The Consumer Financial Protection Bureau is laying the groundwork for increasing disclosure requirements on overdraft programs.
In a study released Friday, the agency found that consumers who frequently overdraw their checking accounts pay nearly $450 more in overdraft penalty fees a year than those who opt out of coverage. Though just 9% of consumers frequently overdraw their accounts, these so-called frequent overdrafters paid a whopping 79% of all overdraft and insufficient funds fees, the study said.
This suggests that consumers may not fully understand the overdraft product. As a result, it released four sample disclosure forms that it said would make it easier for consumers to evaluate the costs and risks of overdraft coverage.
"When every penny counts, people need to understand how overdraft works, and whether they want to take the risk of paying overdraft fees on debit card transactions and ATM withdrawals," CFPB Director Richard Cordray said in prepared remarks on a conference call Wednesday with reporters.
Overdraft fees are a big driver of bank earnings, but banks have been widely criticized for reordering transactions to maximize fees by processing large withdrawals first.
The release of the CFPB's study and "Know Before You Owe" disclosure forms are part of a broader effort by the agency to help consumers avoid overdraft fees. The CFPB has said such fees tend to drive the poorest consumers out of the banking system.
The study was based on data from more than 40 million consumer accounts provided by several large banks.
Consumers who frequently overdraw their accounts tend to be younger, have low daily balances (less than $350, on average) and credit scores of less than 600, which is considered subprime. They also use debit cards more frequently, about 25 times a month.
The study found that frequent overdrafters are typically charged 18 fees a year, compared with five a year for those who opt out of overdraft. Banks typically charge from $24 to $34 when a consumer does not have the funds to cover a transaction.
Overdraft fees fell after 2010, when regulators required financial institutions to get consumers' consent in advance before charging overdraft fees on most debit card transactions and ATM withdrawals.
Consumers can still overdraw their accounts when they use checks, online bill payment or direct debits from lenders.
Banks and credit unions also can charge overdraft fees on checks or electronic payments made through the automated clearing house system and on debit card payments set up on a recurring basis, which do not require that consumers opt in.
The CFPB said the sample forms are being tested on consumers and are designed to make it easy for banks and credit unions to plug in overdraft information within their existing compliance systems.