Federal Reserve rules implemented in 2010 were supposed to protect customers from getting hit with overdraft fees if they unwittingly made a purchase that put their account in the red. Now, two years later, banks are still raking in billions, and overdraft fees have hit an average of $30, an all-time high. If you’re wondering what gives, you have company. The Consumer Financial Protection Bureau (CFPB) is wondering the same thing, and according to a new report, it’s taking a hard look at the overdraft practices of the biggest banks.
Banks’ collective overdraft revenue peaked in 2009, when the industry made $37.1 billion off customers, $26 at a time (the amount of the average overdraft fee), according to research company Moebs $ervices Inc. The new regulations kicked in halfway through 2010, which brought banks’ collective haul down to $33 billion, even as the average fee crept up to $27.50. Last year was more of the same: credit unions charged an average of $25 and banks charged an average of $30, bringing the overall average to $29 per overdraft and the total take in 2011 to $31.6 billion.
So how are banks still making so much money off overdraft fees? The Fed rules had a loophole that said customers could overdraw and be charged the fee if they opted into it. This sounds pretty cut-and-dried, right? Who’s going to say, Sure, let me run a negative balance and sock me with a $30 fee every time I swipe? Actually, a lot of people. Before the regulations kicked in, banks went full throttle with marketing campaigns designed to get consumers to opt in — mostly by confusing the heck out of them.
The Pew Charitable Trusts and the Center for Responsible Lending conducted surveys and focus groups and found that a lot of bank customers thought they had chosen the option that avoided overdraft fees, when they had actually done the opposite.
In February, the CFPB announced an investigation into overdraft practices, but it didn’t call out any specific banks. The move was applauded by watchdog groups like Consumers Union, which urged the agency to put the kibosh on banks’ marketing doublespeak. At the time, CFPB director Richard Cordray said bank customers “may have been misled by marketing materials that suggested opting in to overdraft protection was necessary if they wanted to continue to use their debit card. Or maybe they saw one-sided advertising that emphasized the benefits of overdraft while burying information about the costs.”
Now, Bloomberg reports that nine banks are subject to investigation by agency examiners, citing unnamed sources. The article doesn’t list all nine, but it says megabanks JPMorgan Chase, Wells Fargo and Bank of America are all on the CFPB’s short list, along with regional heavyweights U.S. Bancorp, Regions Financial and PNC Financial Services. All six declined comment to Bloomberg.
The CFPB is similarly tight-lipped. “It’s our policy to neither confirm nor deny information about investigations,” spokeswoman Michelle Person says via e-mail.
Bloomberg’s sources say the CFPB is looking at how overdraft programs were presented to determine if banks went out of their way to mislead customers. It’s scrutinizing print mail and online marketing as well as scripts that customer-service personnel were given. It’s also looking into why banks charge so much for overdrafts, and if that $30 average — it’s $33.50 at big banks, according to Moebs — is appropriate.