Few things can ruin your day quite like seeing that your checking account balance is a couple hundred dollars in the red thanks to a cascade of overdraft fees. But should federal regulators step in to prevent it?
The Consumer Financial Protection Bureau seems to be considering that question as it releases a new report on the impact of "courtesy overdraft protection" on consumers, which includes data from a selected group of large banks regulated by the CFPB during 2010 and 2011
For the just more than a quarter of checking accounts hit by an overdraft in 2011, that impact was overwhelmingly negative, according to the report. Those account holders paid an average of $225 in overdraft fees over the course of the year, although that number varied greatly depending on where they banked, with overdrafters at some banks averaging as much as $298 in fees.
A rule put in place by the Federal Reserve making overdraft protection an "opt in" for account holders also has had mixed results in reducing the impact of overdraft charges on consumers, according to the report. While a majority of consumers who'd had problems with overdrafting refused to opt in, they still opted in at a substantially higher rate than the average account holder.
That's a big deal because, consistent with past research done by the Fed, a small group of checking account holders is responsible for the vast majority of overdraft charges. If those account holders are opting in in large numbers, that's going to undermine the effectiveness of the "opt-in" approach in limiting the financial damage to consumers from overdrafts.
Account holders who opted in were also 2.5 times more likely to be hit with an involuntary closure, which is what banks call it when they close a checking account because of a negative balance. That's a serious issue because an involuntary closure can result in being reported to a consumer reporting agency such as ChexSystems, which can prevent consumers from being able to open a checking account for up to five years.
So what's the CFPB going to do about all this?
Not much, at least for the moment. A senior CFPB official says the bureau plans to study the issue more broadly and collect more data before planning any specific actions to curtail overdraft charges.
But remarks by CFPB Director Richard Cordray seemed to point in the direction of simplifying disclosures about how and when overdraft charges would be applied, and giving consumers more information about when different charges would clear an account to help them avoid overdrafts in the first place.
"Financial institutions have very different policies, procedures, and practices that can be highly complex and difficult for consumers to understand, yet greatly affect whether and how often they will incur overdraft fees," Cordray said in prepared remarks during a teleconference.
Cordray also expressed concern about how the financial impact of overdrafts on consumers varied from bank to bank, including the amount of total overdraft fees paid and the number of involuntary closures.
It seems unlikely, though, that the CFPB will ever ban overdraft protection altogether.
"Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage," Cordray said.
And even if the CFPB wanted to, it couldn't do much about overdraft fees at small banks since it only has authority over banks with more than $10 billion in assets.
What do you think? Should the CFPB crack down on courtesy overdraft? Have you ever been hit hard by an overdraft?
Follow me on Twitter: @ClaesBell.