Checking account overdraft protection policies are set to be examined by the U.S. Consumer Financial Protection Bureau (CFPB), director Richard Cordray announced on Wednesday. He explained that banks have increased their profits through these policies and may be using calculated practices to ensure customers overdraft their accounts regularly.
Checking Account Overdrafts Hike Profits for Banks
The ability to overdraft a checking account has long been a topic of discussion among lawmakers, and as explained in his announcement today, Cordray revealed it is necessary to take a closer look at the way banks handle their policies.
Overdrafting an account occurs when a consumer spends or withdraws more money than is available in their checking account. Banks usually charge a fee averaging $30- $35 when a customer’s balance falls below zero. At this point, the amount of the overdraft is treated as an interest-bearing loan.
The problem, according to the CFPB, is that big banks like JPMorgan Chase and Wells Fargo along with smaller institutions may be deliberately adjusting their practices to ensure customers overdraft their accounts so the institution can increase profits.
Banks and credit unions charged customers about $38 billion from overdraft fees in 2011 alone, according to a Sept. 15 estimate by Moebs Services. For this reason, the CFPB is taking a closer look at the practice.
Overdraft Protection Policies May Face Stricter Regulations
To examine overdraft protection policies more closely, Cordray said the CFPB will begin requesting data from banks while also requesting input from the public on how the ordering of these transactions affect how much consumers pay.
A few practices and issues the bureau plans to look at include:
- Debiting accounts out of sequence: According to the CFPB, banks may sometimes debit customers’ checking accounts not in the order of the transactions, instead going with the highest amount first. This way, the account overdraws faster, incurring fees and interest.
- Quality of program information: The agency plans to examine the quality of information consumers receive on overdraft programs.
- Marketing campaigns: It also will explore overdraft marketing campaigns and the financial impact these practices have on young and low-income persons.
- Penalty fee box option: Finally, the bureau plans to seek feedback on a sample “penalty fee box” that could appear on checking account statements and state what fees consumers pay.
This is not the first time the government attempted to impose rules on overdraft protection practices. In 2010, banks were required to allow consumers the choice to opt in or out of overdraft protection programs rather than automatically adding them as they had in the past.
As noted by Cordray in his announcement, “overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it.” With the threat that depositors could pay over $1,000 in overdraft fees per year, the bureau says it is considering what can be done to ensure consumers are protected.
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