Last week, the Consumer Financial Protection Bureau issued a report studying the use of overdraft fees on checking accounts. The report, drawing data from roughly 2 million accounts at large banks, contained some startling information, and may indicate the CFPB’s intent to issue new rules governing overdraft fees. The report can be found here.
The data reveals that overdraft fees represent by far the largest expense associated with checking accounts, costing consumers more than ATM fees, maintenance charges and transfer fees combined. Younger consumers paid the most. 10.7 percent of consumers under the age of 25 paid at least 10 overdraft fees each year, according to the report. 34 percent of young consumers paid at least one per year. Occurrence of overdrafts declined steadily with age.
Not surprisingly, consumers who opted into an overdraft protection program experienced higher overdraft and NSF fees compared to accounts that are not opted-in. Overall, 14.3 percent of account holders in the study were opted in to overdraft protection. The average overdraft charge for all accounts was $34. The CFPB suggests that overdraft protection programs are fostering poor financial habits, particularity in young consumers. Though overdraft protection can be a convenience, it is a better financial strategy to simply allow an account to run down to zero. The report noted that the average amount that is overdrawn from an account to generate a fee is just $24.
“Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate,” the CFPB says, noting that the banking industry collected about $32 billion in overdraft fees during 2013.
Last week’s report comes on the heels of a new set of rules issued last November that declared overdraft protection on prepaid credit cards to be a form of a loan and therefore subject to CFPB regulation. Those rules, which are now in the comment phase, place new requirements on prepaid card issuers. Rather than simply offering overdraft protection, which amounts to extending credit, those lenders would be required to evaluate the borrowers’ ability to repay the loan. They would also be required to issue detailed monthly statements clearly indicating the amount borrowed and the interest rate. Finally, fees would be capped at 25 percent of the credit limit, and any late fee would have to be “reasonable and proportional.” Applying such rules to checking accounts would have a substantial impact on lenders.