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Overdue overdraft overhaul

"Bart Naylor" "Financial policy"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% in the last six years? Some observers figure consumers pay $30 billion in these fees. Could it be (cynicism alert!) that banks view these “penalties” as a lucrative source of revenue? Consider that the entire banking industry earned $119 billion in 2011 from all sources, sharpening the importance of overdraft fees.

Whether overdrafts derive from bad money management by customers, or calculated targeting by an industry with proven skills in this area, the new Consumer Financial Protection Bureau (CFPB) aims to shed light. “Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it,” explains CFPB Director Richard Cordray. “We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees.”

In a conversation with Public Citizen February 28, CFPB official Corey Stone outlined the study he’ll help conduct. The assistant director explained that the agency will dive deeply into statistics to clarify a number of problems currently understood only by sampling or localized analysis.

In addition, the CFPB has invited public comments on bank overdraft policies. (Comments are due April 30.) They have asked the public to weigh in on how prevalent transaction stacking really is? That’s where 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. When that happens, sometimes customers suffer penalties early in the month even when they haven’t actually 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.

No consumer would intentionally pay $40 for coffee, raising the broader question the CFPB asks: How well does a bank disclose its overdraft policies? The CFPB 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. One Federal Deposit Insurance Corp sample found that 84 percent of overdraft fees come from only 9 percent of a bank’s clients. And about half of that comes from lower income consumers.

We encourage the CFPB to go beyond the study. Where the investigation leads to deception, the CFPB should follow with rules that insure that overdraft fees accomplish their mission. That means discouraging overdrafts. And we will know the CFPB has succeeded when bank overdraft fee revenue falls.

Bartlett Naylor is Public Citizen’s financial policy analyst. Read more about our financial reform work.