The government's new consumer-watchdog agency is launching a probe into costly overdraft fees charged by big banks.
The Consumer Financial Protection Bureau said Wednesday that it will ask banks for information about how overdraft fees affect consumers, how overdraft protection is marketed and what information consumers receive.
The probe could result in new rules or even lawsuits if banks are accused of violating consumer laws.
"Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it," CFPB Director Richard Cordray said in a statement. "We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees."
Banks impose overdraft fees when people spend more money than they have in their accounts. The fees didn't exist 15 years ago; by 2009, they were generating tens of billions of dollars for banks.
The fees function like extremely high-cost, short-term loans. The cost of pushing your checking account into the red averages $30 to $35 per transaction, the CFPB said.
Banks were barred from automatically enrolling customers in overdraft programs for debit card or ATM transactions in 2010, under a rule issued by the Federal Reserve. The rule did not apply to checks and online bill payments or recurring debits. It also did not limit how much banks can charge for the service.
Banks have responded by marketing overdraft protection aggressively. They told consumers that opting out of overdraft protection "may prevent you from completing everyday transactions including . . . medical or health emergencies," according to research published last year by the Center for Responsible Lending, a consumer group that opposes overdraft fees.
Some banks increased their fee income through a practice known as "re-ordering." The banks would collect all the transactions in a given day then apply them in order, from largest to smallest. The effect is to maximize the number of transactions that trigger a fee.
Reordering has been challenged in class-action lawsuits around the country. Bank of America settled one case for $410 million last July. JPMorgan Chase agreed this month to pay $110 million to settle similar claims.
The CFPB outlined four areas of interest in its inquiry:
— The reordering of transactions in ways that increase costs to consumers.
— Missing or confusing information. The agency wants to make sure people understand how they can avoid overdraft fees. It will look at how the fees are disclosed and what other options are presented.
— Misleading marketing. The number of people who choose overdraft protection varies widely from bank to bank, the CFPB noted. It wants to know how marketing affects people's decisions. The Center for Responsible Lending report noted several examples of misleading or threatening language in banks' marketing materials.
— Disproportionate impact on low-income and young consumers. According to a 2008 study by the Federal Deposit Insurance Corp., 9 percent of checking accounts incur 84 percent of overdraft fees. The study found that nearly half of younger cardholders paid the fees.
The CFPB also is requesting public input on a draft "penalty fee box" — a disclosure on a consumer's checking-account statement that would highlight any overdrafts and related fees.
The results of the probe will inform the CFPB's policy on overdraft programs. It could spawn consumer-education efforts, new rules, guidance for bank examiners or legal action against banks that are accused of wrongdoing.
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