3 Ways the CFPB Can Improve Overdraft Practices

NEW YORK (MainStreet) — The Consumer Financial Protection Bureau announced Wednesday that it will be looking into overdraft practices currently being used by the nation’s financial institutions.

The inquiry will specifically address reordering practices that result in more charges, misleading marketing information and the impact overdraft fees have on low-income and young consumers.

CFPB spokeswoman Jennifer Howard said the bureau expects to have a report and an action plan based on the inquiry’s results available by the end of the year. No details were offered yet as to what the action may entail, but after culling recommendations made by consumer advocates present at a CFPB roundtable held in New York on Wednesday, here’s what MainStreet would like to see the plan entail.

Create a Universal Disclosure Form

Part of the problem with banks’ current overdraft procedures is that consumers don’t always understand what it is they are signing themselves up for. It doesn’t help that financial institutions commonly refer to fronting funds when a consumer charges more than is in their checking account as “overdraft protection,” a term with a decidedly positive connotation that the bank is looking out for you. It also doesn’t help that they don’t always understand their alternatives.  

“Consumers need to understand they have three overdraft options,” said Susan Weinstock, project director for Pew’s Safe Checking in the Electronic Age Project, at the CFPB’s roundtable. They can forgo opting in to overdraft protection. They can chose to enroll in an overdraft transfer plan, which pulls money from an alternate account held by the consumer in lieu of declining the payment, or they can opt in to overdraft protection and chose to incur the penalties associated with overdrawing their checking account.

A universal form, similar to the ones the CFPB has already proposed for credit card agreements and mortgage disclosure forms, would limit confusion and also prohibit banks from using marketing materials that lead consumers to believe they need a service that may not be right for them.

Require That Transactions Be Processed As They Occur


Most consumer advocate groups at the CFPB’s roundtable, including the Consumers Union and Pew Charitable Trusts, asked the CFPB to require banks to process transactions as they occur. The recommendation stems from the fact that many institutions are in the habit of processing checks, debit card transactions and bill payments from the highest dollar amount to the lowest. But the practice, which led to a $203 million judgment against Wells Fargo (Stock Quote: WFM) in August 2010, often results in overdraft penalties that would have not been incurred otherwise. (You can actually learn how this works in this MainStreet article.)

Financial institutions have said the reordering helps to ensure that large bills, like a mortgage payment, are covered, but we agree that the responsibility should fall to the consumer to make sure their checkbooks are balanced, while knowing their transactions are being processed in the ways they intended them to be.

Require Fees Be Proportionate to the Transactions They Are Covering

It would be easy to say overdraft fees at the point of sale, at least, should be eliminated entirely, but the truth is that would likely hurt consumers as banks look for alternative ways to recoup the lost revenue. However, we are apt to agree with Pamela Banks, senior policy counsel for Consumers Union, who suggested that overdraft fees should be proportionate to the transaction they are covering, though percentages were discussed at the roundtable.

As it stands, most financial institutions charge $30 to $35 anytime you spend more than you have in your checking account, whether you write a check for your rent or use your debit card to pay for a $2 cup of coffee.

—Jeanine Skowronski is staff reporter for MainStreet. You can reach her by email at Skowronski.jeanine@thestreet.com, or follow her on Twitter at @JeanineSko.

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