CFPB Scrutinizing Bank Overdraft Fees

While the mortgage settlement sellout has been a singularly depressing process, once in a while there are encouraging bits of news on the bank regulation front.

An open question has been whether the Consumer Financial Protection Bureau would live up to its promise. It appeared, like so many Obama Administration efforts, that the formation of the agency was a cynical move, to create the appearance of Doing Something without roughing up the banks in a serious way (of course, you’d never know that give the way they carry on at any minor trimming of what they see as their imperial right to profits).

One of the Administration’s cagiest-looking moves was enlisting Elizabeth Warren to set up the agency. This was clearly an intention to neutralize her as a critic while ultimately deep sixing her. It isn’t hard to imagine that the powers that be hoped she’d perform poorly at the task (building an organization is vastly more daunting than running one) so they could deny her the role of first CFPB chief with clean-looking hands. When she did an undeniably stellar job and refused to take the hint that she should take herself out of the running and pursue the shiny consolation prize of a Senate seat, she showed that the Administration was no where near as committed to having a tough regulator (which is what would have resulted had she become its permanent head) than it pretended to be.

But Warren may have given the Administration more than it bargained for. One of the things she said in her numerous hazing sessions before Congress was that the role of the director was not as important as it seemed, that she had set up the agency with a strong culture and staff in each of its divisions, and she had also gone to some lengths to put mechanisms in place to foster communication and coordination across divisions. If that were true, that would mean it would take some time and effort to erode the tough enforcement mindset that she had endeavored to put in place.

It’s too early to reach a definitive judgment, but this Bloomberg story on bank overdraft fees is an encouraging sign that the CFPB may well prove to be a competent, forceful regulator. Admittedly, at this stage the CFPB is only reviewing the practices of nine major banks in the checking account overdraft arena, but they are looking well beyond the fee structures and probing whether the banks engaged in deceptive practices. New regulations required banks to require banks to have consumers opt in to overdraft protection programs and to stop the abusive practice of ordering debits from accounts in a way designed to maximize income. Note that for any customer with a credit line, an overdraft service is superfluous and more costly, so the banks are motivated to steer customers to this service.

From Bloomberg:

The inquiry focuses on how financial institutions persuade customers to enroll in what they call overdraft protection programs. Examiners are looking at online and mailed marketing material as well as scripts used by the banks’ customer-service representatives to determine whether they could be confusing to consumers, said the people.

Bureau examiners have conveyed “a tone of skepticism that this is really a good product for borrowers,” said Jo Ann Barefoot of Washington-based Treliant Risk Advisors, who counsels banks on dealing with federal supervisors.

While tighter rules could help U.S. consumers, they also could threaten a major revenue stream for banks already struggling to replace income pinched by new regulations including a cap on debit-card “swipe” fees. Last year bank customers paid $31.6 billion in overdraft fees, down from $33.1 billion in 2010, according to Moebs Services, a Lake Bluff, Illinois-based research firm. About 15 million Americans overdraw their accounts 10 or more times a year, the firm said.

The bureau’s examiners also are reviewing the banks’ justifications for the size of overdraft fees, two of the people said. Large banks charge an average $35 per overdraft, compared with $25 at community banks and credit unions, Moebs reports.

There is also a remarkable lack of information on the customer uptake rate:

Moebs estimates that 77 percent of bank customers have opted in, while the Consumer Bankers Association concluded in an October study that the rate was 17 percent. The Center for Responsible Lending, a Durham, North Carolina-based advocacy group, estimated the opt-in rate at about 33 percent.

Wonder why the Consumer Bankers Association (the industry group) came up with what looks like an awfully low estimate? A high opt in rate for such a crappy product would look to be prima facie evidence of deceptive selling practices.

The CFPB is also taking a hard look at bank servicing and that will prove to be an even more important test of its seriousness. Let’s keep our fingers crossed that the Obama Administration may have, despite its intent otherwise, put an effective regulator in place.

