If you've ever had an overdraft fee turn a $2 debit purchase into a $37 debit purchase, you may be glad to know the first action item on the Consumer Financial Protection Bureau's list when it comes to banking is "courtesy" overdraft programs.
At a roundtable with banks and consumer advocacy groups hosted by the Roosevelt Institute in New York, CFPB Director Richard Cordray announced a new inquiry into how banks run their courtesy overdraft protection programs, and how they affect bank customers. Once that inquiry is completed, which CFPB officials hope will happen by the end of the year, the bureau will likely roll out some new regulations governing exactly how and when banks can hit customers with courtesy overdraft fees.
As part of that inquiry, the CFPB is soliciting comments from consumers for the next 60 days on how they've been impacted by courtesy overdraft. If you're interested in participating, you can send an email to firstname.lastname@example.org or surf on over to Regulations.gov and follow the instructions there.
In explaining the reason for the inquiry, Cordray cited several concerns CFPB regulators had regarding courtesy overdraft.
- Overdraft fees disproportionally affect two already beleaguered populations: those with low incomes and young consumers. Cordray cited an FDIC study from 2008 that found just under 10 percent of bank customers incurred more than 80 percent of overdraft fees.
- While banks' practice of reordering debit transactions from largest to smallest could help prevent nonpayment of large, important bills such as mortgage payments, it can also result in large, catastrophic penalties as many smaller purchases each trigger separate overdraft fees.
- While banks are now required to seek customers' OK to enroll them in courtesy overdraft thanks to the Federal Reserve's changes to Regulation E, banks' marketing materials many times overstate the benefits of courtesy overdraft and downplay the associated fees and risks, sometimes to the point of being misleading.
- Overdraft policies and fee schedules are often hard to read and hard to find, especially online. One example Cordray cited was a bank website that took three clicks and a scroll-through of 50 pages to get to overdraft fee information.
- Bank customers are often surprised by the charges and are unsure how or why the fees are applied to their accounts.
While he acknowledged some banks' voluntary efforts to address those problems and actions by other regulators, Cordray said that continuing negative impact of courtesy overdraft on consumers warranted study and potentially, action. Cordray laid out some of the options the CFPB is considering:
- Creating a standard "penalty fee box" to appear on monthly statements that would outline any penalty fees the customer was charged that month, along with tips on how to avoid those charges in the future. You can see an example of that box here (requires Acrobat).
- Creating a model fee disclosure form and setting guidelines to make sure those disclosures are easy for consumers to find.
- Creating guidelines for how banks advertise courtesy overdraft programs to ensure the negatives are clearly stated.
At the roundtable, consumer advocates, including the Susan Weinstock of the Pew Charitable Trusts, Rebecca Borne of the Center for Responsible Lending and Pamela Banks of Consumers Union, echoed Cordray's concerns and stressed the effects of a spiral of overdraft fees on lower-income Americans. They noted that during the worst of the recession, thousands of Americans were shut out of the banking system after their banks closed their accounts down due to nonpayment of overdraft fees and reported them to ChexSystems.
For their part, representatives from Bank of America, Citigroup, Amalgamated Bank and the Teachers Federal Credit Union stressed the measures their institutions had taken to voluntarily reduce the impact of overdrafts on consumers, including adopting better fee disclosure forms, sending SMS alerts for low balances and educating customers on the consequences of overdrafts.
What do you think? Are courtesy overdraft programs in need of reform? Do you plan to participate in the inquiry?
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