 2010 regulations, consumers must now opt-in to their institution's checking account overdraft program. Those who do not will have their ATM and debit card transactions declined if insufficient funds are available. The CFPB is investigating concerns that financial institutions may be using misleading marketing to entice consumers to opt-in.
  • Disproportionate impact on younger and low-income populations: A 2008 FDIC study found 9% of checking account holders pay approximately 84% of overdraft fees. In addition, 46.5% of young adults had incurred overdraft fees, with 15% having more than 10 a year. The board plans to revisit this issue during its investigation.

How to avoid overdraft fees

According to data supplied by the CFPB, overdraft fees averaged $30-$35 in 2011, a 17% increase from five years ago. The board is floating the idea of mandating a "penalty fee box" be added to bank statements. This box would list the amount that was overdrawn and the total fees assessed. At the bottom of the bank statement, tips would be included to help consumers avoid future overdraft fees.

The CFPB recommends consumers consider the following three strategies to minimize fees:

In addition to its inquiry, the CFPB is launching a campaign to promote greater public awareness regarding overdraft fees.

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