Richard Cordray, director of the Consumer Financial Protection Bureau.
Richard Cordray, director of the Consumer Financial Protection Bureau. Image: ProgressOhio/Flickr/CC BY

The newly-opened Consumer Financial Protection Bureau announced Wednesday that it will be looking into banking practices as they relate to overdraft fees. Near the top of consumer complaints, banks say that overdraft fees are a fair way to keep customers from getting overextended. Others say they are just a profit-making venture.

CFPB probes banking practices

The CFPB said that it will be asking the nation’s banks about how they assess and market overdraft fees, and at what rates. Also, they will look into how these institutions disclose the terms and conditions of the fees to consumers.

‘Capacity to inflict serious economic harm’

Richard Cordray, director of the CFPB, said in a statement:

“Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it. We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees.”

Banks scramble to make up lost income

Since 2010, banks have been required to make overdraft protection an option for consumers, not mandatory. Since that time, many banks have tried to make up the difference lost to the mandatory fees with marketing pushes, increased fees, raised interest rates and by creative ordering of how daily transactions are recorded. By clearing large purchases first, bankers stack the deck to create more overdrafts.

CFPB seeks public input

The bureau also asked for the public’s input about a sample “penalty fee box” it is proposing be added to consumer bank statements. The box would disclose any fees and the amount overdrawn to trigger the penalty.

More overdrafts among poor and young

The CFPB said it also plans to look into why low-income and young consumers receive more overdraft charges than larger depositors. A 2008 study by the FDIC found that nearly half of young adults had received overdraft fees in the prior year. Fifteen percent were slapped with 10 or more.

Bankers defend the fees

Bankers say that overdraft protection is to save customers the embarrassment of being told they have insufficient funds. Overdraft protection allows a purchase to go through, even if there is not enough in the account to cover the purchase. However, the “favor” comes with penalties, usually in the $30 to $35 range, according to the CFPB.

According to Moebs Services, financial institutions earned about $38 billion from overdraft fees in 2011.

For profit only, some say

But many believe the fees are inflated and designed mainly for making profit. In 2008, the Federal Deposit Insurance Corp. said that banking customers with 20 or more overdrafts a year are paying fees on an average of $1,610 yearly. Those statistics compelled the Federal Reserve to force banks to make overdraft protection optional in 2010. But many feel those changes did not go far enough.


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