WASHINGTON—The threat to overdraft revenue may have just gotten bigger following a new checking account report from The Pew Charitable Trusts.
The report, which evaluates checking account disclosure, overdraft, and dispute resolution practices at the nation’s largest retail banks, revealed that overdraft fees and harmful account terms have shown little change or even grown worse in the past year. Credit unions were not part of the study.
The report, the third in an annual series, recommends that the Consumer Financial Protection Bureau issue comprehensive rules to ensure that checking accounts are safe and transparent for all consumers.
“Three years of comparative analysis have shown that voluntary reforms on the part of financial institutions, while helpful, are not enough to fully protect consumers wherever they choose to bank,” said Susan Weinstock, director of Pew’s consumer banking project. “Customers need the CFPB to set clear standards that bring safety and consistency to this market and help consumers to make informed choices.”
A number of analysts have been warning that a CFPB crackdown on checking overdrafts is coming, and now see this further fueling that effort. A CUToday.info series recently looked at the how the CFPB may extend its new rules on prepaid cards to checking overdrafts. The bureau’s new prepaid rules classify prepaid overdrafts as a loan, opening the product up to all of the Reg Z requirements.
If that happens to checking overdrafts, it will dramatically reduce what can be charged per overdraft and bring additional compliance costs and hassles, prompting many FIs to stop providing the service and get back to bouncing checks and adding NSF charges, say experts,. Michael Moebs, economist and CEO at Moebs Services in Lake Forest, Ill., estimates CUs will lose $6 billion annually in overdraft revenue if the CFPB makes that move.
Analysis in the Pew report, Checks and Balances: 2015 Update, emphasizes, as well emphasizes that checking changes need to be mandated. “Policymakers cannot wait for financial institutions to voluntarily adopt comprehensive practices ensuring that checking accounts are safe and transparent,” the report states.
Pew recommended that the CFPB require banks to:
- Summarize key information about terms and fees in a concise, uniform format.
- Provide accountholders with clear, comprehensive terms and pricing information for all available overdraft options.
- Make overdraft penalty fees reasonable and proportional to the financial institution’s costs in providing the overdraft loan.
- Post deposits and withdrawals in a fully disclosed, objective, and neutral manner that does not maximize overdraft fees.
- Prohibit, in checking account agreements, pre-dispute mandatory binding arbitration clauses, which keep accountholders from accessing courts to challenge unfair and deceptive practices or other legal violations.
The Pew study did show that some banks improved with their overdraft practices, particularly regarding disclosure. “But the prevalence of harmful overdraft fees and account terms showed little change or grew worse,” Pew said in a release.
The report reviewed the practices of 45 of the 50 largest banks as well as trends among the 32 institutions that have been examined in all three previous Pew checking reports.
Among the report’s major findings:
Disclosure summaries: Banks showed progress here. Seventy-eight percent of the 32 banks reviewed over all three years have adopted a summary disclosure box of terms and fees that meets Pew’s standards. “In 2013, only 25% of those banks had a comparable summary box in place. Among all 45 banks evaluated this year, 62% had adopted a complete disclosure box,” Pew said.
Overdraft disclosures: Federal rules require consumers to opt in to overdraft coverage involving debit cards used at ATMs or the point of sale; if consumers do not choose overdraft coverage, the default is that their ATM and point-of-sale transactions are declined at no cost if they would cause an account to be overdrawn. Pew found that more banks are now clearly disclosing the default option: Most (84%) of the 32 banks Pew studied over the full three years made the default option clear in 2015, while fewer than half (47%) did so in 2013. In addition, all 45 banks clearly disclosed the fee for incurring an overdraft penalty.
Overdraft fees: The study revealed that most consumers who have overdrawn their accounts with their debit cards do not recall opting in to overdraft service. “Banks can prevent this confusion by declining all debit card point-of-sale or ATM transactions that would overdraw an account. But only 22% of the 32 banks studied over the three years do this,” Pew stated. “The total was even lower (16%) for the 45 banks in Pew’s 2015 analysis.”
Transaction reordering: The 32 banks reviewed over all three years showed continued but modest improvement on the issue of processing transactions by dollar amount from highest to lowest—a harmful practice that increases overdraft fees—rather than a neutral method such as chronologically, explained Pew. Pew found that as of 2015, 56% of these banks do not reorder transactions or do not charge any overdraft fees, up from 41% in 2013 and 47% in 2014.
Extended overdraft fees: Most banks continue to charge an additional fee if a customer does not repay an overdraft within a certain amount of time, Pew explained. Fifty-nine percent of the 32 banks in all three studies charged extended overdraft fees in 2015, up from 56% in 2013.
Thresholds and limits on overdrafts per day: Three-quarters of the 32 banks studied over three years do not charge fees for very small overdrafts, and nearly all (97%) limit the number of overdraft fees a customer can be charged in one day, the study found.
Dispute resolution: More banks have placed limits on consumers’ options for resolving disputes. Only 6% of the banks studied over the three years did not require customers to waive their right to a jury trial in 2015, compared with 19% in 2013, stated Pew. “The proportion of banks that do not require binding arbitration has declined slightly, from 38% in 2013 to 34% in 2015.