The Consumer Financial Protection Bureau’s latest all-consuming interest is overdraft fees. How do such fees affect consumers? How is overdraft protection marketed? How are consumers able to avoid the fees? Those are some of the questions the CFPB seeks to answer with its latest probe. Specifically, the inquiry will examine the following:
— The reordering of transactions in ways that increase costs to consumers.
— Missing or confusing information. The agency wants to make sure people understand how they can avoid overdraft fees. It will look at how the fees are disclosed and what other options are presented.
— Misleading marketing. The number of people who choose overdraft protection varies widely from bank to bank, the CFPB noted. It wants to know how marketing affects people’s decisions. The Center for Responsible Lending report noted several examples of misleading or threatening language in banks’ marketing materials.
— Disproportionate impact on low-income and young consumers. According to a 2008 study by the Federal Deposit Insurance Corp., 9 percent of checking accounts incur 84 percent of overdraft fees. The study found that nearly half of younger cardholders paid the fees.
Of the four, only the first bothers me. Apparently, as bankers process consumer transactions, they’ll reorder the transactions from the largest to the smallest, so more transactions will incur an overdraft fee. But banks known to engage in reordering are already paying the price for it: Bank of America settled one class-action lawsuit that challenged the bank on the practice for $410 million last July, and JPMorgan Chase settled $110 million on a similar suit.
As to the rest? I have the solution for consumers who wish to avoid overdraft fees: Don’t spend money you don’t have. Politicians and bureaucrats clearly haven’t learned this lesson themselves, so they’re not going to teach consumers fiscal responsibility anytime soon, but it would surely save the CFPB a lot of hassle.
Overdraft fees are annoying — but government interference is even more so. As we learned with Dick Durbin’s debit card legislation, banks will hike costs elsewhere if the government bans overdraft penalties. (Yes, banks cleverly call the penalties — essentially really high-interest short-term loans — “overdraft protection,” but, c’mon consumers, surely you’re smart enough to figure out what that means!)
If the CFPB really has to investigate this issue (I’d prefer we have no CFPB at all!), why don’t they ask how many transactions that incur overdraft penalties represent the purchase of actual necessities? (By necessities I mean “food, clothes, shelter.” By “food, clothes, shelter,” I mean “enough food, clothes and shelter to stay healthy.” By “healthy,” I mean “unencumbered by non-discriminating diseases.” By “non-discriminating diseases,” I mean diseases that are brought on by malnutrition or cold or something — not by lifestyle choices.)
Given that 9 percent of checking accounts are responsible for 84 percent of overdraft fees — and half of all young checking account holders have paid the fees at some point — I’d say kids haven’t learned to do without what they don’t need for the sake of staying within budget. It’s a skill worth developing. Here’s a good, basic principle: “Use it up, wear it out, make it do — or do without.”
P.S. I’ll be talking about this topic and others on Fox Business Channel’s “The Willis Report” today at about 5:35 p.m. ET. The show also re-airs at 8 p.m. ET and 11 p.m. ET. Hope you can tune in!