Business, Finance & Economics

US Consumer Financial Protection Bureau to investigate overdraft fees


President Barack Obama shakes hands with Richard Cordray (R) before speaking about the economy at Shaker Heights High School in Shaker Heights, Ohio, on Jan. 4, 2012.


Saul Loeb

The Consumer Financial Protection Bureau announced today that it will investigate overdraft protection, a business that generates tens of billions of dollars annually for financial institutions, the Associated Press reported.

“Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it,” Consumer Financial Protection Bureau Director Richard Cordray said, according to the AP.

Banks’ overdraft protection plans allow customers to spend more money than they have in the bank, but typically charge fees of $30 to $35 each time an individual overdraws their account, CNN reported. Banks and credit unions earned an estimated $38 billion offering this service in 2011, according to research firm Moebs $ervices, MarketWatch reported.

According to MarketWatch:

A large percentage of bank profits from overdrafts come not from individuals who make a mistake but from low-income consumers who overdraw their accounts on purpose, as a type of short-term loan because they can’t cover their basic living expenses.

Consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees annually, according to a 2008 Federal Deposit Insurance Corp. study, MarketWatch reported.

Since 2010, banks cannot automatically enroll customers in overdraft protection programs for ATM and debit card transactions but must ask them if they want to opt in, according to CNN.

The CFPB said it would look into how banks market these opt-in plans, and whether they adequately inform customers about the terms of the fees and how to avoid them, MarketWatch reported.

A study published in 2011 by the Center for Responsible Lending, a consumer group that opposes overdraft fees, noted that banks told consumers that opting out of overdraft protection "may prevent you from completing everyday transactions including…medical or health emergencies," the AP reported.

The CFPB will also examine the practice of clearing large purchases first, which often triggers more fees, the AP reported. And, the consumer watchdog said, it will seek input on whether banks should add a “penalty fee box” to checking account statements which would disclose the amount overdrawn and total overdraft fees charged.

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