The Consumer Financial Protection Bureau has sprung into action pretty decently since Richard Cordray was installed as director. CFPB has presented new, simple-to-read mortgage forms, and submitted a plan to regulate debt collection agencies and credit reporting bureaus. Today, Cordray is in New York to discuss overdraft fees, a particularly egregious money-making scheme for banks. Here’s an excerpt of the remarks at Hunter College:
With the fast-moving pace of our modern economy, consumers may engage in numerous transactions and pile up multiple overdraft charges before realizing what has happened and how much damage has been done. They may do so by writing a check, paying a bill online, or using their debit card to make a purchase or withdraw funds from an ATM. Every penny counts, and consumers need to be able to understand how overdraft works and avoid costly penalty fees.
Overdrafts can provide consumers with needed access to funds, but the growing costs of overdraft practices have the capacity to inflict serious economic harm. We want to learn how consumers are affected and how well they are able to learn about the costs and risks of overdrafts. So today, we are announcing that the Consumer Bureau is launching an inquiry into overdraft practices and their impact on consumers [...]
Evidence indicates that a small number of checking account customers – just under 10 percent – bear a whopping 84 percent of all overdraft fees. We know that these consumers are largely drawn from the ranks of the low-income. We also know that these charges greatly impact young consumers who are often inexperienced in the banking system. In fact, almost half of account holders who are young adults incur overdraft fees, according to an FDIC study published in 2008. And of those younger customers, 15 percent recorded more than ten overdrafts apiece in a single year.
This is definitely a worthwhile inquiry. As Cordray says, banks prey on low-income customers with their overdraft policies, and use all sorts of tricks and traps to collect fees. Cordray mentioned transaction ordering as one bank scam. They process transactions with the highest amount first, so that overdraft fees can hit on every one of the successive charges, rather than on the first one that goes over the limit on the bank account. There’s also the automatic overdraft fee scam, where a transaction isn’t denied but processed, with the $35 fee attached. This is despite an opt-in requirement from a Federal Reserve rule two years ago. There are many schemes.
As it happens, I have my own overdraft story. Not to go into too many details, but I cancelled an account with Bank of America many years ago, which had overdraft protection tied to a credit card that I thought I also cancelled. When a wayward charge (a mistaken charge) went into the account, it triggered this overdraft protection on the credit card. The bank sent the bill to the wrong address, and it festered for many years until I was tracked down by a debt collector. After all this time, a $30 charge turned into a $500 problem, that I had to just pay to go away, despite all the pitfalls. Multiply that many times over and you have a nice little revenue stream for the financial industry.
In addition to requesting data from the banks, the CFPB will seek a public comment period – known as request for information or RFI – to “seek broad public input on questions about actual consumer experiences and the consequences of different overdraft practices.” This is available at their website and I urge you to go over and tell your story if you have one. This is part of the vision of a consumer financial protection agency that is engaged with the public.
More at the Washington Post.