Bank investigation to target deceptive overdraft practices

The Consumer Financial Protection Bureau announced Wednesday it is investigating banks’ deceptive overdraft practices, which can greatly increase the fees customers may be charged when they spend more than what they have in their accounts.

“We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees,” CFPB Director Richard Cordray told students at Hunter College in New York City. “It is wrong to confuse consumers deliberately for financial gain.”

Pew Charitable Trusts reported in November that many banks were manipulating the order in which they tally customer debits and withdrawals, effectively causing account holders to trip the overdraft fee multiple times.

Instead of processing transactions from checks, debit cards, ATMs and online payments in the order in which the bank received them, many banks reorder a day’s transactions from most expensive to least expensive. Some banks also post withdrawals before deposits. Either of these processes would drain the funds in the account more quickly and could turn one overdraft fee into several.

“This approach can conceivably benefit consumers if it results in making certain that more significant payments — such as mortgage payments or student loan installments — get made,” Mr. Cordray said. “The down side is that this approach also tends to maximize the number of transactions that trigger overdraft fees.”

The bureau also hopes to clarify missing or confusing overdraft information. “The CFPB will examine how clearly overdraft terms are disclosed and the extent to which consumers are made aware of, qualify for, and take advantage of, alternative means of covering overdraft transactions,” the agency said.

Along those lines, the CFPB is also trying to curb banks from sending misleading marketing materials about overdrafts to their customers.

“This so-called ‘disclosure’ is virtually the opposite of transparency,” Mr. Cordray said.

Bank overdraft fees seem to affect low-income and young consumers the most, Mr. Cordray said. Less than 10 percent of account holders are responsible for 84 percent of all overdraft fees, while almost half of young account holders incur overdraft fees, including 15 percent who are charged for more than 10 overdraft fees a year.

Susan K. Weinstock, director of Pew’s Safe Checking Project, is pleased with the CFPB decision to investigate.

“We’ve been wanting them to work on these issues, and we think this is a great first step,” she said. “We’ll see if they can bring some clarity to the marketplace.”

The CFPB could set a national precedent on overdraft fees. Some banks have got in trouble for these practices with state regulators, but no federal policy explicitly outlaws it.

In 2010, Wells Fargo lost a case in California where it was ordered to change its practice in the state and refund $203 million to customers. Last year, Bank of America agreed to a $410 settlement in a related case.

Some banks have stopped this practice. Wells Fargo, Citibank, JPMorgan Chase and HSBC have all announced they will no longer alter the transaction order in a bid to maximize fees.

Other measures banks are taking to protect customers include extending a cushion of $5 to $15 before a consumer is charged, offering a 24-hour grace period for customers to repay the overdraws, and imposing a limit on the number of overdraft charges a consumer can accrue in a day.

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