Government Consumer Watchdog Takes Aim at Bank Overdraft Fees

The government's consumer protection agency plans to take a closer look at expensive overdraft fees.


Those pesky overdraft fees big banks slam consumers with will come under greater scrutiny by the Consumer Financial Protection Bureau, the agency announced Wednesday.

The announcement comes just days after the government consumer watchdog laid out plans to bring the largest debt collectors and credit reporting agencies under federal supervision for the first time ever, expanding their reach and influence in the financial services sector.

The probe will involve investigating banks' overdraft fee practices including how the fees affect consumers, how overdraft protection is marketed, and what information consumers receive, the Associated Press reported.

"Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it," CFPB Director Richard Cordray said in a statement. "We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees."

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Overdraft fees—what banks charge customers when they take out or spend more money than they have in their account—can go as high $35 a pop, and generate billions of dollars in revenue for banks.

The CFPB and other consumer advocates are worried that the allure of making green from consumers going into the red could be causing banks to structure their overdraft policies and marketing in a way that's confusing or even predatory.

"It's very important for the CFPB to investigate and take action to better protect consumers from outrageously high and unfair overdraft fees," says Jean Ann Fox, director of financial services for the Consumer Federation of America. "Just as with mortgage servicing and credit card issues, bank accounts are a very widespread financial product and overdraft fees and practices are the most critical issue for consumers struggling to make ends meet and [who] want to remain in mainstream banking."

"This affects a lot of people," Fox adds.

One example of a questionable practice Fox cites is known as re-ordering and involves banks assembling all transactions from the day and rearranging them from largest to smallest, in effect maximizing the number of transactions that trigger the overdraft fee.

"Transaction re-ordering just strikes consumers as blatantly unfair," Fox says. "The CFPB needs to look at bank practices for all types of transactions, not just debit card, point-of-sale, or ATM."

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The consumer watchdog agency is also toying with the idea of a "penalty fee box" that would be included on account statements to break down any overdraft or other fees incurred.

At this stage, the investigation is about collecting data and finding out how certain bank policies impact consumers, but findings could prompt new rules or even lawsuits if wrongdoing is discovered, multiple sources say.

"We're very positive about the announced program," Fox says. "This is the start of their fact-finding and investigation of banks and request for input from consumers, so the CFPB can build a record to support—hopefully—reforms that have widespread consumer support."

Twitter: @mmhandley