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  1. starburns

    i’m skeptical. at the same time the cfpb seems to be pushing ahead on overdraft fees, it has proposed to amend reg z to scale back the protections limiting first year account fees to twenty-five percent of the credit limit, excluding up front fees devised by banks to get around the requirement.

  2. Jim Haygood

    High fees per overdraft have turned what was a service into a costly disservice.

    Years ago, my overdraft line at a community bank was charged interest solely on the outstanding balance (no per transaction fees). Even better, each deposit automatically was applied first to pay down any balance on the overdraft line.

    Now, since TBTF Effwad Bank took over, steep per transaction fees apply. The overdraft balance stays outstanding regardless of subsequent deposits, such that you can simultaneously have a cash balance and an overdraft debt IN THE SAME ACCOUNT. Failure to net these offsetting credit and debit balances is tantamount to fraud.

    The mirror image of ‘thin air money’ is ‘thin air debt,’ in which one is charged interest on a fictitious, imputed debt despite having a net positive cash balance with the TBTF usurer. Don’t hold your breath waiting for a bankster-whipped government to intervene on behalf on their victims.

  3. Consumer Gouge Prevention

    I’m very skeptical, Banks have done these fee games for years with decades of unhappy, pissed consumers who give up or don’t care or sometimes are unaware the small looting occurred. Many Banks still charge ridiculous fees in advance for “protecting you from overdraft”. They still charge 25 or more when the event occurs. Banks have all kinds of system games to try an extract an overdraft fee, less likely (therefore less profitable) is a consumer actually intending to overdraft. Known, understood, documented for years, complained about forever – here comes a new Gov’mint agency …..Zzzzzzzz

  4. chitown2020

    Could they be running out of places to steal from? This is probably why Bernankes threatening more QE. Time for some real audits of the Big Banks balance sheets. They are all fictional. Then there needs to be an investigation into the shadow banks where all of their massive debt fraud is hidden. There is no legal or monetary correction for $1.2 quadrillion dollars in fraud committee by these banks. Maybe they should all just press the delete button and stop their charade and face it, thanks to some really honest people, they got caught, red handed, trying to steal everything from us by fraud and all of their lies caught up with them.

    1. chitown2020

      Most of these returned check fees are completely bogus. It is the banks call. I noticed this goes in cycles. After so many months they hit you with overdrafts fees that are highly questionable. Esp. Small business accounts. The love to rack up the fees. There excuse is the check came through after midnite and you did not have the funds available. These transactions did not occur during regular business hours so how do they get away with this crap? Who do you call to complain, the Government…? LOL….!

  5. F. Beard

    Never interrupt your enemy when he is making a mistake. Napoleon Bonaparte

    Go banks, go!

    The question is though will banking kill us before it kills itself?

  6. Anon

    You missed a key paragraph in the article:

    “Pew conducted two focus groups on overdrafts during April 2011 and found that people frequently misconstrued the notion of opting out, Weinstock said.
    “We did focus groups where people said, ‘I opted in so I won’t have to pay the overdraft fee,’” Weinstock said.”

    1. Yves Smith Post author

      No, I don’t see that as critical.

      First, no one even knows how many people opted in, so the data sucks.

      Second, the issue is whether the marketing was deceptive. The confusion and that statement indicates it was, and the post already flagged that that is the key issue under scrutiny.

  7. Cattle Drive

    Will the CFPB implement a plan to place Citi, BOA and Wells into receivership? Followed by criminal investigations at the FBI/DOJ? In plain sight, we have a low level finger wagging agency, threatened to have it’s funding gored at any moment, when we need marshalls, justice, firepower and dissent.

    1. Yves Smith Post author

      First, the CFPB has secure funding. The noise in Congress is noise. Their budget is not subject to Congressional approval. And Obama would probably feel compelled to veto a bill subjecting their funding to Congressional appropriations.

      Second, the CFPB could throw a lot of sand in the gears if it proves to be serious. Consumer regulation covers the areas in which the banks make a lot of money. Cleaning up deceptive consumer practices would make a real difference.

