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Bankrate survey: Some banks are cutting customers a break on overdraft fees

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More banks are giving customers a break when they overdraw their checking accounts by $10 or less, the 2016 Bankrate checking account survey found.

Some of these customers, who previously would have been hit with an average overdraft fee of $33.04, instead are being charged nothing.

One explanation for the sudden uptick in generosity: Banks are getting prepared for potential new Consumer Financial Protection Bureau overdraft rules by changing policies they think might be targeted, says Greg McBride, CFA, Bankrate's chief financial analyst.

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"You've seen some banks reorganize or adapt their checking account programs to meet some of the requirements that are already being discussed," says Kevin Barker, a senior equity analyst with Piper Jaffray, a Minneapolis-based investment bank and asset management firm.

"The banks realize eventually they're going to have to change them anyhow," he says.

These low-dollar-figure overdrafts previously came under the crosshairs of the CFPB, which in 2014 issued a report criticizing the charges. It found that the majority of debit card overdrafts occurred on transactions of $24 or less.

More than half of consumers repay that negative balance within 3 days, the CFPB found, meaning if the fee were a loan, it would carry a 17,000% annual percentage rate.

Call for changes

Consumer groups have been pushing regulators to reign in overdraft fees, which are big business for banks. The 594 banks that are subject to new overdraft fee reporting requirements derived 8% of their net income from nonsufficient funds charges in 2015.

How much income is that, exactly? $11.16 billion for the country's biggest banks.

With this much consumer money at stake, any incremental changes are not enough, says Tom Feltner, director of financial services for the Consumer Federation of America.

"That's a step in the right direction, but certainly it's not cause for celebration," he says.

Indeed, Bankrate's checking survey found that overdraft fees remain historically high, falling just 0.1% from their 2015 record high of $33.07 for the first occurrence.

The most common fee for the 8th year in a row is $35, and increases outnumbered decreases by 5-to-1, according to the survey of 10 banks and thrifts in each of 25 large U.S. markets. The study was conducted between July 14 and Aug. 10, 2016.

Feltner says his group would like to see overdraft fees made proportional to the amount of the overdraft itself. The Consumer Federation of America also wants overdrafts limited to one per month and 6 per year.

Other consumer groups have called for the government to cap how much financial institutions can charge per overdraft.

Meanwhile, The Pew Charitable Trusts wants regulators to outlaw check reordering -- the process by which some banks record transactions from largest to smallest rather than in sequential order – which can trigger multiple overdraft charges. The non-profit organization also wants the government to require better disclosure of overdraft terms and pricing information to allow more consumers to avoid the charges.

Not so fast

But it remains unclear what rules the CFPB will hand down, or when. Although the government agency has issued repeated reports on the dangers of overdraft fees to consumers, its long-anticipated regulatory plans have yet to be announced.

As recently as May, the bureau said it was engaged in "pre-rule-making activities." But a Bloomberg BNA report in September said a CFPB announcement is not forthcoming.

"Despite years examining the issue, observers said that it's not clear the CFPB has reached a conclusion about how to best tackle changes to overdraft protection programs," according to the Bloomberg story.

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Recent bank action

That's not to say the government isn't pressuring banks to change.

In 2015, the bureau threatened legal action against Minnesota-based TCF Financial, which operates banks in Arizona, Colorado, Illinois, Michigan, Minnesota and Wisconsin, over its overdraft "opt-in" program.

Since 2010, financial institutions have been required to get customers' approval to process ATM and debit transactions that exceed the amount of money in their bank account. Without approval, or opt-in to overdraft coverage, a customer's transaction is declined.

But the CFPB said in a letter to the bank, it was looking at TCF's opt-in policies to ensure "compliance with laws relating to unfair, deceptive and abusive acts and practices.

The bureau has also fined banks over their overdraft programs, including:

  • Regions Bank, which in 2015 was ordered to pay $7.5 million for charging consumers fees after they did not opt-in for overdraft protection. The Birmingham, Alabama-based bank has retail branches in 16 states.
  • Santander Bank, which in 2016 was ordered to pay $10 million for deceptively marketing overdraft services and signing up some customers without consent. The Wilmington, Delaware-based bank has retail branches in 8 states.

Banks have taken notice of these regulatory actions, Barker says. "They can't play games with a checking account or overdraft. They know it."

What consumers can do

Unless and until the government acts, consumers can find ways to protect themselves. The CFPB recommends taking these steps:

  • Don't opt-in to overdraft programs at your bank or credit union.
  • Link your checking account to another account at your financial institution so that if you run out of money in your checking account, the bank will pull money from the other account to cover the transaction. You may be charged a fee for this, but it's typically less than an overdraft fee.
  • Sign up for low-balance alerts through your bank or credit union's website. These alerts, which you may be able to receive on your smartphone, will alert you when you are at risk of overdrawing.

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Bankrate's Checking Survey Find out what's going on with some of the most common fees charged to checking account holders.
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