Two years ago, the Federal Reserve required banks to stop routinely allowing customers to overdraft their checking accounts via declinable ATM withdrawals or debit-card purchases - source of the infamous $40 hoagie, a $5 sandwich served with a $35 overdraft fee. The Fed said banks could do so only if customers had agreed ahead of time to the deal: that a bank would approve point-of-sale or ATM overdrafts in return for collecting such fees.
Consumer advocates had long argued that the fees were in essence short-term, high-cost loans, and that many banks were manipulating their accounting practices to multiply them. A common procedure is to clear checks and debits together from largest to smallest, rather than chronologically, so that a customer who continues to make small purchases while unaware of a negative balance can get socked for hundreds of dollars in fees.
The new Consumer Financial Protection Bureau, which last year took over the Fed's regulatory duties governing consumer financial products, is now taking a closer look at those practices through examinations at nine banks, according to Bloomberg News reporters Carter Dougherty and Margaret Collins. A key focus: how banks have been persuading customers to opt into the programs even when cheaper alternatives are available.
The Bloomberg story today says the examination focuses on practices at JPMorgan Chase & Co., Wells Fargo & Co., PNC and other large national and regional banks, including at least one, Bank of America, that has stopped the practice of allowing debit overdrafts. Instead, BoA customers' purchases are declined if there are insufficient funds.
Bloomberg, quoting four unidentified people briefed on the examination, says:
The inquiry focuses on how financial institutions persuade customers to enroll in what they call overdraft protection programs. Examiners are looking at online and mailed marketing material as well as scripts used by the banks’ customer-service representatives to determine whether they could be confusing to consumers, said the people.
Bureau examiners have conveyed “a tone of skepticism that this is really a good product for borrowers,” said Jo Ann Barefoot of Washington-based Treliant Risk Advisors, who counsels banks on dealing with federal supervisors.
While tighter rules could help U.S. consumers, they also could threaten a major revenue stream for banks already struggling to replace income pinched by new regulations including a cap on debit-card “swipe” fees. Last year bank customers paid $31.6 billion in overdraft fees, down from $33.1 billion in 2010, according to Moebs Services, a Lake Bluff, Illinois-based research firm. About 15 million Americans overdraw their accounts 10 or more times a year, the firm said.
The bureau’s examiners also are reviewing the banks’ justifications for the size of overdraft fees, two of the people said. Large banks charge an average $35 per overdraft, compared with $25 at community banks and credit unions, Moebs reports.
Consumer confusion is widespread in this market, and the result is that the least-sophisticated customers - most likely the young and the poor - bear the brunt of the cost. An FDIC study several years ago, focused on larger banks with automated overdraft-protection programs, showed that just 9 percent of depositors generated 84 percent of overdraft fees.
Findings by the Pew Safe Checking Project suggested that bank customers might simply be missing the disclosures, since depositor agreements at the nation's 10 largest banks averaged an astounding 111 pages. But Pew, via focus groups, has also found evidence that banks may be confusing people more directily, as I discussed in a February column. Pew found that some customers were getting the significance of opting in exactly backwards - perhaps because they assumed the word "protection" means what it says.
"We had one woman say, literally, 'I opted in so I could avoid the $35 fee,' " Pew's Susan K. Weinstock, the project's director, told me.
When the CFPB's new director, Richard Cordray, announced in February that the agency was looking into overdraft fees, he warned that the agency considered it "wrong to confuse consumers deliberately for financial gain."
If that's what the evidence shows on overdraft protection - as organizations such as the Consumer Federation of America have long contended - it deserves a stronger crackdown.