Consumers are still being gouged by high overdraft fees and abrupt account closures despite new restrictions on banks designed to protect depositors, according to a study released Tuesday by the Consumer Financial Protection Bureau.

Consumers who chose to participate in overdraft programs paid high fees at some banks and were more likely to have their accounts closed than customers who declined to enroll, the study said.

The report shows big differences across financial institutions when it comes to overdraft coverage on debit card transactions and ATM withdrawals, drawing into question how banks sell this account feature. ??

"Our findings raise concerns about the number of consumers who are incurring heavy overdraft fees or account closures, and the wide variations across institutions indicate that certain practices and procedures merit further analysis," CFPB Director Richard Cordray said in a conference call with reporters. "We need to determine whether they are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent."

??The overdraft report is available at: http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf

Although the CFPB said the study was not necessarily a precursor to further regulations on overdraft, the findings make it more likely the agency will act in some capacity.

An overdraft can occur when consumers spend or withdraw more money from their checking accounts than is available. The financial institution can choose to cover the payment by advancing funds on the consumer’s behalf, and generally charges a fixed overdraft fee for doing so. The institution can also choose to return the payment if it is a check, online bill payment, or direct debit, and then charge a non-sufficient fund fee.

In recent years, most banks have adopted automated systems for making these decisions. These systems have contributed to the evolution of overdraft from an occasional courtesy to a significant source of industry revenues. The CFPB estimates that overdraft and non-sufficient fund fees represent 60% or more of consumer checking account fee income.

Many banks have significantly changed their overdraft programs and lowered fees since a 2010 rule required institutions to get customers' permission before enrolling them. But the CFPB report found wide variations amongst banks that continue to offer overdraft protection programs.

For example, the report showed that the annual average overdraft charge was $225 per account but some consumers paid as much as $298 at certain banks while others paid as low as $147.

The rate of involuntary closures was also vastly different. For example, one unnamed bank was 14 times more likely to shut an account in 2011 than the bank with the lowest involuntary closure rate.

The CFPB conducted the overdraft study, which reflects a large portion of U.S. consumer checking accounts, after initial market research raised concerns about overdraft practices. The information was largely gleaned from confidential data from a small set of large banks supervised by the CFPB. It was supplemented by responses to a CFPB Request for Information issued to the public in February 2012, and a recent study by the Independent Community Bankers of America (ICBA).

The ICBA issued a statement about the CFPB study:

“Regulatory policy and oversight should not impede a bank’s ability to offer a variety of overdraft payment services to meet their customers’ financial needs. Consumers must retain the ability to access overdraft services that best fit their unique financial needs and avoid being locked into an ill-fitting ‘one size fits all’ overdraft program. ICBA looks forward to continuing its ongoing communications with the CFPB on overdraft payment services and other issues affecting community banks and the communities they serve.”

The CFPB report finds that consumers who opt in for overdraft coverage end up with more costs and more involuntary account closures.

In 2010, a new federal government regulation took effect requiring that banks and credit unions obtain a consumer’s consent before charging fees for allowing overdrafts on ATM withdrawals and most debit card transactions.

The CFPB study found that new customer opt-in rates varied across banks. At some banks in 2011, more than 40% of all new customers opted in while other banks saw only single digit opt-in rates. The study also found that a consumer’s decision to opt in may have significant ramifications:??    

•    Consumers who opt in end up with more costs: The CFPB study looked at previous heavy over-drafters who declined to opt in when the new federal requirements were implemented in 2010. It found that by opting out these accountholders reduced their overdraft and non-sufficient fund fees, on average, by more than $450 in the second half of 2010.??    

•    Consumers who opt in to overdraft are more likely to end up with involuntary account closures: Negative account balances are a significant contributor to involuntary account closures at many banks and credit unions. The CFPB study found that at some banks in the study involuntary closure rates were more than 2.5 times higher for accounts that had opted in to debit and ATM overdraft coverage.??

The CFPB study raises questions about whether overdraft costs can be anticipated and avoided. A bank’s complex and often unique overdraft policies, procedures, and practices can be very difficult for a consumer to understand. This is true for consumers who have opted in but also for those who have not but are trying to figure out their potential costs in using their bank’s services.

These complexities include:??    

•    Complex transaction postings: The order in which transactions are posted to an account can influence the number of transactions that incur an overdraft fee. The study found wide variation in posting practices, from institutions debiting transactions at periodic intervals throughout the day to debiting them in nightly batches. Banks also differ in how they combine, sort, or order the transactions.??    

•    Overdraft coverage limits that often depend on many factors: The overdraft coverage limit is the amount of money the institution is willing to advance to an accountholder when his or her funds are insufficient to cover a pending payment. Some institutions have limits of fixed amounts, others vary limits based on the accountholder’s individual circumstances, such as his or her deposit patterns. Smaller limits reduce the opportunities for overdraft but can result in more non-sufficient fund fees. Higher limits can result in more overdraft fees because the consumer may keep drawing from his or her account.??    

•    Complicated fee structures that are not standardized: Institutions have different fee structures when it comes to capping the number of overdrafts that can be incurred in a single day. Some banks, for example, limit the number of overdraft charges in a day to two; other banks have no cap on fees or caps that allow as many as 12 overdrafts and non-sufficient fund fees in a day.

Similarly, 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.??Because bank and credit union overdraft policies, procedures, and practices are so different, the outcomes for consumers at the various banks in the study also varied. This raises questions about why some consumers are incurring much higher costs than others – especially when overdraft costs are not upfront fees but automated, back-end charges largely difficult for the consumer to predict.

The CFPB study found:??    

•    Average annual overdraft charges vary among institutions: The average consumer who overdrew his or her account 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.??    

•    Involuntary account closures vary widely: Among the banks in the study the rate of involuntary closures appears to have varied by nearly 9 percentage points across the banks in the study.

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