Following a study on overdraft fees The Pew Charitable Trusts are encouraging the Consumer Financial Protection Bureau (CFPB) to consider limits for customers.
About 84% of the largest banks allow consumers to overdraw their accounts when they lack sufficient funds to cover a transaction.
The CFPB found that the median transaction amount of purchases that generated such a fee was just $50 and, for debit card usage, merely $24. A small proportion (18%) of account holders pay the vast majority (91%) of all overdraft fees triggered by debit cards, checks, and automated clearinghouse (ACH) electronic transactions. These customers paid more than three overdraft fees a year.
Thirty-one percent of those without a bank account reported high or unpredictable account fees as one reason for not having an account; 13% said it was the primary reason. Overdraft fees are often unexpected and unpredictable: Most consumers do not learn of an overdraft for two or more days. More than two-thirds of overdrafters say they would prefer to have a transaction declined rather than incur the $35 fee.
In 2015, The Pew Charitable Trusts commissioned a survey of “heavy overdrafters,” those who incur over $100 in overdraft and nonsufficient funds fees—or roughly three $35 fees—each year.For these consumers, overdraft service is not just an occasional courtesy but an extremely expensive form of credit that is also high risk because it lacks the consumer protections that accompany other credit products.
The most heavy overdrafters are millennials or Generation Xers; more than half are renters rather than homeowners; they generally have below-average incomes relative to the U.S. population; and overdraft fees consumed nearly a full week’s worth of their household incomes on average during the past year.
Pew urges the CFPB to write new rules to ensure that overdraft programs are safe and designed only for infrequent and accidental occurrences. The bureau could achieve this outcome in a number of ways including, by limiting the size of overdraft fees, the frequency with which they can be incurred, or the overall cost.
Adoption of the following options, individually or in combination, would help to limit the negative effect of these fees:
• Make overdraft penalty fees reasonable and proportional either to the financial institution’s costs in providing the overdraft loan or to the overdraft amount.
• Allow financial institutions to charge customers a maximum of six small overdraft fees in any 12-month period, and limit such fees to one per negative-balance episode (i.e., an overdraft that incurs one or more fees). When customers incur the maximum number of fees, any additional credit extended to them should be required to be covered under the rules that govern other types of credit.
• Prohibit banks from maximizing overdraft fees when posting deposits and withdrawals, such as by reordering transactions by dollar amount from highest to lowest, causing the account to be overdrawn more quickly and incur more fees.
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