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Broken Banking: Overdraft Penalties Harm Consumers, Discourage Responsible Products

Tuesday, May 24, 2016
Peter Smith
Rebecca Borné

Updated estimate finds overdraft fees drain $14 billion from consumers annually, while analysis of complaint narratives finds the deck stacked against consumers.

Financial institutions continue to engage in abusive overdraft practices, according to a new analysis by the Center for Responsible Lending (CRL). Each year, consumers pay nearly $14 billion in overdraft fees. If non-sufficient funds are included, the figure climbs to $17 billion.

"CRL's analysis confirms that overdraft abuses continue, carrying an enormous annual price tag for consumers as a whole, and with devastating effects on individuals," said Peter Smith, a Senior Researcher at CRL and the report's co-author.

By analyzing consumer complaint narratives filed with the Consumer Financial Protection Bureau (CFPB), CRL determined that even consumers who carefully attempt to avoid a negative balance find themselves overdrawn and, in turn, charged with disproportionately harsh overdraft fees. Often, consumers are charged several fees, which average $35 each, within a short time period. This costly practice places bank account holders with modest or low balances in jeopardy of involuntary account closures, which lead to checking account blacklists that make re-entry into the banking mainstream very difficult.

Separate and independent data from the Federal Deposit Insurance Corporation (FDIC) indicate that approximately 778,800 households and over a million adults who once had bank accounts are now unbanked, primarily due to high or unpredictable fees.

Frequently marketed as a ‘customer service', overdraft fees are incurred when a bank account lacks sufficient funds to cover a transaction and the institution pays the transaction anyway. The institution then repays itself the value of the overdraft transactions, and all accompanying fees, from the account holder's next incoming deposit. Debit card point-of-sale (POS) transactions, ATM withdrawals, electronic bill payments, and paper checks may all trigger overdraft fees. Some institutions have a far better policy on POS and ATM transactions; they simply decline these transactions at no cost when the account lacks sufficient funds.

"Financial institutions take advantage of consumers fighting desperately to stay afloat," said Rebecca Borné, report co-author and CRL Senior Policy Counsel. "CFPB should require that overdraft fees be reasonable and proportional to the cost to the institution, much the same way that credit card penalty fees are regulated. Overdraft fees should also be limited to one per month and six per year."

CRL has long called for overdraft programs to be regulated as the extremely high-cost credit products they are. "Any credit should be offered only after a determination that the consumer has the ability to repay it. Instead, today, banks generate billions in abusive fees from those least able to shoulder them," concluded Borné.

For more information, or to arrange an interview with a CRL expert, please contact Charlene Crowell at charlene.crowell@responsiblelending.org or 919.313.8523