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Overdraft Rules Mean Consumers Will Pay Up, or Get Out (Update 1)

Updated with additional comment from Frank Mayer, a partner in the Financial Services Practice Group of Pepper Hamilton.

NEW YORK (TheStreet) -- The Consumer Financial Protection Bureau's new focus on overdraft fees will cause banks to strengthen their most profitable customer relationships, while cutting loose consumers that continue to drain the bottom line, according to industry analysts.

"It costs between $100 and $120 a year to maintain a checking account for your customer," says FBR analyst Paul Miller. "[My] guess is they will go back to the old days, and these guys are not going to provide free products. They will either push you out the door, or find a way to charge you."
Consumer Financial Protection Bureau Director Richard Cordray

The Consumer Financial Protection Bureau, or CFPB, on Wednesday announced that it had "launched an inquiry into checking account overdraft programs to determine how these practices are impacting consumers," with Director Richard Cordray saying that "overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it."

The CFPB said that a study by the Federal Deposit Insurance Corporation found that consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees annually." Cordray requested comment on a new "penalty fee box" disclosure statement, that would make it easier for consumers to understand just how much they were paying in overdraft fees.

Of course, one would think that a depositor would realize if they were hit with heavy overdraft fees, but clear disclosure is always a good thing.

But there were several hints in the CFPB release that the big banks are looking at another money grab, justified by the "disproportionate Impact on low-income and young consumers," with "46.4 percent of young adult accountholders [having] incurred overdraft fees," according to a 2008 FDIC study, while "of those, 15 percent recorded more than ten overdrafts in one year."

The CFPB's "What's your overdraft status?" campaign to educate consumers on overdraft fees, may also have an impact on bank revenues, although it would seem that the high fees are already obvious to consumers.

The banks famously took a huge hit to revenue, beginning in August 2010, when the Federal Reserve's new "opt-in" rules went into effect, requiring banks only to provide overdraft protection for ATM or debit card transactions for customers who previously signed up for the service.
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