Feb. 29, 2012

Overdraft Overhaul Is Overdue

Statement of Bartlett Naylor, Financial Policy Advocate, Public Citizen’s Congress Watch Division

If bankers are as smart as they are well-paid, why don’t their overdraft fees work? Why don’t the fees discourage overdrafts? Why did these fees swell 17 percent in 2011 over 2005?  The answer: Banks view these “penalties” as a lucrative source of revenue.

That’s why Public Citizen welcomes the Consumer Financial Protection Bureau (CFPB) investigation of the banking industry’s $30 billion annual overdraft fee business. Fees generated from deceptive practices that fall disproportionately on low-income groups demand a full accounting. 

 In a conversation this week with Public Citizen, CFPB official Corey Stone outlined the study he’ll help conduct. The assistant director for deposits, cash, collections and reporting markets explained that the agency will do a study to draw on extensive data at banks to learn the answers to some of these critical questions.

In addition, the CFPB has invited public comments on bank overdraft policies. It wants public input on how prevalent transaction stacking really is. That occurs when a bank reorders a month’s transactions from largest to smallest, as opposed to the chronological order in which the consumer writes checks or uses a check debit cards. This sometimes causes customers to suffer penalties early in the month even when they haven’t overdrawn their account. That’s one reason a customer might end up with a proverbial $40 cup of coffee – $2 goes to the coffee shop and $38 to the bank in overdraft fees.

The CFPB is rightly trying to determine how well banks disclose their overdraft policies. The agency proposes that banks publish a simple “penalty box” that spells out exactly how the penalties work. The CFPB also wants to learn why it is that low-income groups suffer the most overdraft charges. An Federal Deposit Insurance Corporation sample found that 84 percent of overdraft fees come from just 9 percent of a bank’s clients. About half of that appears to come from lower-income consumers. 

We encourage the CFPB to go beyond the study. Where the investigation reveals deception, the CFPB should ensure that overdraft fees accomplish their mission. That means discouraging overdrafts. We will know the CFPB has succeeded when bank overdraft fee revenue falls.

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