Overdraft fees next item on CFPB agenda

The Consumer Financial Protection Bureau is wasting no time in trying to shore up consumer financial products. The agency is exploring ways to install more safeguards in mortgage, student and payday loans and is now looking at overdraft fees as its newest project.

A latte fees

Overdraft fees, which banks assess when customers overdraw checking accounts, are often the culprit behind what many media outlets refer to as the “$40 latte.” In essence, a $5 latte ends up costing up to $40 with the overdraft fee, once the fee is assessed. The fees add up.

[Interest on overdraft fees can be far more than from getting a loan from payday loan lenders]

Banks were estimated by Moebs Services to have collected $38 billion in overdraft fees last year, according to Forbes. The average fee has also increased by about 17 percent in the past five years. Pew Charitable Trusts, according to USA Today, estimates the average overdraft fee was $35 per occurrence for customers who elected for overdraft protection.

The FDIC found in a 2008 survey, according to the Wall Street Journal, that roughly 84 percent of overdraft fees are assessed on nine percent of checking account holders.

CFPB looking into it

The Consumer Financial Protection Bureau is also looking into overdraft fees, according to CNN, in order to see if consumers would benefit from additional protections. The fees themselves aren’t the focal point, but rather advertising for overdraft protection, which are essentially short term loans to customers. Banks are mandated by law to ask customers if they want to enroll in overdraft protection rather than just have transactions declined once they run out of funds.

The CFPB is also set to examine transaction clearance orders, or in other words, the order in which transactions are processed. Transaction order is important; say a person buys a coffee for a couple dollars, a bottle of soda and then a muffin, then goes grocery shopping and fills their gas tank in the course of one day, which sends them into overdraft.

If the bank processes the largest transactions first, more fees are likely to result as more transactions are conducted while the customer is in overdraft, rather if the transactions were cleared as they occurred.

Only taking comment

According to NPR, having to ask customers whether they want overdraft protection has already caused a 20 percent reduction in overdraft fee revenue.

The CFPB is not issuing any rules, but rather is going to investigate and take comments for the time being. The agency, according to its website, wants to hear back from consumers willing to give comments.

Sources

Forbes

Wall Street Journal

CNN

NPR: http://www.npr.org/2012/02/22/147226187/new-consumer-agency-eyes-bank-overdraft-fees

CFPB: http://www.consumerfinance.gov/whats-your-status-when-it-comes-to-overdraft-coverage/

USA Today: http://www.usatoday.com/money/perfi/credit/2011-04-26-overdraft-checking-fees_n.htm