Federal regulators eye banks on overdraft programs
In December, Shaquita Thomas ordered the most expensive pizza she has ever bought.
She paid with her debit card, believing she had enough money in her checking account to cover the $15 tab.
She was wrong, but didn’t know about it until weeks later when she received her statement from Dollar Bank. She had overdrawn her account by $5, which brought a $20 fee.
The cost for one extra-large pepperoni pizza: $35.
“I don’t even think they should allow overdraft fees anymore,” Thomas said. “I think there should be a block on it, you being able to overdraft.”
Once considered a service to protect bank customers from incurring hefty charges from bounced checks, overdraft protection programs are getting increased scrutiny from regulators amid concerns that they are disproportionately affecting low-income customers and being used as high-cost credit.
Industry watchdogs have called for tighter regulation of overdraft, which they say remains little understood despite attempts to increase transparency.
The Consumer Financial Protection Bureau is drafting rules that could limit banks’ ability to collect overdraft fees. It is unclear what those rules will entail or when they will be finalized, but industry analysts expect the CFPB will target bank marketing practices, limit how often the fees can be applied and change how banks process transactions to maximize the amount of overdraft they can collect.
“When the CFPB comes out with this rulemaking, it could have a major impact on some of these banks,” said Compass Point Research & Trading analyst Kevin Barker.
Overdraft fees have been waning since regulations that went into effect five years ago, declining to $15 billion last year from $35 billion in 2009, according to the Consumer Bankers Association. Still, the fees remain an important driver of bank profits as financial institutions struggle to make money on lending amid low interest rates.
In the first quarter of this year, more than 600 banks collected $2.5 billion in overdraft fees, according to newly released data from the Federal Deposit Insurance Corp.
Banks’ reliance on overdraft varies widely and depends on an institution’s size, customer demographics and business mix, Barker said.
PNC Bank collected the most of any institution in the Pittsburgh region with $76.8 million in the first quarter, although overdraft was a relatively small part of the bank’s non-interest income — revenue from fees and other charges — at less than 6 percent. Citizens Bank collected less in overdraft — $43 million — but it was a bigger share of its non-interest revenue at 12.9 percent. Dollar Bank collected $1.2 million in overdraft charges, or 16.8 percent of non-interest income.
Banks contacted for this story, including PNC, Dollar and Citizens, declined to grant interview requests. But the Consumer Bankers Association said heightened regulations are certain to force overdraft usage down.
“I think there’s going to be more harm done to the consumer than banks,” said Richard Hunt, the trade group’s president and CEO. “There are so many people who use this product to help them make ends meet.”
Regulators tried to give consumers more transparency in 2010 when they implemented the so-called “opt-in” rule, which required account holders to consent to being charged fees when using an ATM or swiping their debit card in a checkout line and not having enough money in their account to cover transaction.
But a report last year by the Pew Charitable Trusts found that consumers are still confused, with more than half of all overdrafters unable to recall giving their consent.
Thomas said she has been charged overdraft fees several times in the past few years, but she doesn’t remember opting-in.
“I’ve never done it on purpose,” Thomas said. “If they give (the funds) to me, I think it’s available to me.”
There are concerns in how bank customers are using overdraft protection, even when they are aware of it. Overdraft is being used as an extension of credit by low-income people who are essentially taking out expensive loans they cannot afford, said Rebecca Borne, senior policy counsel for the Center for Responsible Lending, a consumer advocacy group.
Most overdraft fees are paid by a small proportion of bank customers, with 8 percent of customers incurring three-quarters of all fees, according to the CFPB. Those consumers are habitual users who incur fees that are typically half the cost of the amount they are withdrawing.
“Where it’s clearly not occasional, where it’s clearly stripping a lot of money from people who don’t have a lot of money to spare is where it is most problematic,” Borne said.
Most bank customers are not chronic users, Hunt said. He does not believe low-income customers are disproportionately affected. Banks are taking steps to protect customers from incurring the fees by linking checking accounts to savings, sending email and text message alerts to customers when their accounts get low, and waiving fees the first-time an account is overdrawn.
Thomas does not want the option to overdraw. She closed her account with Dollar Bank when she discovered the overdraft charge and is shopping around for a new bank. Her next account won’t allow her to spend money she doesn’t have.
“I think it shouldn’t be allowed,” she said. “If you don’t have it available, I don’t think you should be allowed to overdraft.”
Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or firstname.lastname@example.org.