February 23, 2012

By now, the industry is buzzing about the news that the Consumer Financial Protection Bureau will be examining bank overdraft fees in the coming year. The purpose, according to the CFPB, is to collect information to determine if banks are making it clear to their customers how the fees work, and if banks are purposefully manipulating the system to increase the frequency with which consumers are hit with overdraft fees.

As part of the inquiry, the CFPB is seeking public input on a prototype "penalty fee box" -- a disclosure on a consumer's checking account statement that would highlight the amount overdrawn and total overdraft fees charged.

Yesterday, I attended a brief roundtable event featuring representatives from the CFPB, consumer groups and banks. During the event, CFPB Director Richard Cordray explained that the agency is conducting this inquiry into bank overdraft fees because "overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it."

Cordray said lack of education is often the reason for customers accruing overdraft fees.

"Due to the fast-paced nature of the economy, consumers can incur multiple overdrafts in one day and not be aware of it," he said, adding that low income and young consumers bear the brunt of the overdraft fees levied. He added that many banks' overdraft rules are "masked by the fine print of checking account agreements."

According to the CFPB, the average overdraft fee ranged from $30-$35 in 2011 and has increased by 17 percent over the past five years. A study by the Federal Deposit Insurance Corporation published in 2008 found that consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees annually.

"There are similarities between overdrafts and payday loans," added Cordray. "Both serve consumers who are strapped for cash and who feel they need short-term help."