Consumers Using Overdraft Coverage Risk Fees, U.S. Says

Consumers who choose bank overdraft coverage are more likely to pay hundreds of dollars in fees each year and have their checking accounts closed than those who decline it, the U.S. Consumer Financial Protection Bureau concluded in a study released today.

“We are concerned that some overdraft practices may increase consumer costs beyond reasonable expectations,” Richard Cordray, the agency’s director, said in an e-mailed statement. “What is marketed as overdraft protection can, in some instances, create greater risk of consumer harm.”

The study, which CFPB began last year, is based largely on data collected from a group of large banks. Cordray said in a conference call with reporters that nothing in the research suggests banks should be “precluded from offering overdraft coverage,” and promised to continue studying the issue.

Consumers paid $32 billion in overdraft fees in 2012, up slightly from $31.6 billion for 2011, according to Moebs Services, a Lake Bluff, Illinois-based research firm.

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. Customers who overdraw typically pay a fee each time they overdraw, and can incur multiple fees daily.

“Discretionary overdraft protection programs began years ago as occasional courtesies that an institution might offer to some of its customers,” Cordray told reporters. “Over time, these programs have become more automated and are provided to a large proportion of depositors. As a result, they have become a significant source of industry revenues.”

Revenue Source

The fees account for 61 percent of all checking account fees among the large banks that were studied. This percentage is “likely even higher” for smaller community banks, according to the study.

The CFPB has supervision authority over banks with more than $10 billion in assets, from giants like JPMorgan Chase & Co. to regional players like Lafayette, Louisiana-based Iberiabank Corp. Smaller community banks, whom the agency has wooed as allies, have taken a hard line against regulation of overdrafts.

The bureau spent more than a year scrutinizing data from nine banks including Bank of America Corp., Wells Fargo & Co. and Regions Financial Corp. Supervisors are also looking at the manner in which banks market overdrafts and the rationales behind the fees they charge.

Fed Rule

A regulation written by the Federal Reserve that went into effect in 2010 required banks to obtain customers’ affirmative opt-in for overdrafts on debit cards. If customers didn’t choose the service, their transactions would be declined if they did not have enough money in their accounts.

The opt-in rate among the banks studied was 16.1 percent at the end of 2011. For new accounts, the opt-in rate was 22.3 percent.

Consumers who made heavy use of overdrafts but then declined to continue overdraft coverage after the Fed rule went into effect reduced the fees they paid by more than $450 during the second half of 2010, according to the study.

Persistent overdrafts can lead banks to close customers’ accounts. At some banks in the study, customers who opted into overdraft coverage were more than 2.5 times likely to have their account closed than those who didn’t.

In the study, the CFPB also found that bank overdraft practices can be “highly complex,” and vary significantly.

Some banks might limit the number of overdrafts during a single day, while others might have no caps. The involuntary account closing rate at the bank with the highest rate was 14 times greater than at the bank with the lowest. The report did not reveal the number of accounts closed at either bank.

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