      1. Cattle Drive

        Holy shit, where do we start? At the car lot or in Vegas?

        “The homeless shelters are bulging, the food kitchens are maxed out, and 46 million people are on food stamps.”

        Yes, I agree, but after what is happening/happened it seems so passe to scold Banksters for unclean consumer “deceptions”. Seriously, that doesn’t give the enemy nearly enough credit.

      2. Snap Peas

        Doesn’t clamping down on Banks abilkity to kite, knickle and dime customers impact some investors? (not the good kind, the bad kind i.e. those ‘bad’ investors)

      1. Systems of Fortune

        Should be just as real as any part of a .com blog you happen to be allowed to view, post and read from at any given time which may not be the same as others see or read or post to.

        1. chitown2020

          Systems of Fortune: I agree. Whoever created that site did a great job turning the tables on them. Like the Onion turns the table on the media. I love it!

          1. Wayward Sabado

            The Onion, of course, is underwritten by another massive corporate outlet, WaPo. Which further underlines the point: You just cain’t’ completely trust anything read online to be free of bias, agenda, propaganda, abridgement, red herrings, falsehoods, generalizations. straw men or complete lies. Absurdity can be funny but the truth is even more hilarious.
            I love the Post/Onion’s work during the healthcare ripoff, just hilarious. Payola!

        2. chitown2020

          Wayward Sabado: Right on! 5 corps control everything. It is a ginormous megaopoly that we have to overthrow. It is up to the patriots to infiltrate and expose it and them.

      1. diptherio

        The site is, apparently, one of the latest Yes Men gags/political theater. I believe there was a link a couple of days ago. Virus warnings are most likely the result of attempted censorship.

  8. YankeeFrank

    One tactic I simply adored before I dropped TD Bank was their automatic bill payment algo. If I had a scheduled payment on a given date, but not enough money to pay it in my account, TD would decide whether they wanted to pay it or not. Mind you, I did NOT have overdraft protection on the account because I hated the way they play games with it. So anyhow, TD would often pay it anyway and charge me $35, which was probably illegal. However, even if they didn’t pay it (which decision appeared random to me), they would charge me $35 as some kind of bounced check fee. They would do this every few days, attempting to make the payment and charging me $35 each time. It was completely ridiculous. Instead of checking my account for the balance prior to the “attempt” to make payment, they would make the “attempt” (which really just amounted to checking my balance anyway) and then bill me $35. It was an incredible racket and left me gobsmacked as I had insisted on no overdraft protection, and could not understand how a scheduled payment that could not be paid could result in a $35 fee. I write code for a living, and know that a simple algorithm that decides whether or not to pay a bill based on my balance doesn’t cost the bank anything to run (perhaps a penny charge could be justified). There is absolutely no justification for the charge aside from simple theft. What a bunch of scumbags. $30+ billion per year in overdraft fees!!

    The fact that all of this is done electronically now and paper checks are not involved in many of these transactions completely obviates the need for “bounced check” charges of any kind, let alone $35 per. I pay bills with money orders from the USPS now. I save a fortune, and make a pleasant trip to the PO twice a month or so.

  9. K Ackermann

    Productive companies build large factories using enormous capital outlays, train hierarchies of skilled management to run every aspect of the factory as efficiently as it can. They spend years branding, cultivating sales, and setting up distribution. They finally reach $30b in SALES.

    The banks create an asymetrical information advantage by deciding the order in which transactions will be processed, seeking to maximize the rent extraction from their “customers” and make $30b in PROFITS.

    And Bloomberg winces at the hit the banks might take if the CFPB finds against the banks.

    Every fee is $30 that could’ve been spent in the non-bank economy. Remember that part?

    Yeah, yeah… people are fools, but you know what? The banks are criminals empires. The most crime infested cesspool on earth is Wall St.

  10. Ms G

    It is strange that the announcement of CFPB planning to examine one single deceptive retail banking practice (among a sea of such practices) arrives a week after a separate story wherein CFPB has “backed off” examining an egregious practice involving newly opened credit cards where banks are stacking the accounts with huge fees before the account is even active.

