Study Finds Overdraft Protection Still Confuses Consumers


NEW YORK (MainStreet) — Most Americans forgo overdraft protection, but those who do sign up have misguided beliefs about how the program really works, says the Center for Responsible Lending.

As we’ve reported, overdraft protection charges consumers whenever they spend more than the balance of their linked checking account. The feature is thought to be attractive to consumers who want to be spared the embarrassment of having their card declined, but overdraft fees tend to be very high, and on average, the CRL says, banks charge around $34 for each overdraft.  

Modifications made in 2010 to Regulation E, which regulates electronic fund transfers, mandate that banks make consumers opt in for overdraft protection instead of enrolling them by default. The change, CRL says, has led a majority of consumers to forgo the protection, and only 33% of accountholders actually opted in for the coverage.

However, the CRL found that 60% of those who did opt in for overdraft protection said they did so to avoid a fee if their debit card was declined, despite the fact that this costs consumers nothing. And 64% of consumers who opted in also did so to avoid bounced check fees, which overdraft protection does not cover.

The CRL attributes consumers’ confusion to the aggressive and misleading campaigns made by banks in an effort to retain some of the estimated $10 billion in profits they were making from overdraft protection prior to last year’s changes to Regulation E.  

Almost half of respondents said they opted in for coverage simply to stop their bank from bombarding them with messages by mail, phone, email and in person.

And an analysis of marketing materials from a sample of banks on file with CRL confirmed this, proving that banks often created the false impression that emergency action was needed on the account by using misleading wording.

Here are a few examples:

•    The Bounce Overdraft Program was designed to protect you from the cost and embarrassment of having your transactions denied.
•    Save money by avoiding retailers’ returned check fees.
•    Please keep in mind that this option [not opting in] may prevent you from completing everyday transactions including any store and gas station purchase, emergency home and car repair.

CRL said its findings suggest that even more strict regulations on overdraft protection need to be passed.

“Given the banks’ ability to manipulate current disclosure requirements, the survey suggests it is likely that disclosure requirements are insufficient to overcome intense industry marketing, misleading information, and the inherent complexity of overdraft coverage,” the group writes. “CRL recommends strong action by our nation’s bank regulators to end overdraft abuse.”

For a full explanation of CRL’s study, visit its website.

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