After focusing largely on mortgages, credit cards and student loans during its first months of existence, the Consumer Financial Protection Bureau is turning its gaze on checking account overdraft fees.
CFPB Director Richard Cordray announced this week the bureau is opening an inquiry into whether “courtesy overdraft” protection hurts consumers by charging big fees to cover the cost of small purchases that overdraw bank customers’ checking accounts.
“We have heard many stories about the $40 cup of coffee. A man swipes a debit card at his local coffee shop and unbeknownst to him, his balance is too low to cover the cost. Rather than the card being declined (with the result that he either pays in cash or goes uncaffeinated), the small transaction is processed, along with a $35 overdraft fee,” Cordray said in prepared remarks at the Roosevelt Institute, a think tank in New York. “We want to learn how consumers are affected and how well they are able to learn about the costs and risks of overdrafts.”
Changes to overdraft fees?
In announcing the inquiry, Cordray highlighted several common criticisms of bank overdraft programs, including how they have a disproportionately high impact on low-income and young consumers. He also noted critics complain that overdraft fee disclosures are hard to find and understand, and some banks process debit transactions in a way that maximizes fees.
“We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees,” Cordray said.
Cordray acknowledged efforts by other regulators to rein in overdraft abuses, including the Federal Reserve’s revamp of Regulation E to require banks to seek customers’ approval before signing them up for overdraft protection. But he also expressed concern that deceptive marketing and other tactics were blunting the impact of these policy changes.
“Many of the consumers we heard from did not realize (overdraft fees) could happen, despite the opt-in requirement that is supposed to provide them with the means of protecting their own interests,” Cordray said.
That the CFPB would revisit past regulatory efforts is a natural result of consolidating consumer protection duties of the Fed, the Federal Deposit Insurance Corp. and other government agencies into the new agency, said Michael Barr, a former assistant Treasury secretary for financial institutions.
“I do think there have been problems in the area of bank overdraft fees that are worth exploring,” Barr said. “It’s important for the CFPB to take a fresh look.”
CFPB solicits comments
Eventually, the CFPB inquiry will yield a wide-ranging study of overdraft programs in the U.S. that will examine how they’re marketed, how their terms and fees are disclosed by banks, and their overall impact on consumers. As part of the inquiry, the CFPB will be soliciting comments from industry professionals as well as checking account customers who’ve been impacted by courtesy overdraft fees and others on its website for the next 60 days.
CFPB officials hope to complete the study by the end of the year, according to a CFPB spokeswoman. From there, the agency will use the study to shape guidelines designed to resolve the issues they find.
One possible policy change that Cordray suggests is a “penalty fee box,” which would be included in bank customers’ monthly statements and would detail checking fees related to customer missteps such as overdrafts, explain how they happened, and offer tips on how to avoid them in the future.
Cordray also says the CFPB might establish guidelines on the order in which banks process debit transactions to prevent them from artificially inflating fees on customers.
Still, Barr says it’s too early at this point to say whether the bureau will make major changes to existing regulations.
“They may take a look and say the recent rule changes are enough or they may say, they still see areas for improvement that could ease the burden on consumers,” Barr says.
Keep consumers informed
Banking industry responses to the inquiry were generally muted. At the Roosevelt Institute round-table event, Andrew Rowe, a senior vice president at Bank of America, expressed gratitude for the CFPB’s efforts and highlighted plans by the bank to keep customers informed about fees through “clarity statements.”
“The American Bankers Association appreciates the Bureau of Consumer Financial Protection’s interest in initiating a study of customer use of overdraft protection services before prejudging any regulatory next steps,” said Frank Keating, ABA president and CEO. “We are not concerned about a study based on the fact as we believe that overdraft protection is a service that customers freely elect to have, they know the fee in advance and they can opt out of overdraft protection at any time.”
The fact that banks seem unworried by the CFPB’s interest in overdraft fees may be because it isn’t anything new for the industry, says Bert Ely, a banking consultant and principal of Ely & Co. in Alexandria, Va.
“We’ve already seen a lot of regulatory initiatives to basically cut down on the amount of overdraft fee income for banks,” Ely says. “They’re just picking up and running with the ball that’s been in play for years.”
Ely also points out that the number of consumers substantially affected by overdraft fees is relatively small. As Cordray acknowledged at the round table, the vast majority of fees are incurred by a small fraction of bank customers.
“What’s with that 9 percent? It’s only a minority of people that pay overdraft fees,” Ely says.
While some banks do boost their overdraft revenue through shady practices, Ely says, “People need to be a little sharper about managing their balances.”