Would you knowingly agree to pay a $35 fee each time you used your debit card at point of sale, simply to allow you to purchase a $4 latte with only $2 in your account? Even the banks didn’t think so, that’s why they made “standard overdraft protection” a feature of your checking account that you didn’t need to choose. Banks also changed the default switch on debit and ATM cards to allow overdrafts. The combination of these practices, along with the switch from cash to debit card transactions encouraged by rewards programs, made overdraft revenue a major profit center over the last 12 years or so, as the old regulators mostly slept.
At a news conference in NYC today, Director Richard Cordray of the new Consumer Financial Protection Bureau (CFPB) will announce a major investigation of bank overdraft fee practices and propose a model “penalty box” disclosure to appear on bank statements. From Ylan Mui of the Washington Post: “The bureau said it will look into whether banks are reordering customers’ debit-card charges to maximize overdraft fees. Reordering transactions can double or triple penalties, and the practice has been the target of several class-action lawsuits against the nation’s biggest banks. The CFPB’s inquiry also will focus on bank overdraft policies, how they market the plans, and their impact on low-income and young consumers. The agency will solicit feedback from the public.”
After years of standing by and watching banks ring up ever-increasing overdraft fees, in 2010 the old regulators — the Federal Reserve, FDIC and OCC — finally were embarassed into issuing new rules partially protecting consumers. The FDIC, which was under stronger management, probably pushed the others. Since July 2010, those overdraft rules have limited some practices and required you to affirmatively “opt-in” before being charged fees for the over-priced “standard overdraft protection” product. U.S. PIRG and other consumer advocates have contended that “standard overdraft protection” marketing continues to be unfair and deceptive. After all, if you are repeatedly asked to choose (opt-in to) the most expensive and least favorable of three choices, “standard overdraft protection,” but not really offered either of two better choices — the less expensive overdraft line of credit or transfer from savings options — did you really ever have a choice?
While a few big banks — notably Bank of America and Citibank– either never charged or eliminated “standard overdraft protection” on debit transactions, many others amped up the opt-in marketing instead. And while several banks have paid big penalties in lawsuits over re-ordering practices (one judge called Wells Fargo reordering a “neat trick” as he imposed a $203 million penalty), only one of the old regulators, the FDIC, has really enforced rules that limit unfair overdraft fees and reordering practices. But FDIC mostly supervises small institutions.
The new CFPB took over in July 2011 as primary supervisor and enforcer for the (over 100) biggest banks. Director Cordray’s inquiry into checking account overdraft practices is an important step that will also require greater fee transparency, so consumers are more aware of bank practices. The rollout today will also propose a “penalty box” disclosure to appear on bank statements. U.S. PIRG has also encouraged the CFPB to make all bank account fees more transparent and to require that bank fees on the Internet be machine-readable smart disclosures, so groups such as Iowa PIRG and others can easily download fee schedules and create localized comparison shopping guides.
Will banks simply turn to other newer fees? Some might. But others may grow more efficient and compete in the marketplace based on price and quality. That will temper the impact of any fee increases by others. And under the new CFPB’s transparency rules, consumers will be more aware of choices and choose more wisely, too. More on overdraft fees and why we need the new CFPB is here in our July 2011 report Ten Reasons We Need The CFPB Now.
Senior Director, Federal Consumer Program, PIRG
Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.