Two nonprofit groups came out with new report this week that sound the alarm about overdraft fees by banks, saying that government regulations are not working to keep fees in check and accusing banks of “payday lending.”
The Pew Health Group – a nonprofit research group – and the Consumer Federation of America (CFA), a consumer advocacy group, both say that it is high time the Consumer Financial Protection Bureau (CFPB) stepped in again to lay down the law.
Been There, Done That
Back in February, overdraft fees were the subject of an inquiry by the CFPB, who said that “Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it.” Richard Cordray, the director of the CFPB , said the organization would investigate why, for example, a 2008 study by the Federal Deposit Insurance Corp (FDIC) found that 84 percent of all overdraft charges occurred within only 9 percent of checking accounts, suggesting that low-income customers were being unfairly targeted.
In spite of that inquiry, both the Pew and the CFA reports found that the frequency of overdraft fee charges has gone up over the past two years, and that further, the disclosure statements regarding the fees are unclear and difficult to understand.
Banks or Payday Lenders?
The fees themselves haven`t gone up, holding steady at $35, but banks also charge penalty fees if the overdraft isn`t paid off in time, and the Pew report says that there has been a 32 percent increase in those penalty fees since 2010. Jean Ann Fox, the director of financial services for the CFA, says in a statement that “Bank overdraft loans are a form of payday lending. Banks are charging staggeringly high rates for short-term borrowing when fees are computed the same way payday loans are calculated.”
Who Pays the Price?
Not everyone signs up for overdraft protection, which is basically a service wherein the bank will cover the funds if customers accidentally overdraw their accounts. Instead of returning the check, incurring bounced check fees on both sides, they process the overdraft and charge the customer a fee. One of the regulations put in place in 2010 prohibited banks from charging overdraft fees unless customers specifically signed up for the program.
Some consumer groups claim that banks pressure customers to sign up for these programs, but a survey by the American Bankers Association says that in fact, not too many customers participate in the program. They say that only 23 percent of customers paid overdraft fees in 2010, and in 2011 only 16 percent paid them. Nessa Feddis, vice president of the association, said that a majority of customers said that they felt the fees were worth the protection they got from bouncing checks.
On the subject of overdraft fees, our Editor-in-Chief Michael Germanovsky says, “Some overdraft fees may be a result of mistakes or unauthorized transactions. Fortunately, it is a common policy for most banks to waive the overdraft fee if charges are proven unauthorized, as part of the zero liability protection offered by major credit card issuers. In the meantime, consumers may help themselves and their credit score by maintaining a low credit utilization ratio, leaving a significant cushion before their credit limit.”