Many banks and credit unions continue to charge abusive fees on debit cards and checking accounts, according to a new report by the Center for Responsible Lending. "High-Cost Overdraft Practices" finds that, in spite of regulatory changes in recent years, consumers paid more than $16 billion in fees during 2011, many triggered by manipulative banking practices.
Debit cards carry fees that are the most disproportionate to the amount of the overdraft, even though banks and credit unions can simply decline these transactions without charging any fee at all. Some financial institutions do decline debit card purchases when the account lacks sufficient funds, but many do not. On debit cards, the median overdraft charge is $35 for a $20 overdraft. The report shows that debit card and ATM transactions account for at least 35% of all overdraft fees charged.
This report, along with a recent paper by the Consumer Financial Protection Bureau (CFPB), show that recent reforms on banking fees have not been adequate, including a rule that requires banks to obtain a customer's "opt-in" on overdraft coverage on debit cards. The CFPB report, issued in June this year, shows that bank and credit union customers who opt in for overdraft "protection" end up paying more fees and have more account closures than those who don't.
The CRL report shows that many financial institutions ignore previous efforts by regulators to curb excessive charges. In 2010, the Federal Deposit Insurance Corporation (FDIC) advised the institutions it supervises that more than six overdraft charges a year is excessive. Yet CRL's report finds that two-thirds of all debit card penalty fees come from account holders charged more than six fees annually.
The CRL report also shows that "reordering" continues, where many financial institutions make the largest withdrawals count first rather than posting them lowest-to-highest, which would minimize overdraft fees, or in the order actually received. Banks and credit unions do this reordering to trigger overdraft fees that otherwise would not have occurred.
Earlier surveys by CRL have shown that account holders who pay frequent fees are more likely to be lower income, single, renters and people of color.
"High-Cost Overdraft Practices" is the most recent chapter in CRL's series of reports collectively called "The State of Lending." For the report, CRL analyzed a nationwide sample of 1,582 checking accounts tracked in 2011 by Lightspeed Research.