New Consumer Agency Eyes Bank Overdraft Fees

Feb 21, 2012
Originally published on February 22, 2012 7:49 am

The Consumer Financial Protection Bureau says it's looking to overhaul rules on overdraft fees. The new agency will be seeking data from banks about how they handle overdrawn accounts, and how they assess fees. The agency plans to use this information to help consumers limit their exposure to these costly charges.

The CFPB estimates that last year, banks made between $15 billion and $22 billion from overdraft fees.

Richard Cordray, the director of the CFPB, says the overdraft cash cow is being fed by a relatively small handful of checking account users.

"The numbers are pretty stark," he says. "Nine percent of the people incur about 84 percent of the overdraft fees."

And, he says, the fees tend to affect a narrow demographic. "They have a massively disproportionate impact on younger consumers, those who are newer to the banking system," Cordray says, "and consumers who are low-income who often are least able to afford the kind of bounced-check fees we're talking about."

A $4 Billion Bite

Overdraft fees have already come under attack. Last year a new Federal Reserve rule took effect requiring banks to get customers to sign up for programs allowing them to overdraft their accounts on debit card and ATM transactions. Without customer approval, a transaction might be denied, but the customer wouldn't have to pay the fee, which typically runs $35 per overdraft.

By some estimates, that rule took a $4 billion bite out of the banking industry's overdraft revenues.

"Overdrafts are down about 20 percent," says Nancy Bush, banking analyst and contributing editor to SNL Financial, a financial news publication. "So yeah, it's been significant."

She says smaller community banks don't have the diversity of revenue streams to make up the loss. "Companies like Bank of America have had other revenue streams to get around it," Bush says. "That's not true of ... ABC Community Bank."

Bush says with increasing scrutiny of fees, banks are likely to continue what they have been doing: increase other fees.

'Piling On Fees'

"If you talk to any bank customer, they can cite you every fee that has gone up for them. And they are considerable," Bush says. "The banks have certainly not been able to recover that overdraft change. But they are piling on fees or adding fees where it's legal and where they're applicable."

But banks are finding even that avenue is one that's fraught with risk. Last year, Bank of America scrapped plans to charge customers for using their debit cards, bowing to customer outrage. Other banks, including SunTrust and Wells Fargo, also abandoned similar plans.

The CFPB's Cordray, who is scheduled to announce the agency's initiative Wednesday in New York, says this is one of many moves by the agency to research and design measures to protect consumers. And he says he expects the banking industry will support him.

"Here's the reaction I've had from the industry thus far," Cordray says. "They understand that we have a job to do. We are required by Congress to protect consumers in the financial marketplace. Many of the players in the industry seem to recognize what I preach constantly, which is that protecting consumers is good for responsible financial providers in the marketplace."

While many banks support that principle, it's not clear how much enthusiasm they will have if doing so means giving up more of their fee income.

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Transcript

STEVE INSKEEP, HOST:

In this country, the Consumer Financial Protection Bureau announces, today, that it's looking to overhaul rules on overdraft fees. The new agency will be seeking information from banks about how they handle overdrawn accounts, and how they assess charges that you may pay if you're a bank customer. The agency plans to use this information to help consumers limit their exposure.

NPR's Yuki Noguchi has more.

YUKI NOGUCHI, BYLINE: The Consumer Financial Protection Bureau estimates that last year, banks made between 15 and $22 billion from overdraft fees.

Richard Cordray is the director of the CFPB. He says the overdraft cash cow is being fed by a relatively small handful of checking account users.

RICHARD CORDRAY: The numbers are pretty stark. Nine percent of the people incur about 84 percent of the overdraft fees.

NOGUCHI: And, he says, the fees tend to affect a narrow demographic.

CORDRAY: They have a massively disproportionate impact on younger consumers, those who are newer to the banking system; and consumers who are low income, who often are least able to afford the kind of bounced-check fees we're talking about.

NOGUCHI: Overdraft fees have already come under attack. Last year a new Federal Reserve rule took effect requiring banks to get customers to sign up for programs allowing them to overdraft their accounts on debit card and ATM transactions.

Without customer approval, a transaction might be denied, but the customer wouldn't have to pay the fee, which typically runs $35 per overdraft. By some estimates, that rule took a $4 billion bite out of the banking industry's overdraft revenues.

NANCY BUSH: Overdrafts are down about 20 percent. So yeah, it's been significant.

NOGUCHI: Nancy Bush is a banking analyst and contributing editor to SNL Financial, a financial news publication. She says smaller community banks don't have the diversity of revenue streams to make up the loss.

BUSH: Companies like Bank of America, you know, have had other revenue streams to get around it. That's not true of, you know, ABC Community Bank.

NOGUCHI: Bush says with increasing scrutiny of fees, banks are likely to continue what they have been doing: Increasing other fees.

BUSH: If you talk to any bank customer, they can cite you, you know, every fee that has gone up for them. And they are considerable. The banks have certainly not been able to recover that overdraft change. But, you know, they are piling on fees or adding fees, you know, where it's legal and where they're applicable.

NOGUCHI: But banks are finding even that avenue is one that's fraught with risk. Last year, Bank of America scrapped plans to charge customers for using their debit cards, bowing to customer outrage.

Other banks including SunTrust and Wells Fargo also abandoned similar plans. The CFPB's Cordray, who will announce the agency's initiative today in New York, says this is one of many moves by the agency to research and design measures to protect consumers. And, he says, he expects the industry will support him.

CORDRAY: Here's the reaction I've had from industry thus far. They understand that we have a job to do. We are required by Congress to protect consumers in the financial marketplace. Many of the players in the industry seem to recognize what I preach constantly, which is that protecting consumers is good for responsible financial providers in the marketplace.

NOGUCHI: While many banks support that principle, it's not clear how much enthusiasm they will have if doing so means giving up more of their fee income.

Yuki Noguchi, NPR News, Washington.

INSKEEP: Here's another White House initiative that could have a big effect on business and politics. Later today, the Obama administration is expected to outline a plan to streamline the corporate tax code. The president seeks to remove dozens of loopholes and subsidies and then lower the overall tax rate from 35 to 28 percent.

The New York Times reports the president also wants to lower the rates for manufacturers down to 25 percent. Business groups have complained that the current tax rates are among the highest in the world - rates that put them at a competitive disadvantage, they say, even though many pay significantly less, already, due to tax breaks.

(SOUNDBITE OF MUSIC)

INSKEEP: It's MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.