NEW YORK (MainStreet) — The Consumer Financial Protection Bureau launched an inquiry into bank overdraft practices on Wednesday, asking a number of financial institutions for data on their current policies.
“Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it,” CFPB Director Richard Cordray said in a written statement. “We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees.”
As MainStreet has previously reported, overdraft protection charges consumers whenever they spend more than the balance of their linked checking account, leading the financial institution to advance funds on the consumer’s behalf. The feature is attractive to some consumers who want to be spared the embarrassment of having their card declined, but they’ve been long under scrutiny as the fees associated with the service are often very high.
According to the CFPB, the average overdraft fee ranged from $30-$35 in 2011 and has increased by 17% during the past five years.
Modifications made in 2010 to Regulation E, a federal law that regulates electronic fund transfers, mandates that banks make consumers opt in for overdraft protection instead of enrolling them by default. But they don’t limit how much banks can charge in overdraft fees and they don’t restrict the number of times banks can continue fining customers for a single violation.
Regulation E does not prohibit banks from processing checks, debit card transactions and bill payments from the highest dollar amount to the lowest. This 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 had the transactions been processed in the order they were actually made.
According to a study from industry analyst Moebs Services, banks netted $29.5 billion in overdraft fees during 2011, despite the regulation change.