Pew Report finds overdraft protection still dangerous
These fees are billed as a service to consumers, but they do great harm to the very people they claim to be helping.
Americans pay nearly $ 14 billion in overdraft fees each year, according to the Center for Responsible Lending. It’s no surprise, then, that these fees – which are often sold to consumers as a safeguard against failed transactions when there is not enough money in an account – contributes greatly to financial insecurity, by especially for low-income Americans, think many consumer advocates. And despite efforts regulators and industry watchdogs in recent years to reduce recurring charges, questionable overdrafts continue to flourish in many banks.
On Tuesday, the Pew Charitable Trust released new search on overdraft practices in banks across the country. Looking at the top 50 banks (by national deposits), the study found that most charged a fee of at least $ 35 each time a bank customer drew on an account that did not have enough money. ‘silver. And most of these banks allow multiple overdraft fees per day. About 40% of these large banks have also explicitly allowed what is known as ‘reorganization of transactions’, where banks prioritize withdrawals from largest to smallest, which increases the risk of an account holder reaching a limit. negative balance within 24 hours and suffers multiple overdrafts. cool as they sink deeper into the red.
Here is an example of the CFPB complaints database on the impact of replenishment on overdraft fees:
I was aware of the low balance, but all transactions were processed. I was going to deposit money the next day. Overnight BOA reorganized all transactions by charging me 5 overdrafts … before they waived fees. Now they insult me because I don’t keep the right balance. I do, but they keep rearranging transactions, so I keep falling into a hole and they take part of my paycheck that comes from direct deposit… It’s not the first time. XXXX dollar fee for XXXX transaction caused by reorganization of transactions? I will no longer allow them to take money out of my paycheck and child support. I work too hard. I have been with BOA for 26 years. They are stealing money from customers now. I want and need my five overdraft fees waived. It was until XX / XX / XXXX and after, so I will deposit money and close my account. Thank you.
(The CFPB crosses out specific amounts and days to protect sensitive information.)
The high fees associated with basic checking account services are often seen as a problem with very large financial institutions, which many people see as impersonal and ruthless. But according to Pew’s research, many smaller banks have the same overdraft shortcomings. The study looked at 45 small banks (defined as those with between 360 million and 1 billion deposits and fewer than 30 branches) and found that 42 of them offer standard overdraft protection plans, which include the ability to overdraft at an ATM or during a debit purchase, while all 45s allow some form of overdraft on one’s account. (Pew is clear that these 45 banks may not be representative of all small banks.) Only two of these banks make it clear that they allow reorganization of transactions, while the other 43 do not explain how they order transactions. in case of overdraft. . And all banks allow an overdraft fee of at least $ 90 (which can result from an active overdraft or a passive overdraft via scheduled payments) per day.
Perhaps the most disturbing finding of the study – and many others – is that despite the rules that prevent banks from automatically enrolling overdrawn account holders, most consumers don’t really know what they are doing. they have the service or not. If they do, many don’t know what types of transactions trigger the fees, how high the fees are, or how many fees they may incur. Most customers say they would rather have a transaction declined rather than going overdraft on their account and being charged a fee later.
“The prevalence of paid overdraft programs in large and small banks underscores the need for new policies to prevent ‘courtesy’ overdraft programs from being expensive and unsustainable short-term forms of credit for many financially vulnerable consumers. Said Nick Bourke, director of the Pew consumer credit project. “Regulators should set reasonable limits on overdraft fees and help banks create new small credit options for those who want them.”
Pew researchers say some simple fixes, such as clearer overdraft disclosures, and better options for opting out of this protection could help consumers. Lowering daily overdraft authorization ceilings could avoid accumulating large debts, while preventing the practice of reorganizing transactions – or at least being transparent about it – could help clients with low balances. to avoid overdrafts in the first place.
But it can be difficult to convince the financial industry to implement these fixes, after all – a CFPB study found that the overdraft is a important part of total commission income in many banks. And some consumers may fear that the inability to overdraft an account means that critical bills or expenses could be refused or delayed due to insufficient funds, leaving them at a dead end. One option that banks can buy into is to replace current forms of overdraft with a short-term, low-amount overdraft option. This would allow consumers to opt for a program where they would be granted a loan for any overdrawn portion of their account. Banks would receive interest, but for consumers, payments would be less aggressive and immediate than current overdraft fees. These loan programs would also be subject to best credit and lending practices, such as repayment capacity rules.
Overdraft coverage can seem like a convenient way to avoid embarrassment when sending a check at best, and at worst, an inconvenient and expensive account feature. But for low-income families, overdraft fees can seriously derail a monthly budget and push an account holder into the sidelines of the financial world. Many of the millions of Americans who survive without a bank account have had them before, but have shut them down – or have them shut down unintentionally – because of difficulty keeping up with costs, as discovered. And the lack of bank accounts can push people to turn to dangerous and expensive products, such as payday loans, auto title loans, or fee-charged prepaid cards. Correcting overdrafts can therefore be a simple way to help more Americans reconnect to safer financial systems.