What consumer protection looks like: CFPB goes after overdraft fees; bank mouthpieces pout

This is admittedly a story that kind of fell through the cracks while we were focusing on the GOP's insistence on a government small enough to insert itself into a woman's vagina. But it's an important story if you do any banking. The Consumer Financial Protection Bureau is going after bank overdraft fees. Yes, President Obama's credit card reform already limited banks to charging overdraft fees to those who opt-in (for others, transactions would be denied), but the Consumer Financial Protection Bureau - the first federal agency in history with a sole mission to protect consumers - is now probing the banks' actual practices on charging and advertising overdraft fees and how it affects consumers who do sign up for overdraft protection in exchange for a fee.

Along with outlines of the inquiry into fees, the CFPB released a sample "penalty fee box" that they may institute for banks to tell customers just how much they are paying in overdraft fees and how they could lower or eliminate those payments.
So what are the specific areas under scrutiny by the bureau? Bank tricks to reorder your transactions so they can charge you the most overdraft fees possible, confusing the hell out of you with lengthy and legalese fine print, misleading marketing material, and the victimization of low-income and young consumers.

  • Transaction Re-ordering that Increases Consumer Costs: The CFPB is concerned that overdraft practices employed by some financial institutions increase consumer costs. One such practice is commingling of all checks, bill payments, debit card transactions, and ATM withdrawals each day and processing the largest transactions first. This maximizes the number of transactions that will trigger an overdraft fee. The CFPB will examine how prevalent this practice is and how it impacts consumers.
  • Missing or Confusing Information: The CFPB is exploring whether consumers can anticipate and avoid overdraft fees. The CFPB will examine how clearly overdraft terms are disclosed and the extent to which consumers are made aware of, qualify for, and take advantage of, alternative means of covering overdraft transactions.
  • Misleading Marketing Materials: The Bureau is looking into reports that consumers are receiving misleading marketing materials about overdrafts. Initial data suggests that opt-in rates differ widely among institutions. The CFPB seeks to understand how differences in the way institutions explain and promote overdraft programs may affect opt-in rates.
  • Disproportionate Impact on Low-Income and Young Consumers: The Bureau is revisiting the 2008 FDIC study that found that 9 percent of checking account customers bear about 84 percent of overdraft fees. Evidence suggests that overdraft programs disproportionately impact low-income and young consumers. According to this study, 46.4 percent of young adult accountholders incurred overdraft fees, and of those, 15 percent recorded more than ten overdrafts in one year.
Banks do love to confuse the heck out of you with complicated disclosures and misleading marketing material. The average length of a checking account disclosure, for example, is 111 pages. For clarity, Forbes magazine explains the transaction re-ordering:
Essentially the CFPB has a hunch that banks are manipulating the order of your daily transactions to maximize the chances you’ll be charged an overdraft fee. Here’s an example: Say you’re a student with $50 in your account. You make 3 consecutive purchases for $10 each. That leaves you with $20, but you still need to buy a $40 book for class that evening. You decide to swipe your debit card anyway under the assumption you’ll be charged a $35 overdraft fee just once.

The CFPB says some banks will wait until the end of the day to deduct your daily purchases and start with the biggest purchase first. In this case, the $40 book is deducted first leaving the student with $10 then the three $10 transactions are deducted. That allows the bank to collect and overdraft fee two times instead of one.
All of the elements of the CFPB's inquiry are important, but I think that the last point - the disproportionate impact of fees on low-income and young consumers - is especially crucial. As a matter of fact, it illustrates the larger consumer-unfriendliness problem with financial institutions today. The fees and charges are targeted to those who can least afford it. Big banks almost always exempt you from fees if you have a big enough account with them. The people who live paycheck-to-paycheck are always hit with the short end of the fee-stick.

Not only is this unfair practice that punishes the poorest the most, it is also bad for our economy. Given that people who don't have a lot of money are more likely to spend every additional dollar they have, every dime they have to pay in bank fees comes directly out of consumer spending and thus, economic growth.

Banks, predictably, don't like the fact that the Consumer Financial Protection Bureau is actually trying to, you know, protect consumers. The mouthpieces of banks over at The Street are very pouty about this. Their complain? The federal crackdown on bank fees is making it harder for banks to make money on fees! For example, they say Bank of America made only $1.3 billion on fees, the first quarter after the opt-in overdraft fee law went into effect. And now, they complain that the poor, poor banks will really have no choice but to get rid of poorer customers if the CFPB cracks down on overdraft fees.
"It costs between $100 and $120 a year to maintain a checking account for your customer," says FBR analyst Paul Miller. "[My] guess is they will go back to the old days, and these guys are not going to provide free products. They will either push you out the door, or find a way to charge you."
First of all, yes, go ahead big banks, please push your customers out the door. Not like they aren't already fleeing the big banks in droves. Empty threats, anyone?

Secondly, maintaining a checking account costs a bank $100 to $120 a year, does it? Then why are big accounts exempt from the fees? Do their accounts suddenly cost less to manage than your tiny checking account? Also, even if the industry's blowhorns aren't inflating the numbers, there's this: the average American family has $3800 in the bank. The average interest banks earn on all their outstanding loans. They would need to earn a mere 3% return on that money to make $120 in a year. If a bank can't make 3% in returns from all their loans and investments, perhaps they should find another line of work.

Speaking of which, isn't that the concept of .. uhh.. banking? Banks are supposed to pull the depositors' money, loan it out to businesses and individuals who need it, make investments, and make a return from that. Banks are not doing you a favor by holding your money for you. They are not charities. They pull your money with others' to make money for themselves, and provide you with a convenience of a checking account perhaps a small interest on your savings account - much smaller than what they make on their loans. That's how banks are supposed to make money, not by charging you for them being able to have your money to loan out to others.

Despite the very pouty and fake-threat-issuing banks, consumers are celebrating the CFPB's move.

Fees are an easy way for banks to make money while they sit on the cash and refuse to give loans to small businesses, or refinance your mortgage or even give you a mortgage loan. But that's not what banking is supposed to be about. And if the big banks don't want to engage in actual banking to make money the old fashioned way, then perhaps it's best that they do drive their customers out. Community banks and credit unions will be happy to take those customers, make investments into the local community, and help America thrive.

Before I end, I would like to remind everyone something: that this is even happening today is yet another testament to President Barack Obama's leadership. From the beginning, he stood behind an independent consumer protection agency, built it strongly, and appointed a Director over the mounting obstruction of minority Republicans in the Senate. If the GOP got their way, there would be no consumer protection. Evidently, according to Republicans, we need a government too weak to protect American consumers and just strong enough to shove probes in women's vaginas.