Those who choose to “opt in” for the overdraft protection on their checking account will likely end up paying far more in non sufficient charges. This, according to a new study released last week by the Consumer Financial Protection Bureau. Overdrafts occur when bank customers write a check that their bank balance can’t cover. Historically, banks have had the option of paying the overdraft or returning it to whom the check was written and notifying the account holder that their account did not have sufficient funds for the value of the check.
Federal Regulations for Overdraft Opt In
Many may recall that in 2010, federal regulations kicked in requiring banks and credit unions obtain a consumer’s consent before charging fees and allowing overdrafts on ATM withdrawals and most debit card transactions – along with the written checks. It was met with some resistance, but for the most part, it quickly balanced out and before long, the CFPB began seeing patterns with the overdraft opt in. After studying previous heavy over-drafters, CFPB realized many of them declined to “opt in”. The new requirements seemed to be having an affect, though in unlikely ways.
As a result, the agency found that by opting out, these account holders were able to reduce their overdraft or “insufficient funds” fees, on average, by more than $450 in the second half of 2010 alone. Now, those who opted into overdraft protection are more likely to end up with involuntary account closures. On average, those consumers who overdrew their account balances paid $225 in overdraft and insufficient funds charges over the course of one year. Among the banks in the study, consumers at some banks paid an average of $298, while consumers at others paid only $147.
As we know, it’s the negative bank balances that are the primary reason for involuntary closings, regardless of their overdraft opt in services. This is true at both banks and credit unions and some of those closure rates are more than 2.5 times higher than those who have an opt in feature. Further complicating matters for both those who opt in or opt out is the discovery by CFPB that for many, understanding the terms and conditions, along with the fee structures, are non-existent. This could indicative of how consumers choose to structure their bank accounts.
One year ago, Fortune reported consumers paid $31.5 billion in overdraft fees over the previous twelve months. In 2011, that number was $30.5 billion. Clearly, a trend was in place and even as the recession was officially being wrapped up, many consumers were still struggling as evidenced by these numbers. These new reports suggest personal finances are still tight or else, we have a nation of over spenders (which has historically been the case). Despite the determination of many to rein in spending and make better financial choices, these latest numbers show we’re doing anything but making better financial choices. From another perspective, we paid 10% more in overdraft fees these days than we did in 2011. That number is expected to rise in 2013 and 2014.
If there’s any good news, though, it’s that this number is still lower than the whopping $36.8 billion in 2008. This, of course, was the height of the recession, the massive numbers of foreclosures that were happening every week and before the big banks came under fire for their less than ethical business practices.
So is this a combination of the mindsets and differences those who opt in experience or is it could be that many consumers are doing little more but falling into their old habits? The new laws, including the 2010 CARD Act that dictates the opt in requirement should be better at preventing these types of monetary problems.
Remember, banks are now required to process incoming checks from the smallest face value to the largest. This is to ensure the influence of the number of NSF checks are minimized. It also cut into profits for the big banks especially. It’s also the driving force behind many of the banks to begin tacking on peculiar charges. The first one that comes to mind is the $5 monthly debit card transaction fee that Bank of America announced in 2011. That, as many know, was the driving force behind the Occupy movement that still moves forward today – long after Bank of America ceased its $5 monthly fee. It should be noted that there have been talks in a few of the big banks to once again implement the fee.
Many Factors to Consider
The overdraft coverage limit is defined as the amount of money the institution is willing to advance to an account holder when there’s shortage of funds to cover payments or debit withdrawals. Some banks have limitations and others require the linking of a savings account. For instance, some banks limit the number of overdraft allowed to process through in a single day. Others will consider the account holder’s record with the bank. Some banks will not charge an overdraft fee for any item that overdraws the account by less than $5 while other banks charge fees on every overdraft transaction regardless of size.
The lack of consistency across the sector could be providing some confusion, too. There’s no universal NSF charge and states have their own laws and compliance regulations. Some believe a more uniform fee structure applicable in every state would go a long way in efforts of banks to remain transparent in their policies. Further, because each bank has its own fee structure for capping overdrafts, there could be a better consistency throughout the nation’s bigger banks at a minimum.
There’s another reason why breaking the pattern of relying on overdraft protection is beneficial. The Journal of Family and Economic Issues released a report suggesting we’re more likely to overdraw our checking accounts if our parents did. That’s not surprising since it’s long since been understood that a parent’s spending and savings habits often determine the way their kids’ spend and save.
Have you opted into your bank’s overdraft protection? Have you come to rely upon it too often? Let us know your thoughts on this latest CFPB study.