Home > Personal Finance > Feds Launch Investigation into Bank Overdraft Fees

Comments 0 Comments

Federal regulators announced a new investigation into bank overdraft fees last week, which could lead to new regulations aimed at helping consumers avoid paying such fees. The Consumer Financial Protection Bureau is especially concerned that a small group of mostly young and low-income consumers pay the vast majority of overdraft fees.

Only nine percent of checking account customers pay 84 percent of all overdraft fees, and they are the people least able to afford such fees, according to a press release by the agency.

[Article: 3 Ways to Avoid New Hidden Bank Fees]


Credit.com’s Credit Report Card
Check your credit bureau profile for free with this great tool. See your detailed credit evaluation, expert advice on managing your credit, and unlimited free updates every 14 days.
Get Started Here »

“We know that these consumers are largely drawn from the ranks of the low-income,” Richard Cordray, the bureau’s director, said in a speech Tuesday at Hunter College in New York City, where he compared overdraft fees to costly payday loans.

Banks charge overdraft fees when a customer tries to withdraw more money than she has in her account. Originally such fees were charged as a disincentive to prevent overdrafts, but by the 1990s many banks came to rely on revenue from such fees as a source of profits. The average fee is now $30 to $35, and has increased 17 percent over the last five years, according to the bureau.

As fee revenue increased, many banks found creative ways to charge more. One is called transaction re-ordering. Instead of processing checks and purchases chronologically, as they happen, some banks wait a period of time, often a day. Then they process all the transactions from that day from highest dollar amount to lowest.

[Free Credit Calculator: Use Credit.com’s Credit Report Card]

The practice assures that important bills like mortgages and car payments get paid first, Cordray said. But it also increases the chance that consumers will overdraw their account early, and then rack up additional fees every time they buy smaller things like gum.

“We have heard many stories about the $40 cup of coffee: a man swipes a debit card at his local coffee shop, and unbeknownst to him, his balance is too low to cover the cost,” Cordray said. “Rather than the card being declined (with the result that he either pays in cash or goes uncaffeinated), the small transaction is processed—along with a $35 overdraft fee.”

The bureau also is concerned about banks sending out misleading marketing materials that extoll the values of overdraft protection (such as not getting denied at the cash register when going to make a purchase), but fail to explain all the costs.

[Credit Cards: Research and compare credit cards at Credit.com]

“They may have been misled by marketing materials that suggested opting in to overdraft protection was necessary if they wanted to continue to use their debit card,” Cordray said.

Right now, the bureau is simply asking banks for information on their overdraft fee programs. But it may eventually use its findings to require a new penalty fee box, similar to the Schumer Box on credit card promotions, that would disclose how much money consumers pay in overdraft fees each month. You can see the bureau’s prototype for such a box by clicking here.

Image: 401K, via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team