Yesterday the Pew Charitable Trusts released its latest study of the terms and conditions of U.S. checking accounts offered by the biggest banks and credit unions as part of its Safe Checking in the Electronic Age Project. The results were far from encouraging.
- Checking account disclosures are still too long and confusing. The average bank disclosure was 69 pages, according to the study, which is down compared to last year, mostly because this year's study sample changed. Still, it's unlikely the average consumer would go through so many pages of dense legalese, and even if they did, they'd be hard-pressed to understand it.
- Overdraft fees have increased and multiplied. The one-time fee banks charge for overdrafting your account has risen, but so have other overdraft-related fees you may not expect. "Extended overdraft fees," which many banks charge for having a negative balance for more than a week, rose from an average of $25 in 2010 to $33 this year.
- Banks still rearrange the order of debits in a way that boosts fees. All 12 banks in the Pew study reserved the right to reorder customer purchases from highest to lowest. That often has the effect of multiplying the number of overdrafts fees charged.
- Bank terminology is confusing when it comes to fees. The Pew study found little consistency in the names banks used for different types of fees, making apples-to-apples comparisons hard.
- Don't think overdraft transfers are free. It's not nearly as expensive as an overdraft, but an overdraft transfer, where a bank transfers money from your savings account or line of credit to cover an overdraft, will still cost you. Of the banks Pew studied, 77 percent charged such a fee, deducting a median of $12 for each transfer.
To get some perspective on the Pew study's results, I spoke with project director Susan Weinstock about overdraft as a 5,000 percent loan, why clear disclosure is important, and how the Consumer Financial Protection Bureau could help.
What jumped out at you about this year's study?
We thought it was interesting that given all of the attention, media attention, that the $35 overdraft penalty fee has gotten that that figure, that median amount, stayed the same at $35. But for the 12 largest banks, the overdraft transfer fee was up 20 percent from last year, and the extended overdraft penalty was up 32 percent. So the fees that weren't getting as much attention, it seems like, went up.
And when you say extended overdraft fee, you mean that if they have a negative balance for a while that's an extra fee?
Right; if they don't pay back the fee and the overdraft itself, the median length of time that banks give consumers is seven days. And if they don't pay it back in seven days, the banks usually charge an extended overdraft fee.
What were some of the differences between the results for credit unions and those for banks?
Sure. With credit unions, the fees are lower. There's no question about that. The disclosures are a lot shorter but equally as unclear. And that's why we think the (model disclosure box develop by Pew) would be particularly helpful.
In some cases, with the credit unions, we weren't sure if they had a fee and it wasn't disclosed, or if they just didn't have the fee at all. If the CFPB said, you all have to have this disclosure box, then we would know that. But we don't know that right now, and if we had the box we could make that apples-to-apples comparison and know this is cheaper than that.
Why do you think banks and credit unions make these disclosures so long and complex?
I think they're trying to make sure they cover all the bases, and so the lawyers get a hold of them and they write them, and this is what they end up looking like.
What advice would you give consumers based on this study? What should people look out for?
Our data (show) that it's hard to read those disclosures, but that's going to tell a consumer about the intricacies of their checking account. When we did focus groups to develop that box, nobody read those disclosures and certainly we understand why. But until we get the CFPB to mandate a box like this, that's the key to really knowing the intricacies of your account.
So it seems clear from the study that consumers who aren't aware of those fees could really get themselves in some trouble?
Absolutely. The research on overdrafts that we put out last month showed that there's a lot of confusion. We looked at consumers who had overdrafted in the last year, and 54 percent of them didn't think they'd opted into overdraft. So that, to me, just says people are confused.
Do you think the increasing popularity of debit cards makes this a more important issue than in the past?
Certainly, the explosion in overdraft fees certainly seems to have been tied to greater use of debit cards. But it's hard to say.
Can you talk about a couple of the recommendations to regulators and financial institutions you've made based on the study results just to give us kind of a brief overview?
The Consumer Financial Protection Bureau has as its mission to protect consumers. But we think there's a great opportunity for them to really do something that will affect a lot of people, since 9 out of 10 adult Americans have a checking account. We think transparency is really key here, because this is such a fundamental product.
It would be great to have some uniformity to (disclosure boxes) so that consumers could easily make apples-to-apples comparisons. We think the (Pew box) has made things better for consumers, but not everybody's adopted it. And I think without the CFPB mandate, it's unlikely that all banks would adopt it. And to get that level playing field, that's what you would need. We think that's important.
Our research shows that there is a lot of confusion out there about overdraft options and what the different costs for each choice of overdraft coverage are. So we think that the CFPB should ensure that financial institutions lay out all of the options that they offer to their customers along with the fees and the terms, so the consumer can make an informed choice about what they want.
Third, we think overdraft fees are excessive. When we did the math, the median overdraft amount is $36 according to the FDIC. If you add the $35 fee and then you say it's a seven-day loan because you have to pay an extended overdraft fee in seven days, that comes to over 5,000 percent interest. So that's excessive. We think the CFPB should take a look at that, find out what it costs the banks to provide that service, and then write a rule that says that those fees should be reasonable and proportional to what it costs the bank to provide the service.
And then finally, we think that transaction reordering that maximizes overdraft fees should just be prohibited. It's a program that really can hurt consumers. It can snowball; it makes it very hard for a responsible consumer to ever know what's actually in their checking account if the banks are reordering the transactions.
You found significant differences in the terminology banks used for various fees. Can you speak to that a little bit and what the effect of that is on consumers?
This goes back to the problem that we have with being able to make apples-to-apples comparisons of fees, of terms and conditions and fees. So we found that what we referred to in our report as an "overdraft penalty fee" had eight different names among the 12 credit unions we studied. And they call it anything from "optional overdraft protection service transaction," to "courtesy pay fee," to "overdraft fee," to "balance protection."
And then the banks have, like, five different names for an extended overdraft penalty fee. They call it an "extended overdrawn balance charge," an "extended overdraft fee," a "continuous overdraft charge," "sustained overdraft," and "negative account balance fee." Again, if you're trying to choose an account based on the terms and conditions and the fees, if they all call it something different, it's going to be very hard to make that comparison.