New CFPB study proves need for Maloney’s Overdraft Protection Act

WASHINGTON – Congresswoman Carolyn B. Maloney (D-NY) is calling for the House to consider legislation she introduced to end abusive overdraft fees after a new report from the Consumer Financial Protection Bureau found that, in lending terms, certain overdraft fees are tantamount to a 17,000 percent annual percentage rate (APR).

“The evidence in the case against excessive overdraft fees continues to pile up,” said Congresswoman Maloney. “The CFPB’s new report shows that a small number of consumers, usually those who struggle to make ends meet, are paying exorbitant fees for overdraft protections. And a Wall Street Journal report earlier this week showed that many banks are still re-ordering transactions in a way that causes consumers the maximum amount of pain. The Overdraft Protection Act that I introduced would solve both problems. Let’s end the $35 cup of coffee. Consumers deserve it.”

Maloney introduced H.R. 1261, the Overdraft Protection Act in 2013, in March of 2013. The bill:

• Requires consumer consent before financial institutions can permit overdraft fees to paper checks, automated clearinghouse (ACH) charges and debit card swipe-terminal transactions on consumer accounts, and defines overdraft fees as finance charges subject to the Truth in Lending Act disclosures.  Current Federal Reserve rules require opt-in to overdraft fees only for debit card transactions.
• Prohibits financial institutions from manipulating the sequence in which checks and other debits are posted if it causes more overdrafts and maximizes fees paid to financial institutions.
• Requires that fees be ‘reasonable and proportional’ to the amount of the overdraft.
• Caps the number of fees that can be charged at one per month and six per year.
• Enhances disclosures to consumers both at the point of opt-in (disclosing alternatives to overdraft protection, including linked accounts or lines of credit) and when an overdraft fee is charged (if consumers choose to opt in).
• Requires the Consumer Finance Protection Bureau to study prepaid debit card overdraft fees and grants rulemaking authority over those fees to CFPB.

The Overdraft Protection Act would build on reforms established by Maloney’s Credit Card Accountability Responsibility and Disclosure Act which virtually eliminated overlimit fees associated with credit cards. The CARD Act requires consumers to opt-in to allow card issuers to process overlimit transactions and requires that consumers be notified of their right to revoke overlimit transactions processing whenever an overlimit fee is assessed. The CARD act also limited the number of overlimit fees to one per billing statement.

Findings of the CFPB Report:

• Consumers use debit cards nearly three times more than writing checks or paying bills online: The most common way consumers access money in their accounts is through debit card transactions. The study found that consumers use their debit cards for purchases about 17 times a month; in comparison, consumers, on average, write checks fewer than three times per month, and they make automatic bill payments a little more than three times per month. Consumers who are opted in for overdraft services use their debit cards even more frequently, at 24 times per month. The wide use of debit cards can mean more fees for those who opt in for overdraft. 
• Majority of debit card overdraft fees incurred on transactions of $24 or less: When consumers use their cards, it is typically for smaller purchases than when they write checks or use a bank teller. Consumers who opt in for overdraft services incur the majority of their debit card overdraft fees on transactions of $24 or less. Most overdraft transactions for which a fee is charged -- including debit overdraft transactions -- are $50 or less.
• More than half of consumers pay back negative balances within three days: Most consumers who overdraw on their accounts bring their accounts to a positive balance quickly. More than half become positive within three days; and more than 75 percent become positive within a week.
• Consumers pay high costs for overdraft “advances:” Overdraft fees can be an expensive way to manage a checking account. The median overdraft fee at the banks studied was $34. If a consumer were to borrow $24 for three days and pay a $34 finance charge, such a loan would carry a 17,000 percent APR.
• Nearly one in five opted-in consumers overdrafts more than ten times per year: The study found that 18 percent of opted-in accounts overdraft more than ten times per year, compared to 6 percent for non-opted-in accounts. In addition, opted-in accounts are nearly twice as likely to have at least one overdraft transaction per year. Not all of these overdrafts incur overdraft fees, but many do.
• Opted-in consumers pay seven times more in overdraft and NSF fees per year: Consumers who opt-in for overdraft fee services are paying significantly more for their checking accounts than non-opted-in consumers – about seven times more in overdraft and NSF fees. On average, opted-in accounts pay almost $260 per year in overdraft and NSF fees compared to just over $35 for non-opted-in accounts.