This week, the Consumer Financial Protection Bureau (CFPB) rolled out draft "Know Before You Owe" disclosures for marketing so-called "Standard Overdraft Protection," a controversial product that requires consumers to "opt-in" for the "privilege" of overdrafting debit and ATM transactions. It wants to know what you think about the new sample disclosures (see them here; comment by email to Cfpb_overdraft_forms@cfpb.gov).
At the same time, it released a major study that finds that at-risk consumers who opt-in pay $450/year more than other at-risk consumers. According to CFPB director Richard Cordray's remarks to the media:
"It shows that opting in to overdraft coverage can be a very expensive way to manage a checking account. And it shows that the vast majority of those who pay the most in overdraft fees are those who can least afford it. In contrast to those who rarely or never overdraw their accounts, consumers who do so frequently tend to hold lower account balances, have lower credit scores, and have less access to traditional credit."
The Consumer Bureau's study was based on an anonymous (the CFPB, contrary to its detractors' baseless claims, does not spy on consumers) dataset of over 40 million consumer accounts. It found that financially vulnerable frequent overdrafters who opted-in paid $450/year more than similar consumers who chose not to opt-in, despite massive marketing campaigns by many banks.
"But the difference in costs can be huge: frequent overdrafters who have opted in are typically charged 18 fees a year, compared to only 5 for those not opted in. With a fee of $34 per event, this amounts to almost $450 more in overdraft fees each year. [...] Finally, we found that frequent overdrafters use their debit cards six times more often than those who do not overdraft. Our prior studies have shown that the widespread use of debit cards can lead to more fees for those who opt in for overdraft."
Years ago (1990s and earlier), overdrafting was seen as a negative behavior, like illegal parking or speeding. Banks actually "bounced" (refused to pay) many checks and charged consumers a bounced-check fee as a deterrent to bad behavior. Several things happened in the late 90s that gave banks a greater opportunity to make overdrafting a profit center.
- First, ATM cards previously usable only at ATM machines morphed into "dual-use" ATM/debit cards also usable at retail (point of sale). Banks marketed use of the cards heavily because of the potential to gain increased "swipe-fee" revenue from merchants accepting debit as well as credit cards and also to reduce the number of both cash and check transactions, along with their associated handling fees.
- Second, banks, aided by aggressive consultants, realized that most accountholders (except for very new accounts) who bounced checks would eventually pay (were good for the money). So banks began to market the "overdraft privilege:" "We've got you covered; we'll cover your overdrawn transaction (pay it, not bounce it); but, hey guess what, we've got to charge you a $34 "courtesy fee."
- Third, the consultants convinced the banks to "flip the switch" on ATM/debit transactions. All of a sudden, consumers who were accustomed to having their ATM transactions declined for insufficient funds found that they were getting a $3 latte for $37! ($3 plus a $34 average courtesy fee)! As the CFPB report and numerous consumer studies have found, debit transactions themselves have a median cost of only about $24; but the average fee is $34. Director Cordray: "This makes debit card and ATM overdraft a very expensive way to cover a small cash shortfall."
- Finally, to tighten the screws down further, more and more banks adopted transaction re-ordering, which supercharged overdraft fee income. If a consumer had enough money in her account to pay for a $3 latte, then a $10 lunch and a $12 movie, but overnight a large check cleared that would have caused just one overdraft, the bank re-ordered the transactions to force 4 overdrafts.
For over ten years, consumer groups including PIRG, the National Consumer Law Center, Consumer Federation of America, Consumers Union/Consumer Reports and others (our 2003 comments) badgered the regulators and Congress to do something. We argued that overdraft protection was a type of loan that deserved stronger protections; we argued that other practices were unfair and deceptive. The pre-CFPB regulators, finally, in 2009, issued a regulation effective July 2010 that prohibited charging for overdraft protection on debit or ATM transactions unless a consumer first opted-in. The rule allows overdraft fees on checks and Internet payments, regardless of whether a consumer has opted-in.
It was a good step but not a full solution. Despite a plethora of successful class action lawsuits over re-ordering, that practice, as well as one where banks impose multiple daily and recurring overdraft fees, still continues. And while most big banks have settled their re-ordering cases for millions of dollars, poster-child wrongdoer Wells Fargo continues to fight. Nonetheless, this week's announcements and the prospect of further CFPB action on unfair overdraft practices are welcome.
The Consumer Bureau has taken several enforcement actions against financial institutions for overdraft-related violations. Here are a few:
- This week, CFPB ordered JPM Chase to pay a $4.6 million fine for a variety of violations concerning its sharing of accountholder information with specialty credit bureaus Chex Systems and Early Warning. Their blacklist (no positive information at all) credit reports based on alleged overdraft activity result in consumers being denied the right to open new accounts at other banks. Chase also "kept consumers in the dark" by failing to grant consumers their rights in disputes over reporting to the bureaus and about their own account-opening denials. More from the CFPB about your rights if denied the right to open a bank account.
- In 2016, CFPB ordered Santander Bank to pay a $10 million fine for deceptive marketing of overdraft protection services.
- In 2015, the CFPB imposed a penalty of $7.5 million on Regions Bank for illegally imposing overdraft fees on hundreds of thousands of customers. The bank also had to return $49 million to those customers.
Here are tips from PIRG (and CFPB) about how to avoid overdraft fees and how to opt-out of controversial overdraft protection. (If you think you were deceived into opting in, certainly file a complaint to CFPB.) Here is our latest PIRG report (December 2016) on overdraft revenues and overdraft complaints to the CFPB.
The idea of the CFPB needs no defense, only more defenders.