Consumer watchdog launches overdraft inquiry

February 22, 2012

The Consumer Financial Protection Bureau is expected to launch an inquiry Wednesday into banks’ overdraft practices, which have been in regulatory crosshairs in recent years.

The bureau said it will look into whether banks are reordering customers’ debit-card charges to maximize overdraft fees. Reordering transactions can double or triple penalties, and the practice has been the target of several class-action lawsuits against the nation’s biggest banks.

The CFPB’s inquiry also will focus on bank overdraft policies, how they market the plans, and their impact on low-income and young consumers. The agency will solicit feedback from the public.

“Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it,” CFPB Director Richard Cordray said in a statement. “We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees.”

Overdraft fees have long irked consumers, who have complained that withdrawals of as little as $3 from their bank accounts have resulted in penalties as high as $37. As the recession squeezed Americans’ budgets and anger at the financial industry reached fever pitch, regulators and lawmakers began moving to curtail banks’ fees.

In 2010, the Federal Reserve began prohibiting banks from imposing overdraft charges unless a customer had signed up for the service. The rule only applies to debit-card transactions, not to checks or recurring withdrawals such as automatic bill pay.

Meanwhile, the Federal Deposit Insurance Corp. issued guidelines calling for the smaller banks it oversees to set limits on the number of times customers can be charged overdraft fees in one day and offer alternatives to those who overdraw their accounts more than six times in a year. Its guidelines encompass checks and recurring payments.

As a result of the new regulations and consumer uproar, several banks, including Bank of America, ended their overdraft programs all together. A poll by Consumer Reports shortly after the Fed’s ban went into effect found that only 22 percent of customers had opted into the service. Of those customers, more than half had experienced an overdraft in the past six months, the poll found.

One thing regulators left unaddressed, however, was the order that banks processed charges. That issue has been winding its way through the nation’s court system instead. In 2010, a California judge ordered Wells Fargo to return $203 million in overdraft fees to customers whose transactions were reordered. Chase, Bank of America and several other banks have spent hundreds of millions of dollars to settle a separate class-action lawsuit over the practice.

The CFPB said it is seeking information on how prevalent the practice remains and how it affects consumers. It is also concerned about a 2008 FDIC report that found that 9 percent of checking account customers made up about 84 percent of overdraft charges, suggesting that the fees were concentrated among low-income customers.

The bureau said it also hopes to educate consumers about the overdraft rules. It is launching a campaign called “What’s your overdraft status?” and has developed a “penalty fee box” that would appear on checking account statements to help consumers understand any overdraft charges.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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