CFPB Report Details Consumer Experiences with Overdraft Protections

As part of the agency’s financial education mandate, the Consumer Financial Protection Bureau released a report this week chronicling consumer experiences with bank account overdraft coverage. The study found that many account holders did not understand how their banks managed account transactions and the penalties that could arise from overdrafting. Many of the respondents simply forgot about transactions that could trigger an overdraft.

Overdraft protections, fees charged when an account holder draws more from their account than is available, have become big business for large banks. In 2015, almost two-thirds of bank account fees were overdraft charges, totaling $32.5 billion.  Although categorized as a fee, overdraft coverage functions exactly like any other short term, small dollar loan. The bank customer lacks the sufficient funds to complete a transaction; rather than have the transaction denied, the bank covers the account holder’s deficit and charges a fee. Outgoing CFPB Director Richard Cordray said overdraft fees were a “very expensive way to cover a small cash shortfall.” The annual percentage rate for overdraft protections can exceed 17,000%.

In August, the CFPB announced a proposal for banks to use new standard disclosure forms regarding overdraft coverage. The CFPB’s efforts in this area have strong support from Congressional Democrats, but have received considerable criticism from the American Bankers Association.