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New reports from the Pew Charitable Trusts and the Consumer Federation of America (CFA) indicate that checking accounts still charge high overdraft fees, often without adequate disclosures. Overdraft fees function as high-cost, short-term loans and can be structured in a manner that triggers many fees so that banks can maximize fee income. In 2010, the Federal Reserve enacted new regulations requiring that consumer affirmatively opt in to receive overdraft protection, but these reports show that there are still unresolved issues with overdraft.
Overdraft fees are starting to rise after two years of no price increases following the Federal Reserve rule, CFA found in a new report. Banks are now moving to tiered pricing models where overdraft fees grow larger the more frequently a consumer incurs them, while some charge the fee every day until the balance is repaid. CFA’s director of financial services, Jean Ann Fox, noted:
“Big bank overdraft fees for a single transaction are very high, ranging from $33 to $37 at the largest banks. Consumers can be charged up to $370 in one day, according to the maximum fee and daily limit fee policies that banks have.”
One somewhat positive finding in the report is that some banks are restructuring the way they process transactions so that fewer overdraft fees are charged. In 2010, CFA found that almost all banks reserved the right to process transactions from largest to smallest, which means that consumers pay a much higher number of fees (see an example of how this works). Today, some banks now process transactions in the order they are received, though eleven banks still process some transactions from largest to smallest.
Now that consumers are charged with deciding whether to opt in to overdraft programs, they need to have full information on the costs and benefits of doing so. Unfortunately, the Pew Charitable Trusts have found that many banks still make it difficult to understand the costs of their overdraft program and other costs related to checking accounts. Pew says, “financial institutions do not summarize important policies and fee information in a uniform, concise, and easy-to-understand format that allows customers to compare account terms and conditions.” In response to this issue, Pew developed a simplified model checking account disclosure form in 2011 and encouraged banks to adopt it (Chase, TD Bank, Pentagon Federal Credit Union, and others have adopted much of it).
We will continue to encourage banks to simplify their disclosures so consumers can make informed decisions. Let the Consumer Financial Protection Bureau know your thoughts on overdraft practices by June 29.
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