Overdraft Fees are Under Scrutiny Again

February 23, 2012, Written By Lynn Oldshue

Yesterday, the Consumer Financial Protection Bureau formally announced that it will investigate the overdraft fees that banks charge on checking accounts.

Overdraft fees are charged by banks when customers try to spend more money than they have in their checking account. Banks will allow the transaction, but this service is a loan from the bank and it isn’t free. Banks charge a non-sufficient funds fee (NSF) that is typically between $30 and $35. A fee is charged for each transaction paid in this manner.

In July 2010, the Federal Reserve required banks to receive permission from each checking account customer before the bank provided overdraft protection for ATM and debit card transactions. Before these new rules, most banks automatically added courtesy overdraft protection to checking accounts with details and fees in the fine print. Some customers didn’t realize the high price of the fee until they incurred the charge.

After the rules went into effect, banks continued to aggressively encourage their customers to “opt-in” for overdraft protection and still marketed the benefits of overdraft protection.

Overdraft fees remain a significant source of revenue for banks. In 2011, banks collected $29.5 billion from overdraft fees, according to research firm Moebs Services. That was down from $33.1 billion in 2010.

The CFBP is investigating a number of areas when it comes to overdraft fees.

Some banks are still generating overdraft fees by posting transactions from highest to lowest dollar amount, rather than in the order they occurred. This increases the risk of consumers paying overdraft fees on smaller purchases.

The agency will look into why low income and young consumers are disproportionately burdened by overdraft fees. According to a 2008 study by the Federal Deposit Insurance Corporation, 9 percent of checking accounts incur 84 percent of overdraft fees.

In addition, the CFPB is asking consumers for their input on a “penalty fee box” for bank statements. This will be a disclosure where consumers can see how much overdraft fees will be from their bank.

The judicial system is also tackling the overdraft fee. In February, Chase settled for $110 million a consumer case charging that it routinely reordered checking account transactions. In November 2011, Bank of America reached a $410 million settlement in a class-action lawsuit to compensate debit card customers who were charged excessive overdraft fees between January 2001 and May 2011.

Overdraft protection is not necessary and opting out is an easy way for consumers to avoid an expensive fee. If you don’t have enough money in your account and you don’t have overdraft protection, then the debit transaction will simply be declined.

If you feel more comfortable with overdraft protection, most banks offer cheaper alternatives with a link to your savings account, a credit card, or a line of credit that will cover overdrawn transactions. There is still a fee each time you overdraw your account since your bank performs a transfer, but it is typically $5-$15, much less than the standard overdraft fee. You must contact your bank to set up this alternative service, since it is not part of the opt in selection.

This is a good time to assess how you monitor your checking account. Set up a low balance alert that will notify you when your account is low. Online banking you can help avoid overdraft situations and help keep up with your account in real time.

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The information contained within this article was accurate as of February 23, 2012. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.

About Lynn Oldshue

Lynn Oldshue has written personal finance stories for LowCards.com for twelve years. She majored in public relations at Mississippi State University.
View all posts by Lynn Oldshue