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Stung by Overdraft Fees? U.S. Nudges Banks to Explain Rules Better

The New York Times logo The New York Times 5 days ago By ANN CARRNS

Consumer advocates have long worried that bank customers are easily confused about how checking account overdrafts work, and that this confusion leads to costly fees.

Now, the Consumer Financial Protection Bureau is taking a crack at redesigning the form used by banks to explain overdraft options to customers, and has published samples of four possible versions for public scrutiny.

The overdraft form is the latest financial document to receive a makeover from the bureau: In 2015, the agency adopted simplified mortgage disclosure forms, which are meant to help borrowers understand the terms of their home loans.

But don’t expect banks to use one of the redesigned overdraft disclosures anytime soon. The one-page prototypes are still being field-tested on consumers, and a formal rule-making process would be needed in order to make them official, according to the bureau. Plus, the agency is under political pressure in Washington, where the Republicans who control Congress oppose the bureau’s regulation-friendly approach.

The bureau has been studying overdraft issues for several years and has taken steps to police bank practices. Last year, for instance, the bureau fined Santander Bank $10 million for using deceptive marketing to enroll customers in overdraft services.

“We look forward to working with the bureau to test the proposed new disclosures to make sure they improve consumer understanding,” said Virginia O’Neill, senior vice president of the American Bankers Association’s center for regulatory compliance.

While the forms need tweaking, “they’re moving in the right direction,” said Michael Moebs, an economist whose research firm tracks bank account data.

An overdraft occurs when you don’t have enough money in your account to cover a bill or purchase, but the bank pays it anyway — then charges an overdraft fee (typically $34 per incident), which must be paid along with the amount of the shortfall. In the past, overdrafts were mostly caused by checks. But these days, with much consumer spending done on debit cards, overdrafts are commonly triggered by debit purchases. Even overspending by small amounts can trigger a hefty fee.

Since 2010, federal regulations have required banks to obtain permission from customers before covering their shortfall if they spend too much on a debit card or withdraw more money than they have at an A.T.M. The alternative is to decline the transaction or refuse to dispense the cash. Banks do not need a customer’s prior approval to allow overdrafts — and charge fees — for checks and online bill payments, Richard Cordray, the director of the Consumer Financial Protection Bureau, noted in prepared remarks to reporters last week.

“Overdraft is still a very big issue for some consumers,” said Nick Bourke, director of consumer finance at the Pew Charitable Trusts, which has published studies on the subject.

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Some bank customers use the service as a convenience, to help make sure their bills are paid if they make an occasional mistake.

But for some families, Mr. Bourke noted, overdraft fees can create a financial burden. A bureau study released with the prototypes found that “very frequent” overdrafters, who had 20 or more overdrafts a year, held just 5 percent of accounts but paid 63 percent of overdraft fees.

Mr. Moebs said he thought the new study, based on data from a handful of big banks, might overstate the impact of overdrafts. But the bureau said that its data set was “powerful” and that the findings were representative of more than 40 million bank accounts.

The form currently used to explain the option might confuse customers, Mr. Bourke said. Pew’s own research has found that many people who are hit with overdraft fees don’t recall opting into coverage.

Allie Vered, director of the nonprofit America Saves program, which encourages low- and moderate-income families to save, said banks and credit unions often marketed the service as overdraft “protection,” which sounds beneficial. But consumers should really think of it as opting into a “consent to fees” if they overspend, she said.

The current form omits some helpful information, Mr. Bourke said: “It doesn’t show the benefits of not opting in.”

One of the new prototypes does the math for customers, giving examples of what an account balance would be after an overspending incident, with and without overdraft coverage.

“The prototype forms are designed to show more clearly the cost of the fees and when they can be charged,” Mr. Cordray said in his prepared remarks.

Here are some questions and answers about overdrafts:

If I have already “opted in” to overdraft coverage for debit purchases, can I still opt out?

Yes. You can change your mind at any time by contacting your bank. If you opt out, and a debit purchase or A.T.M. withdrawal would overdraw your account, the transaction will be declined.

Where can I offer my opinion on the redesigned overdraft forms?

You can see the prototypes on the bureau’s website. To comment, send an email to the bureau at cfpb_overdraft_forms@cfpb.gov.

How can I avoid overdraft fees?

Ms. O’Neill of the American Bankers Association suggests signing up for alerts that will notify you if your checking account balance falls below a certain amount. You can also ask your bank about linking your checking account to a savings account or credit card and having funds transferred if you overspend. The bank may still charge a fee, but it’s usually less than the typical overdraft fee.

Related video: High bank overdraft fees prompt call for plain-English disclosure forms (provided by USA Today)

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