The fight over debit card overdraft fees is not over, according to a consortium of consumer-advocacy groups that vows to keep the pressure on regulators to force significant changes in how banks handle such fees.
Despite new debit-overdraft protection rules that went into effect last summer, many banks are using deceptive marketing tactics to trick consumers into unnecessarily opting in and paying “steep fees” for the programs, the groups claim.
In a letter sent to regulators in October, the consortium suggests they must go much further by restricting many existing bank practices surrounding debit-overdraft fees.
Certain observers also expect debit-overdraft fees to be among the topics the new Consumer Financial Protection Bureau tackles when its formation is complete next year.
“Consumers are being unfairly and deceptively tricked by misleading information, and they are also being harassed by banks repeatedly asking them to confirm their opt-in decision even after they have said no,” Ed Mierzwinski, consumer program director of the Washington, D.C.-based U.S. Public Interest Research Group, tells PaymentsSource.
Mierzwinski’s group is one of seven organizations that signed a letter sent to the Office of the Comptroller of the Currency urging tighter restrictions on banks’ debit-overdraft policies. The other organizations include the Center for Responsible Lending, Consumer Federation of America, the National Consumer Law Center, Consumers Union, Consumer Action and the National Association of Consumer Advocates.
“The bottom line is that banks don’t want to give up revenue from unfair and draconian overdraft-protection schemes so they have decided there are several ways to confuse people, and we want it to stop,” Mierzwinski says.
Bank customers as of Aug. 15 for the first time had to opt in to receive overdraft protection on existing accounts or risk having their debit card transactions declined at the point of sale or ATM. Banks were required to get new customers’ permission beginning July 1. Many banks previously provided the service automatically, and customers discovered the coverage only after seeing charges on their statements.
The most recent overdraft-protection changes are the result of new Federal Reserve Board rules and pertain to Regulation E of the Electronic Funds Transfer Act (see story).
The average bank account overdraft is $27, and more than half of the $37 billion in fees banks earned last year came from ATM and debit card overdrafts, according to data from the National Foundation for Credit Counseling.
The American Bankers Association insists banks are not misleading anyone. Banks are required to comply with the new rules disclosing overdraft-fee policies, and the association says it advises banks to adhere closely to sample forms the Fed provides that conform to the rules.
“These consumer groups have no proof that issuers are failing to properly disclose charges for debit overdrafts,” Nessa Feddis, the association’s vice president and senior counsel, tells PaymentsSource.
But consumer advocates charge that many banks, while technically staying within the rules, are nevertheless managing to artfully steer consumers to opt in to fee-generating overdraft-protection programs.
Examples include “burying the facts in fine print” and “sending out alarming, misleading messages that make people think they need to opt in for some other reason beyond the rules,” Mierzwinski contends.
In their letter to regulators, the groups note that “most of the largest banks” are soliciting their customers to pay for overdrawn debit card transactions that could easily be denied at no charge to their customers.
Toronto-based TD Bank, a unit of TD Bank Financial Group, only disclosed debit-overdraft protection in “fine print” in a brochure it circulated earlier this year, and its marketing materials “skirt the question” of how the bank determines whether it will cover an overdraft, the groups’ letter states.
A TD Bank spokesperson says the bank has provided clear explanations of its debit-overdraft options throughout the year, and bank personnel are widely available to explain the options to customers in person or by telephone.
The groups’ letter also says JPMorgan Chase & Co. and Comerica Bank unnecessarily alarmed customers with mailers implying debit cards no longer would function properly if customers failed to make a choice about overdraft coverage.
A Chase spokesperson says the bank ended that practice last summer after hearing from consumer groups. Comerica declined to comment on the situation.
The groups’ letter to regulators states that Chase is among several banks this year “repeatedly badgering” consumers to opt in to debit-overdraft programs even after consumers have decisively declined coverage.
Chase continues to “reach out” to customers if they have not elected debit card overdraft coverage and have a transaction rejected, a Chase spokesperson says.
The consumer-advocacy groups are urging regulators to draft rules that limit overdraft fees to no more than six per year and ensure fees reflect the actual cost and risk to the bank. The groups also want to ensure consumers receive clear communications that cheaper alternatives to cover their overdrafts are available, such as a low-cost line of credit, according to a spokesperson.
The organization also urges regulators to ban “the manipulation of transaction postings” in such a manner that maximizes overdraft fees so that a customer may end up paying a $35 overdraft fee for purchasing a $2 cup of coffee.
Transaction-posting order is at the center of a legal fight in which a federal court in August ordered Wells Fargo & Co. to repay $203 million in overdraft fees because of alleged manipulation of the order of customers’ payments, resulting in multiple overdraft payments in a single day (see story). Wells is appealing the ruling.
Such resistance is not surprising. Many banks this year announced they will see steep revenue-declines caused by the fallout from the overdraft rules that went into effect last summer.
U.S. Bancorp on Oct. 21 said the new opt-in requirements will reduce its revenue by more than $250 million this year (see story). Wells Fargo & Co. in July said it likely will experience a $525 million pretax effect over the next two quarters from the combined effect of the CARD Act and new overdraft-protection rules (see story).
Citigroup Inc. notably never has offered debit-overdraft protection, and Bank of America Corp. last year announced it was ending its overdraft-protection service.
But BofA may be seeking other ways to recoup lost debit-overdraft revenue. The bank recently introduced a product called “emergency cash” that generates a $35 charge when customers exceed their balances when withdrawing cash from ATMs (see story).
Regardless of banks’ recent actions, consumer organizations may have an uphill fight in persuading the OCC or the Fed to toughen rules surrounding overdraft protection, some lawyers and compliance experts say.
“The consumer groups are overreaching in their bid to get tougher rules around debit overdrafts,” Alan Kaplinsky, a partner at the Philadelphia-based law firm of Ballard Spahr LLP, who specializes in consumer financial services litigation. “Banks are required to disclose their fees, the fees are spelled out ad nauseum, and consumers know overdrafts don’t come cheap.”
Regulators likely will try to punt further rule-making on debit-overdraft fees to the new Consumer Financial Protection Bureau, says Mike Brauneis, director of regulatory risk consulting at risk management firm Protiviti Inc.
“As the new bureau will be taking over rule-making authority for nearly all of the laws that touch this area in less than a year, ... any significant future changes are more likely to come from the bureau than the existing banking regulators,” Brauneis says.
Meantime, Protiviti is encouraging its clients to “at least focus on clarifying their disclosures in areas like order of payment posting and the criteria used to decide whether a charge that exceeds available funds will be approved in an attempt to stay ahead of the curve,” Brauneis says.
Consumer groups are united in their conviction that banks are being unfair in the way they market debit-overdraft protection, but most issuers appear to be technically in compliance with federal laws. It may require the efforts of a new agency to force further changes.
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