CFPB Report: Typical Overdraft Situation Is Comparable To Small-Dollar Loan With 17,000% Interest Rate

If you’re one of the hundreds of millions of consumers who use a debit card you’ve likely found yourself on the receiving end of an overdraft fee when your account balance just wasn’t quite enough to make a desired purchase. While consumers might not necessarily question the occasional overdraft fee, a new report from the Consumer Financial Protection Bureau puts the fees into a disconcerting perspective.

According to the report [PDF], a majority of the $32 billion in annual debit card overdraft fees are incurred for transactions of $24 or less, and the majority of those overdrafts are repaid in three days.

That doesn’t sound too bad, right? Wrong. The CFPB did the math and if a consumer borrowed $24 for three days and paid the average overdraft fee of $34, that would mean their “loan” comes with an interest rate of 17,000%.

That seems outrageous. But we’re not done. Consider the fact that consumers are twice as likely to use their debit cards as their credit cards and that the average debit card holder uses their card 17 times each month, giving ample opportunity to run up those overdraft fees.

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In fact, the report found that more than half of consumer checking account income is from overdraft fees – often the costliest of all banking fees. That’s a problem the CFPB is looking to tackle as it works on creating necessary consumer protections for overdraft and related services.

“Overdraft fees should not be ‘gotchas’ when people use their debit cards,” CFPB director Richard Cordray says. “We need to determine whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”

The CFPB study examined nearly two million consumer checking accounts and found that approximately 14% opted for overdraft protection.

On average, those customers paid about $260 a year in overdraft and non-sufficient fund fees. That means that a consumer would have at least 10 overdraft occurrences in a 12-month period.

On the other hand, consumers who did not opt-in for the plan paid just $35 in annual fees.

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One concern regulators encountered when reviewing the study data was the way in which banks organize transactions. Some banks were found to have maximized overdraft fees by processing transactions not in the order in which they are made, but in a way that results in a larger number of overdrafts.

The practice, often called stacking, has been criticized by a number of consumer groups, including Pew Charitable Trust which has studied the overdraft process extensively.

In a June report on overdrafts, Pew found that reordering only inflates the issue of overdrafting and in the end consumers pay significantly more.

Pew reports that while banks have employed additional policies that can help limit the impact of overdraft fees, including reordering only certain types of transactions, implementing a threshold amount to trigger an overdraft, and not charging an extended overdraft fee, more attention is needed for this often unfair practice.

Just last month, Wells Fargo announced it would put an end to the practice for its checking customers. The bank previously stopped reordering debit card transactions and ATM withdrawals.

While Wells Fargo’s move is a step in the right direction, issues concerning overdraft fees continue to be prevalent, even though some federal regulations were put into place over the last five years.

Not too long ago, consumers were often unaware of overdraft fees until they appeared on their statements. That changed back in 2010 when federal regulators mandated that banks use an “opt-in” requirement. That mean institutions had to obtain consumers’ consent before charging fees for allowing overdrafts on most ATM and debit card transactions.

While the mandates meant that consumers were more aware of their accounted being enrolled with overdraft protection, that doesn’t mean they fully understand the program or realize the amount of fees they’ll actually incur.

Around the same time, some banks updated their policies to allow customers to not be charged if they are only overdrawing their account by a small amount, such as $5. Additionally, some banks began capping the number of overdraft and NSF fees charged on an account on a single day.

Cordray says that today’s report doesn’t mean banks should stop offering overdraft coverage, it just means there needs to be a determination of whether current practices are causing consumers more harm than good and if consumers have a clear understanding of the plans to begin with.

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  1. furiousd says:

    I recall when I got letters from the banks I have accounts with, every one of them tried to make it sound like the best thing to get to pay overdraft fees instead of being reminded at the POS terminal that you were out of money. I declined on all of them and haven’t had any trouble since. Well, one check I wrote when I’d forgotten about an online transfer from that account hit me with a fee. Twice, actually, when the bank where the check was cashed ran the same check again the next day without calling to confirm funds. So for some reason I ended up with three NSF charges: the first one due to my error, the second one when the cashing bank ran the check again (I believe improperly), and a third one when my $28 water bill didn’t go through because of the second NSF charge. I was particularly unhappy with my bank that week.