Banking Fees Are Rising And Often Undisclosed
Sunday, March 2, 2008
Banks are failing to provide consumers with information about fees on savings and checking accounts even though federal rules require such disclosures, according to a government report to be released tomorrow.
The report by the Government Accountability Office also says that some of the invisible fees have climbed substantially in recent years. The average overdraft fee, for instance, increased 11 percent from 2000 to 2007.
GAO staff members made undercover visits to 185 branches of 154 depository institutions throughout the country and were unable to get comprehensive lists of checking and savings account fees at more than a one-fifth of the locations. The information was not available on the Web sites of half of the institutions.
The undercover workers were also unable to obtain account terms and conditions, such as information on when deposited funds are accessible and how overdrafts are handled, at one-third of the branches visited.
Federal rules require uniform disclosure of fees and interest rates. From 2002 to 2006, regulators cited financial institutions 1,674 times for violations of fee-related disclosures, the report says. That's about 335 annually among the 17,000 institutions regulators oversee. They took formal enforcement action in only two cases because most of the banks "took corrective actions during the course of the examination or shortly thereafter," the report says.
Eric Halperin, director of the Washington office of the Center for Responsible Lending, said the GAO report was consistent with the center's studies, which have found that consumers are getting increasingly hit with overdraft fees that now reach $17.5 billion a year. He said banks are automatically covering customers' shortfalls and levying a hefty fee rather than rejecting debit card transactions that exceed the customers' balances.
"Banks are trying to maximize the revenue they're getting from fees, either to increase their profit margins or to make up for declining returns on assets and revenue from their core lending operations," he said. "Most people think their debit card is a safe way to do transactions because it's not like your credit card -- you can't spend money you don't have. But actually, banks have turned that on their head and are turning people's debit cards into credit cards with interest rates that are astronomical."
The overdraft fee, Halperin added, is hitting a disproportionate number of low-income consumers, who repeatedly pay a fee of more than $30 on transactions that average about $20.
The GAO report says the percentage of income at banks and thrifts derived from "noninterest sources," which include fees, rose to 27 percent in 2006 from 24 percent in 2000. Increased consumer use of electronic payments, as well as increased marketing of automatic overdraft protection programs, are likely contributing to the trend, the report says. The GAO was unable to analyze the demographic characteristics of the customers who incur the fees because such data are not publicly available.
The American Bankers Association, an industry group, said it could not comment on the GAO report because it had not seen it. But the group pointed to a survey it released last summer, which found that 20 percent of the 1,000 consumers surveyed had paid an overdraft fee in the past 12 months. Of those, about one-third said they paid the fee once, though one-third said they were charged the fee four times or more. Eighty-eight percent said they were glad the payment was covered, and 11 percent said they wished the bank had refused the payment, according to the survey.
"Most people tell us they appreciate not being embarrassed in front of a cashier telling them they don't have enough money in their account," said Carol Kaplan, an ABA spokeswoman. "They would rather pay the overdraft fee than go through the embarrassment of not having enough money."
She said consumers have a responsibility to track how much money they have in their accounts, adding that it is easy to do online. "If they go above and beyond what's in their checking account, there's going to be a fee," Kaplan said. "It's meant to be a penalty because banks incur costs. They just can't be giving away free loans."
The 84-page report recommends that the five federal banking regulators, including the Federal Reserve and the Office of the Comptroller of the Currency, incorporate ways to ensure that fee and other disclosure documents are available to consumers before opening an account. The GAO notes that federal regulators examine financial institutions' written policies but do not determine whether consumers actually receive the documents on fee disclosures. All five agencies said they would address the issue.
The report was requested by Rep. Carolyn B. Maloney (D-N.Y.). Consumer groups and some in Congress have raised concern about the impact of rising banking fees on consumers.