Getting to the bottom of bank overdraft fees

Michelle Singletary
Columnist February 25, 2012

Bank overdraft fees drive me crazy. It’s just wasted money. Sure, overdraft protection is a good backup for the times you miscalculate, but sometimes the fees run into the hundreds of dollars a month and are the most burdensome on the people least able to afford them.

Well, the Consumer Financial Protection Bureau intends to do something about this. The bureau is investigating banks’ overdraft practices and their effect on consumers’ finances.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

If you have overdraft protection, your financial institution will cover the transaction so your check won’t bounce — but it will charge you a fee. The average overdraft fee ranged from $30 to $35 in 2011 and has increased 17 percent over the past five years, according to CFPB.

The bureau wants to know whether financial institutions are using methods to increase the likelihood that their customers are accessed with an overdraft fee.

“We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees,” Richard Cordray, director of the CFPB, said at a town hall meeting in New York announcing the agency’s plan to study overdraft protection.

Of particular concern to the watchdog agency is how certain customer transactions are processed. Some banks do not process transactions, including the checks you write, in the order in which you make them. Instead, they collect the transactions from a specified period, such as a calendar day, and pay them from the highest amount to the lowest amount, Cordray said. Switching the order can mean certain bills such as a person’s mortgage or student loan payment is paid. But this reordering can also increase the number of transactions that trigger overdraft fees.

In addition to looking at how transactions are processed, the agency will be focusing on how institutions are disclosing their overdraft terms and whether consumers are receiving misleading marketing materials about overdrafts.

Certainly people should be responsible with their checking accounts. But there is no shortage of horror stories. During the town hall meeting, Sarah Ludwig, founder and co-director of the New York-based Neighborhood Economic Development Advocacy Project, provided an example of one low-income customer who felt the financial sting of overdraft fees.

Ludwig said her organization received a call from a 51-year-old single mother whose bank assessed her $1,390 in overdraft fees over two months. The woman tried to close her checking account, which was being automatically debited by payday lenders. A payday loan, which is not legal in New York state, is a short-term loan of usually $100 to $500. Ludwig said the woman’s bank refused to close the account and allowed the automatic debits to be processed even though the account was overdrawn from previous payday loan payments.

The customer was “caught in a spiral of payday loan debt, gouged by her bank’s abusive overdraft practices, and the victim of illegal debt-collection practices,” she said.

Bankers participating in the town hall meeting said overdraft protection is a service their customers want. But Andrew T. Rowe, a senior vice president at Bank of America, also said its customers “did not like to be surprised by being charged for spending money they don’t have.” To that end, the bank has launched low-balance alerts in which customers who sign up for mobile banking get an electronic notice when their account balance falls below $25. Rowe said Bank of America sent more than 20 million texts to 8 million customers last month.

As part of its study of overdraft practices, the CFPB is seeking public comment on a sample “penalty fee box.” On your checking account statement would be a box highlighting all your overdraft-related fees for that particular period and fees paid year-to-date. The box would also include tips to lower or avoid future fees.

I love the penalty-box proposal. It’s a bold way to help people see how much overdrafts are costing them.

“Americans spend billions of dollars in overdraft fees every year, and overdraft fees are the No. 1 reason that bank customers lose their checking accounts, driving more and more Americans into the ranks of the unbanked and the underbanked,” said Rebecca Borne, senior policy analyst for the Center for Responsible Lending. “We are so pleased that there is finally a regulator, the CFPB, whose primary responsibility and commitment is to ensuring that reasonable rules of the road are in place to reform harmful and reckless financial practices. Today’s typical bank overdraft practices remain in dire need of that reform.”

I encourage you to weigh in on this issue. Go to www.consumerfinance.gov and tell your story.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071, or singletarym@
washpost.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read previous Color of Money columns, go to postbusiness.com.

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