It's common knowledge that overdraft fees on checking accounts have historically been moneymakers for banks, while hitting the pocketbooks of customers who are the least able to afford them. Generally, the largest banks charge the biggest fees, sums that rival the interest levied by payday lenders.
Now, the Consumer Financial Protection Bureau has released a study on this very subject, revealing some unsettling facts about the methods banks are utilizing to squeeze these extra penalties out of customers -- despite new legislation designed to make the rules surrounding overdraft products more transparent.
Protection? Not so much
Though the service is marketed as "overdraft protection," the report points out that customers who opted in for such services generally paid more in fees than those who did not opt in.
For example, customers who overdraft their accounts most often were hit hard, paying an average of $450 more in the latter half of 2010 when they opted in -- as required by Dodd-Frank -- to the bank's protection services, as opposed to those who did not opt in. In addition, those who opted in were two-and-a-half times more likely to experience an involuntary account closure by their bank.
Confusing and inconsistent rules
If not opting in can save a typical high-overdrafter $450 for six months, why do these customers opt in? The report suggests that a confusing array of rules pursuant to overdrafts and a lack of policy predictability from one bank to another are the root causes.
Reminiscent of the problems found with banks' debit transaction-ordering, the study found much variation between banks regarding how they processed transactions, which could lead to consumers being charged more than they should. In addition, some banks charge an overdraft fee, and then levy a non-sufficient funds fee as well.
It makes sense that more easily understood rules would help save the most vulnerable consumers a great deal of money. Regulators want this and, of course, so do customers. And yet, the fine print persists, as jumbled as ever.
Recently, the Pew Charitable Trusts surveyed consumers to see which banks had the best and most comprehensible disclosure forms, ranking the largest 36 banks in the U.S. First Republic Bank (NYSE: FRB), Citigroup (NYSE: C), and Bank of America (NYSE: BAC) were all in the top five for overall transparency, which encompassed three categories: Disclosure, Overdraft, and Dispute Resolution.
Very good indeed, but a closer look at the Overdraft column in isolation shows B of A looking a little light, with a much lower "best practice" rating than First Republic or Citi. Still, considering all the disdain that Bank of America engenders in its customers on a regular basis due to issues like fees and mortgage servicing, this is a very good showing, particularly compared to peers Wells Fargo and JPMorgan Chase -- which sit at No. 20 and No. 21, respectively.
More study needed
The CFPB report concludes that further analysis is needed to determine whether the agency needs to step in with additional consumer protections. The study notes that, according to the bureau's calculations, overdraft fees accounted for over 60% of fee revenue attached to checking accounts in 2011.
That's a big pot of money, and banks aren't going to give it up easily. With overdraft revenue estimated to climb steadily until 2016, the CFPB will need to put some more muscle behind any new rules it promulgates, since the last batch didn't dent bank coffers for very long. It seems like overdraft fees are a cash cow that the banks will make certain never gets slaughtered.
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