    Is this agency cognitive dissonance? A difficult-to-discern pattern of “chosing battles”? A sign that the agency is capable only of devoting itself to “one practice at a time”? Whatever the answer, this doesn’t bode well for anyone hoping for a strong and comprehensive financial consumer fraud sheriff.

    See link below re Corday retreating from announcement to investigate the fee-stuffing of newly opened credit card accounts (affecting especially low-income debtors).

    1. YankeeFrank

      In other words, Cordray is buying the line that without a charge of $100 to open an account with a $300 limit, the banks won’t offer credit to subprime borrowers. What a load. If the banks were so worried about risk they would worry more about tacking large fees onto cards in the first place. The fact is, the $100 fee IS the honey for the banks. If the borrower defaults on the $300 the bank doesn’t really care. It collect way more than that in fees from borrowers who do pay them back the $300 (plus what, 100-200% interest?). Nice racket, if you have no conscience and enjoy the loansharking business. Banks should stop the charade and start charging vig.

      1. Ms G

        Yep. Deja vu all over again, as with the wildly successful experiment on the mortgage side of credit “innovations”. It’s the same justification for the industry of microlending in less-developed countries . . . maybe Grameen is contemplating expand its operations to First-World USA!

        1. Ms G

          “expand” = “an expansion”

          CFPB caving on the credit card issue doesn’t inspire confidence in its power, competence or willingness to take on consumer fraud in any meaningful way. Notwithstanding the election-year noise it is making about looking into the overdraft issue, which is just a continuation of the “old” overdraft issue in its next incarnation DESPITE and BECAUSE of the lame regulations supposedly enacted to deal with it.

  11. David

    Let take the example of that Billy the Kid bank, “Wells take your Cargo”.

    The wait 7 seven days before the mail an overdraft notice.
    Billy gave up his gun when he found out there was more money to be taken by being the bank!

    What a country, Corporations buy the right to milk the citizens and pay no expenses to run the country by giving to politicians.

  12. Ep3

    Yves, did they speak to anyone that wasn’t a bank shill?

    I wouldn’t look at whether Obama put someone in there as a tough regulator. He wouldnt do that. We need to look at whether these regulators are willing to put their necks on the line and actually bring these issues to light. The question from this article then is Obama allowing the agency to look tough by pretending to tackle issues. Or are these regulators “disobeying” their political agenda?

    1. Wayward Sabado

      Doesn’t matter. Obush put ‘Corduroy’ in as part of the faux-appeasment program of political entertainent. Liz Warren would have been fine since the Banksters love her too, but anaylsis implored the oligarchs to place her toe to toe for the highly prized stool that Brown is currently in.

  13. Walker

    The CFPB is still in complete disarray. They don’t have publicly available email addresses for anything but and a generalized The reception staff is not can not give out any internal email addresses, and has been instructed not to say why (do these email adresses even exist?). Their Research, Markets and Regulations department (one would think such a depatment would be at the center of the CFPB, right?) is non-existant except on paper, according to the people who answer the phones for the deapartment, and there is not even an asociate director fo the department. Truly depressing how little has been accomplished. However, they have managed to hire Holly Petraeus to lead their millitary office. I’m sure she got it has nothing to do with politically convenient nepotism.

  14. mac

    It seems to me that these overdraft protections are loans not unlike those from payday loans unless the cover dollars come from a saving account. If they are these small short term loans how do the fees compare?
    I have had checking accounts since 1960 or earlier and had one overdraft, so what kind of thing have we taught people?
    Is the problem the fees are the idea of not monitoring our accounts?

  15. diptherio

    The CFPB does have some good staffers on board. After meeting with a couple of national social justice organizers this afternoon, I found out that one of them is a woman I know from the non-profit world in my little town. She is very dedicated and hard-nosed, and I was happily surprised to hear that she was working at the agency. If people like Ren are the norm at the agency, even a waffler like Cordray may have a hard time keeping them from doing some real good. I haven’t given up all hope yet.

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