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Consumer Financial Protection Bureau logoSince its inception in 2010, through the Dodd-Frank legislation, the Consumer Financial Protection Bureau (CFPB) has targeted mortgages, credit reports, and student loans. It is now training its microscope on the overdraft fees that banks are charging on consumer checking accounts. The concerns are centered on the bank’s practices that include confusing rules and the ability to ”stack the deck” so that multiple overdraft fees can be charged to a single account. At this time, the CFPB is not proposing any new regulations, but the agency released a scathing report about the practices of many banks on June 11, 2013.

Consumer Concerns

Overdraft fees accounted for $32 billion in profit for the banking industry in 2012 alone. That is an increase of $400 million over 2011. This increase comes despite regulations enacted in 2010 that required banks to inform consumers that a transaction would overdraw their account. The 2010 rules require that a consumer be given the choice to allow the transaction, incurring the overdraft fee, or deny it. In many cases, denying the transaction still caused the consumer to incur a fee.

Each overdraft transaction is a costly affair. Should the consumer allow the transaction to take place, thereby authorizing the bank to pay the check, but put their account into a negative balance, the fee is generally $35 per transaction. The consumer then has an average of three business days to bring their account balance to zero or the account is closed. On the other hand, if the consumer denies the transaction, they usually face a fee for returning the check from their bank, a fee from the company the check was written to, and a possible negative balance.

A third concern is that banks can essentially ”stack the deck” against consumers. Overdraft practices and rules concerning the order in which checks are processed allow banks to intentionally return multiple checks. For example, if your balance is $450 and you write four checks in these amounts: $150, $100, $75, and $400 and those four checks arrive for processing on the same day, the bank would have a choice of which on to process first. The best way, from the consumer point of view, is to process the three small amounts first, then return the fourth; thus incurring a single overdraft fee. Most banks will process the highest amount first, allowing them to return the three smaller checks and collect triple the overdraft fees. That scenario would see a single consumer owing their bank $105 in overdraft fees. Since most retailers also charge a fee between $35 and $50 for a returned check, the same consumer would be on the hook for a potential total of $255 plus needing to bring their account balance back to zero.

What The CFPB Is Looking At

The CFPB is not looking to ban the practice of charging a fee for overdrafts. After all, consumers are at fault for overdrawing their accounts. The agency is mainly looking at the way banks write their rules. Often, the rules are intentionally written in a confusing manner, making it difficult for the average consumer to wade through them successfully. Additionally, the agency wants to examine how banks are processing items that could overdraw an account. The hope is to encourage banks to process items so that fewer fees are charged to each account. One step in that direction took place in a federal court in San Francisco this past May(2013).  A judge ordered Wells Fargo to return $203 million in overdraft fees for processing overdrafts in a manner that directly caused consumers to incur unnecessary fees. Pretty much for processing transactions as described earlier in this post. Richard Cordray, director of the CFPB, admits that eliminating the fees will not happen, but he says that: ”consumers need to be able to control their costs and expenses, and they deserve clarity on those issues.”

 

About the author: Jerry Coffey

 

Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.

 

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