The U.S. Consumer Financial Protection Bureau is starting an inquiry into bank checking account overdraft policies and may initiate related enforcement actions during the probe, director Richard Cordray said today.
“With today’s technologies, consumers have more opportunities to access their checking accounts and cause overdrafts,” Cordray said in an e-mailed statement. “But overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it.”
Large banks such as JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) as well as smaller institutions rely on overdrafts for revenue in retail banking. Banks and credit unions were set to charge customers about $38 billion from overdraft fees in 2011, according to a Sept. 15 estimate by Moebs Services, a Lake Bluff, Illinois-based economic research firm.
While it is studying the issue, Cordray warned that the bureau will use its enforcement powers against banks that trick customers into to choosing potentially expensive overdraft protection.
“The bureau plans to take action against financial institutions that exploit consumers with deceptive marketing about opting in to overdraft or other unlawful overdraft practices,” Cordray said during a speech at Hunter College’s Roosevelt House Public Policy Institute in New York. “It is wrong to confuse consumers deliberately for financial gain.”
In 2009, the Federal Reserve required that consumers opt-in to overdraft programs rather than be enrolled by default.
Overdrafts as Loans
Overdrafts occur when consumers spend or withdraw more money than is available in their checking accounts, whether through the use of debit cards, checks, ATM withdrawals or direct debits, known as ACH transactions. Banks typically charge a fee when balances go below zero, and sometimes treat the amount of the overdraft as an interest-bearing loan.
John P. Carey, managing director for global consumer banking, governance and external affairs at Citibank, defended overdraft policies.
“Our customers find overdraft protection services for checks and ACH transactions to be of value,” Carey said during a panel discussion after Cordray’s speech.
Citibank never authorizes a transaction at an ATM or point- of-sale debit card if the money is not available, Carey said, though it does so for checks and ACH transactions. Many customers prefer that to, for example, the consequences of a bounced check, such as damage to their credit scores or a fee from a merchant.
The bureau will request data from banks, and input from the public on how the ordering of transactions affects how much consumers pay, the agency said in the statement. Banks have sometimes debited customers’ accounts not in the order of the transactions, but with the highest amount first, so as to overdraw the account as quickly as possible and incur fees and interest.
The agency will also examine the quality of information consumers receive on overdraft programs, bank marketing campaigns on overdrafts, and how young and low-income persons are affected by overdrafts, the bureau said.
Finally, the bureau is seeking feedback on a sample “penalty fee box” that could appear on checking account statements and state what fees consumers pay.
The bureau is asking for public comment within about 60 days. It did not name the banks from which it is obtaining data. Bureau spokeswoman Jen Howard said the inquiry on overdraft would be completed this year.
Other Agencies’ Rules
Other regulators have imposed various rules that have limited the application of overdraft programs or affected their design. Cordray criticized the results while promising the consumer bureau would take the initiative itself.
“We plan to examine current overdraft practices, hear from consumers about their experiences, study the impact of prior guidance, consult with our fellow regulatory agencies, and then assess and determine the best policies for the future,” Cordray said.
Joint guidance by federal regulators encouraged best practices in the field, but they “have not been widely adopted by banks,” Cordray said.
In 2010 the Federal Deposit Insurance Corporation approved guidance forcing banks it regulates to steer heavy users of overdrafts into cheaper forms of credit, a move that drew strong opposition from community banks. Cordray noted that “it applies only to the subset of banks that are actually supervised by the FDIC.”
Fees Up 17%
The Office of the Comptroller of the Currency proposed its own guidance last year, which would cover big national banks such as JPMorgan or Wells. That plan has not yet been finalized, Cordray noted.
The average overdraft fee ranged from $30 to $35 in 2011 and has increased by 17 percent over the past five years, according to the consumer bureau. A 2008 study by the FDIC found that consumers who overdrew their accounts 20 or more times annually paid an average of $1,610 in fees.