NEW YORK (
Consumer Financial Protection Bureau
is raising its scrutiny on overdraft fees on consumer checking accounts, a major source of fee income for banks.
In a report released Tuesday, the CFPB highlighted the varying differences in the overdraft practices across banks and raised concerns about the ability of consumers to anticipate and avoid overdraft costs.
In 2010, a new rule went into effect that prohibited banks from charging an overdraft fee for ATM withdrawals and debit-card transactions unless consumers "opt-in" for the service. The rule was meant to prevent consumers from automatically being charged an overdraft fee whenever a customer makes a payment or withdrawal with insufficient funds in his or her account.
However, consumers continue to struggle with complicated fee structures levied by banks, according to the CFPB's findings.
The report found that customers who opted-in for the service were more vulnerable to increased costs and involuntary account closures. For instance, the study looked at consumers who had been heavy overdraft users before the 2010 federal opt-in regulation took effect and found that they saved, on average, $450 during the first half of 2010 by choosing not to opt in for overdraft coverage.
The CFPB report found that involuntary closure rates at some banks in the study were more than 2.5 times higher for accountholders who had opted in to debit and ATM overdraft coverage.
Banks continue to have very different policies and procedures on how overdraft fees are charged. Some for example limit the number of overdraft charges per day, while others allow as many as 12 overdraft fee charges a day. Some do not charge a fee if the transaction is below $5, while others charge a fee for every transaction.
Banks also vary in how they process transactions which also has an influence on the way fees are charged. Some banks debit transactions at periodic intervals while others do it at nightly batches. In some cases, banks process large transactions first. Depending on how the transactions are processed, a consumer can be hit with one fee or a series of fees, which he has no control over.
About 45% of consumers considered heavy overdrafters opted in for the service after the opt-in rule was passed in 2010, but the adoption rates varied widely across banks, suggesting that some banks marketed the service more aggressively.
"Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that some overdraft practices may increase consumer costs beyond reasonable expectations," said CFPB Director Richard Cordray in a press release. "What is marketed as overdraft protection can, in some instances, create greater risk of consumer harm."
Overdraft fees account for 60% of fees from consumer checking accounts on an average. While nothing in the report suggests that banks should be precluded from offering overdraft coverage, the CFPB said it would dig in further to understand the reason behind the varying bank practices and whether they were harming customer interests.
-- Written by Shanthi Bharatwaj from New York
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