CFPB Report Spotlights Unfair Overdraft Fees

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By Consumers Union on Friday, June 14th, 2013

Do bank overdraft protection programs really protect consumers? Consumers Union doesn’t think so. We’ve advised consumers to not opt-in to bank programs that charge a fee when consumers overdraft their accounts when using their debit cards.

And now a new report from the Consumer Financial Protection Bureau (CFPB) shows that consumers who sign up for overdraft protection are more likely to be charged high fees and to find their checking accounts involuntarily closed.

While only a minority of customers elect to participate in the overdraft programs, based on the CFPB’s research on customers’ behavior in 2011, those customers can expect to pay an average of $168 more in overdraft or non-sufficient funds fees per year than those who do not opt-in. We’re concerned that these programs are levying huge fees on consumers for a service of questionable value, and we hope that the CFPB takes the next step and tightens the rules on overdraft protection programs.

High overdraft charges can be unfair for two main reasons: first, because the fees can dwarf the cost of the overdrafted purchase, these fees are essentially a loan with an enormous interest rate. Second, because banks have differing and complicated rules on how and when they will debit a charge from an account, it is often difficult for consumers to tell whether they’re racking up fees in overdraft charges. Many consumers don’t understand that their ATM withdrawals and point-of-sale debit card purchases may not be debited in chronological order, which could cost them hundreds of dollars in fees.

Cheaper alternatives to overdraft programs may include arranging to have funds taken from your savings account to cover charges, or connecting your account to a line of credit. Check out Consumer Reports’ other tips on avoiding overdraft fees.

Consumers Union believes that banks should offer additional safety mechanisms to consumers who do opt-in to overdraft protection. These include clearly disclosing the fees to consumers before they participate in the overdraft programs, moderating overdraft fees, and ordering ATM withdrawals and debit purchases in a fair, consistent manner. That’s why we need a strong CFPB, to make sure that these reforms happen.

What’s your take on overdraft protection programs? Sound off in the comments.

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