End Debit Card Dysfunction

Bank Regulators Should Make Fair Overdraft Fee Policies The Rule


Center for Responsible Lending
April 5, 2011

A positive move by one of the nation’s biggest banks this week highlights the extent of overdraft abuse within the financial system and should encourage bank regulators to undertake further reform.

In response to consumer feedback, Citibank announced it will begin clearing checks from lowest to highest to minimize overdraft fees. That will be a departure from clearing check transactions in high-to-low order, a common banking practice that creates more overdraft fees by emptying the account faster. This decision makes Citibank unusually active among our nation’s largest banks in voluntarily reforming its own overdraft practices.

Citibank already had overdraft policies more responsible than most institutions because it doesn’t approve debit card and ATM overdrafts for high fees. Bank of America has also stopped debit card overdrafts.  But many banks continue high-cost debit card overdrafts and posting from high-to-low when they balance accounts each day. Some also clear all checks before all debit card and ATM transactions, further maximizing fees, as checks tend to be larger than electronic transactions and thus drain the account more quickly.

Last week, the FDIC clarified guidance it had issued warning banks against allowing overdraft coverage to function as short-term, high-cost credit. The guidance instructs the banks the FDIC supervises to inform their frequently overdrawn customers of cheaper overdraft alternatives and sets six overdraft fees in a 12-month period as a signal of excessive fees. The FDIC also aims to stop transaction reordering at these banks, specifically directing institutions not to post from high-to-low or to increase fees by arranging the order in which various transactions—checks, debit cards, etc.—are posted.

But much more needs to be done.  Federal banking regulators should stop excessive overdrafts among all banks by ending the dysfunctional practice of charging fees of over $30 on small debit card transactions.

As the attached letters to JPMorgan Chase and to Wells Fargo from civil rights groups attest, African American and Latino communities are among the hardest hit by abusive overdraft fees. Reform is essential for both individual Americans and for the economy. Regulators must take action to end these continuing overdraft abuses.

Attachment: Letters to Wells Fargo and JP Morgan Chase from five civil rights groups.

http://www.civilrights.org/fairhousing/banking/ltr-to-wells-fargo-re-overdrafts-11-29-10.pdf

http://www.civilrights.org/fairhousing/banking/ltr-to-chase-re-overdrafts-11-29-10.pdf

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.