Americans are encountering a wide variation of overdraft charges on debit card purchases and ATM withdrawals because of a patchwork of policies at the nation's biggest banks, the Consumer Financial Protection Bureau said in a report.
The bureau said that while some banks limit the number of times customers can overdraw on their accounts to twice a day, others allow as many as 12 overdrafts that can trigger hundreds of dollars in fees. Some banks waive penalties for purchases under $5 that overdraw an account, but others charge fees for every one, regardless of size.
"What is marketed as overdraft protection can, in some instances, put consumers at greater risk of harm," CFPB Director Richard Cordray said Monday on a call with reporters. "Consumers need to be able to control their costs and expenses, and they deserve clarity on those issues."
Cordray said the consumer bureau, which has the authority to write new overdraft rules, is not making a policy recommendation but will continue to examine the issue. The CFPB has supervisory and enforcement authority over banks with more than $10 billion in assets.
Banking industry groups cautioned the bureau against handing down any rules that could limit financial options for consumers.
"CFPB ought not adopt any policy that drives America's families to unregulated industries with riskier and costlier alternatives," said Richard Hunt, president and chief executive of the Consumer Bankers Association, an industry trade group. "Consumers have the right to choose the products and features which best provide for their family's daily financial needs."
The report comes three years after the Federal Reserve banned banks from allowing customers to automatically overdraft their checking accounts and charging them high fees in the process. As advocates noted at the time, the ban aimed to put an end to customers unwittingly incurring a $35 overdraft fee for a $3 latte.
As the economy sputtered, some banks raised a variety of fees charged to consumers. Overdraft revenue peaked at $37 billion in 2009, according to research firm Moebs Services. Lawmakers and advocacy groups bemoaned institutions raising fees and pinching consumers while receiving taxpayer bailouts.
The backlash set the stage for changes in the way banks handle overdrafts. Banks must now give consumers the option of signing up for the service or having their debit cards declined. But consumer groups say banks are doing a poor job of explaining the rules.
In some cases, consumers with overdraft protection are more vulnerable to high fees and having their accounts involuntarily closed, according to the report. Account holders with overdraft protection incurred $196 in overdraft fees on average in 2011 and had their accounts closed at a rate 2.5 times higher than those without the service.
The consumer bureau also found that annual overdraft charges ranged from an average of $147 at some banks to as much as $298 at others. The CFPB noted that overdraft and insufficient-funds charges account for 60 percent or more of the fee income on consumer checking accounts.
But Hunt, the bankers association chief executive, said overdraft is not exactly a windfall for banks. "The marketplace for checking accounts is extremely competitive, and banks make every effort to educate their customers about the options available to them," he said.
Overdraft revenue slipped 2.8 percent, to $31.1 billion, in the first three months of the year, after a steady climb in the fourth quarter of 2012, according to Moebs Services. Consumer groups say banks only pay cents on the dollar to cover an overdraft charge. But other researchers, such as those at Moebs, say megabanks might spend on average up to $27 because of overhead costs.
Economist Mike Moebs said better disclosure, not caps on fees, is the best way to ensure that banks are not taking advantage of consumers. "Why can't these overdraft disclosures be written at a junior-high level?" he said. "If they could, people could totally understand them and make educated choices."
Pew, which issued an overdraft study in May, is calling on the consumer bureau to curtail banks' ability to maximize overdraft fees. One way would be to prohibit transaction reordering, the practice of processing transactions from largest to smallest, to trigger more overdraft fees.
"We would like to see a product as fundamental as a checking account not include hidden fees that can push consumers out of the banking system," said Susan Weinstock, director of the Safe Checking Project at Pew Charitable Trusts. "We hope that the CFPB's study will be the basis for new rules that assure the product's safety and transparency."