Overdrafting your checking account might only hit you for $35, but when that happens a few hundred million times each year, it really adds up. A new report estimates that banks in the U.S. are now making $17 billion a year from fees for overdrafts and insufficient funds.
The report from the the Center for Responsible Lending suggests that financial institutions continue to engage in abusive overdraft practices and that reforms to the system are overdue.
CRL looked at data such as consumer-submitted narratives from the Consumer Financial Protection Bureau and data from the Federal Deposit Insurance Corporation related to approximately 778,800 households.
In all, the report found that consumers pay nearly $14 billion in overdraft charges each year, and that number jumps to $17 billion when you include fees for non-sufficient funds.
“CRL’s analysis confirms that overdraft abuses continue, carrying an enormous annual price tag for consumers as a whole, and with devastating effects on individuals,” Peter Smith, a Senior Researcher at CRL and the report’s co-author, said in a statement.
Through the analysis of CFPB narratives, CRL found that even consumers who attempted to avoid a negative balance and subsequent fees were subject to disproportionately harsh overdraft fees.
The typical bank overdraft fee averages about $35. CRL found that when a customer incurs one overdraft fee, several subsequent fees follow.
“This costly practice places bank account holders with modest or low balances in jeopardy of involuntary account closures, which lead to checking account blacklists that make re-entry into the banking mainstream very difficult,” the report states.
In fact, CRL found, based on FDIC information, that over a million adults who once had bank accounts are now unbanked, primarily due to high or unpredictable fees.
While some banks and financial institutions have revamped their overdraft practices — doing away with fees on student accounts, discontinuing the reordering of transactions, and declining transactions rather than letting them go through when balances are too low — CRL found that the overall fee-heavy model remains typical in overdraft situations.
“Though these are encouraging developments, the abusive overdraft model continues to dominate the checking account market,” the report states. “And it will likely continue to do so until unfair practices are reined in and a level playing field replaces the existing race to the bottom.”
Based on the report, CRL provided several policy recommendations for federal regulators to consider when looking at protecting consumers from unfair and costly overdraft fees:
• Rein in Excessive Fees: These fees bear virtually no relation to the cost to the institution of covering the overdraft.
• Stop the Onslaught: Limit overdraft fees to one fee per month and six per year, and prohibit predatory posting practices. Once an account has gone negative and the customer has incurred an overdraft fee, the customer should have sufficient time to bring the account back to positive before being charged additional fees.
• Regulate Overdrafts Through Installments: Overdraft fees have long enjoyed a regulatory pass in many respects. When financial institutions pay a customer’s transactions when the account lacks sufficient funds, the financial institution is extending credit to that customer, and the product should be regulated as such.