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Federal Agency Weighs Regulating Bank Overdraft Fees
The CFPB is considering issuing regulations for bank overdraft fees after it issued a report about how those fees impact consumers.
When you are living paycheck-to-paycheck, barely making ends meet, it is easy to overdraw your bank account. Many banks and credit unions will cover their customers' overdrafts in exchange for a fee. As a result of a 2010 law, banks need to inform consumers of the charges for overdraft protection programs and have consumers opt-in to be part of their overdraft protection programs. A new study released in August 2014 by the Consumer Federal Protection Bureau revealed that there is little uniformity across financial institutions in their overdraft protection fees, which can be harmful to consumers.
CFPB study on overdraft fees
Researchers working on the study looked at a representative sample of financial transactions from a number of banks from January 2011 through June 2012, analyzing a portion of the $32 billion in overdraft fees that banks collect annually. The study revealed that banks charge an average of $34 for each overdraft on a debit-card account, and the average transaction resulting in an overdraft was for $24 or less. Even though most of the accounts returned to positive balances within three days, the banks still charged the consumers overdraft fees. The report calculated that a $34 fee on a three day loan for $24 is equal to a 17,000 percent interest rate. The report revealed that about 60 percent of banks' income from accounts comes from overdraft fees.
Fees harmful to consumers
The report also revealed that consumers who opted in to overdraft protection programs ended up paying more in overdraft fees. Those who opted-in paid an average of $260 in overdraft fees annually, which equals about 10 overdraft instances a year. In contrast, those who did not opt-in paid an average of $35 in overdraft fees a year. About 8 percent of consumers incur about 75 percent of all overdraft fees, according to the report, and those are the people who are usually least able to afford to pay these fees because they are struggling to manage their debts.
The report also noted that some banks processed transactions so that they generated the most overdraft fees, called "stacking" transactions, rather than in the order which the consumer made the transactions. Additionally, the report found no uniformity across institutions in the way they processed overdrafts and the fees they charge, leading to confusion in consumers and an inability to predict the fees they would pay.
In light of the harm that these fees cause consumers, the CFPB is considering issuing rules that would regulate the amount of overdraft fees banks could charge, as well as the way that banks process overdrafts.
Options for debt relief
Repeated overdrafts are just one sign that you have serious financial problems. Overwhelming credit card debt, medical bills and other debts are also indicators that you need help reorganizing your finances. If you are struggling with debt, speak with an experienced debt relief attorney who can review your situation with you and advise you of all of your debt relief options.
At Illini Legal Services, we offer a free, no-obligation consultation to each of our clients. During your consultation, we will take the time to listen to your financial concerns and assess your case and individual situation. We have five locations to serve you. Contact us today for help!
Illini Legal Services is engaged in the private practice of law and is not a public legal aid agency. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.