The $30 billion banks collect in overdraft fees each year may shrink as the U.S. Consumer Financial Protection Bureau imposes rules aimed at shielding customers from harm.
The agency is weighing regulations to improve consumer awareness of overdraft costs and restrict how banks can debit transactions and impose fees, according to a senior agency official.
“Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error,” Richard Cordray, the bureau’s director, said in an e-mailed statement. “Overdraft fees should not be ‘gotchas’ when people use their debit cards.”
The potential regulations are a response to an agency study being released today — following up from an earlier study released last year — that documents practices the CFPB says harms consumers. Cordray and the agency official, who spoke on condition of anonymity, briefed reporters in advance of the report’s release.
Cordray said that “in lending terms,” a person who overdrew a checking account by $24 and covered it with a deposit three days later would pay a median overdraft fee of $34. That’s the equivalent of loan with an annual rate of 17,000 percent, Cordray said.
Banks and credit unions reaped $31.9 billion in overdraft fees in 2013, according to Lake Bluff, Illinois-based Moebs Services, a research firm. Overdrafts occur when consumers spend or withdraw more money than is available in their checking accounts, whether through the use of debit cards, checks, ATM withdrawals or direct debits.
Small Transactions
The CFPB drew its conclusions from anonymized data it collected through banks it supervises, those with assets above $10 billion. Under authority it gained in the 2010 Dodd-Frank Act, the CFPB oversees a range of banks from Wall Street giants including JPMorgan Chase & Co. (JPM:US) to regional players such as Lafayette, Louisiana-based Iberiabank Corp. (IBKC:US)
In the study published today, the CFPB found that the majority of overdraft fees are incurred on transactions of $24 or less, and that more than half of consumers pay back negative balances within three days.
A 2010 rule imposed by the Federal Reserve, the CFPB’s predecessor as the main consumer banking regulator, required banks to obtain an affirmative “opt-in” from customers who want overdraft coverage when they swipe their debit cards. Without it, transactions are supposed to be declined at the point of sale.
The CFPB found that nearly one in five customers who do opt in overdraft their accounts more than 10 times per year, and pay seven times more in fees than those who do not opt in.
‘Expensive Way’
“Opting in for overdraft coverage for debit card and ATM transactions is an expensive way to manage a checking account,” Cordray told reporters in a conference call.
Large banks collect the lion’s share of the roughly $30 billion in overdrafts. Small banks, however, depend more heavily on the fees, which provide between 3 and 15 percent of total revenue.
The report concludes that the impact on consumers is similar at large and small banks, a point smaller banks have vigorously disputed.
The first area of possible regulation includes changing the process by which customers opt in to overdraft services. Consumer groups such as the Pew Charitable Trusts say that consumers are often confused about whether they in fact opted-in.
Transaction Order
A second area would address the order in which transactions are debited from a consumer’s account.
A court case against Wells Fargo & Co. (WFC:US) found the bank manipulated the order of transactions to maximize overdraft fees.
“I want to take pains to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage,” Cordray said. “But we need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”
To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net
To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo
Banks Face Hit on $30 Billion in Overdraft Fees From CFPB Rules – Businessweek.