Two years after regulators gave Americans more power to manage overdrafts of their checking accounts, the Consumer Financial Protection Bureau is reviewing bank practices to determine if the crackdown went far enough.
The agency, which will decide by the end of the year whether to write new rules, is scrutinizing nine banks including JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Bank of America Corp., said four people briefed on the examination.
The inquiry focuses on how financial institutions persuade customers to enroll in what they call overdraft protection programs. Examiners are looking at online and mailed marketing material as well as scripts used by the banks' customer-service representatives to determine whether they could be confusing to consumers, said the people.
Bureau examiners have conveyed "a tone of skepticism that this is really a good product for borrowers," said Jo Ann Barefoot of Washington-based Treliant Risk Advisors, who counsels banks on dealing with federal supervisors.
While tighter rules could help U.S. consumers, they also could threaten a major revenue stream for banks already struggling to replace income pinched by new regulations including a cap on debit-card "swipe" fees. Last year bank customers paid $31.6 billion in overdraft fees, down from $33.1 billion in 2010, according to Moebs Services, a Lake Bluff, Illinois-based research firm. About 15 million Americans overdraw their accounts 10 or more times a year, the firm said.
The bureau's examiners also are reviewing the banks' justifications for the size of overdraft fees, two of the people said. Large banks charge an average $35 per overdraft, compared with $25 at community banks and credit unions, Moebs reports.
Charges and Interest
When a customer who's enrolled in overdraft protection writes a check or makes a debit that puts an account into a negative balance, some banks approve the transaction but charge the flat fee along with interest on the amount advanced. People who don't enroll get overdrafts denied at the point of sale.
Policies vary from bank to bank, and may depend on whether a transaction involves a paper check, debit card or electronic transfer. For example, Citigroup Inc. (C) and Bank of America don't allow overdrafts on debit-card purchases, which are simply denied if the customer's account doesn't have sufficient funds.
The consumer bureau's inquiry also encompasses regional banks including U.S. Bancorp (USB), Regions Financial Corp. (RF), and PNC Financial Services Group Inc. (PNC), said the people briefed, who spoke on condition of anonymity because the work isn't public.
The people didn't give the names of the rest of the nine banks under scrutiny. Spokesmen for JPMorgan, Bank of America, Wells Fargo, PNC, Regions and U.S. Bancorp declined to comment.
Richard Cordray, installed four months ago by President Barack Obama as the bureau's first director, disclosed the overdraft inquiry in general terms on Feb. 22. In a recent interview, he said the agency is looking at "a lot of data" as it coordinates with other federal regulators on the subject.
"We want to work with the other agencies to develop, as much as possible, common guidance on this," Cordray said. "We intend and expect to have an action plan on it by the end of the year."
Cordray previously has said the agency plans enforcement action against banks that "exploit consumers with deceptive marketing."
Before it officially started work July 21, the bureau had focused its attention on mortgages and payment cards, the two major forms of consumer credit. The only clue to its interest in checking accounts was the name of the team it fielded in Washington's 2011 summer softball league: The Overdrafts.
Billions at Risk
The money at risk for the banking industry could exceed the impact of the Fed's 2011 cap on debit card swipe fees, which may cost the 10 largest banks $4.6 billion a year.
In 2011, Wells Fargo's retail division took in $4.3 billion from fees, including overdrafts, roughly equal to a quarter of the bank's net income for the year, financial disclosures show. That same year, JPMorgan brought in $3.2 billion in fees related to lending and deposits, disclosures show.
Greg McBride, senior analyst with Bankrate.com, said tighter rules could lead financial companies to make up for the loss in revenue by raising fees on basic checking services.
"The economics of the checking account become vastly different without that overdraft income," McBride said in an interview.
Consumer activists and lawmakers have long criticized overdraft protection as a system designed to build profits rather than protect customers. They say the penalties are too high, that some banks manipulate the timing of transactions to maximize fees and that customers were being automatically enrolled without understanding the potential drawbacks.
Fed and FDIC
As a result, the Federal Reserve passed a rule effective July 1, 2010, requiring banks to obtain an "opt-in" from customers for overdraft protection on debit and ATM transactions. After market research on what would benefit consumers, the Fed didn't cover paper checks or electronic transfers.
That same year, the Federal Deposit Insurance Corp. required the banks it supervised to counsel customers who use frequent overdrafts about alternate ways to manage their money. The Office of the Comptroller of the Currency proposed its own guidance, which would cover national banks such as JPMorgan or Wells, last year.
It's unclear how the rules have affected enrollment. Moebs estimates that 77 percent of bank customers have opted in, while the Consumer Bankers Association concluded in an October study that the rate was 17 percent. The Center for Responsible Lending, a Durham, North Carolina-based advocacy group, estimated the opt-in rate at about 33 percent.
Understanding how many people are signing up may help inform the debate about whether the banks' marketing is deceptive. That's why the consumer bureau hopes to clarify the enrollment rate as part of its inquiry, said the people briefed.
The rule changes in 2010 didn't stop banks from marketing their overdraft programs, which they portray as a consumer benefit, said Susan Wolfe, vice president for Mintel Comperemedia, a London-based consultancy that catalogs marketing materials in financial services.
"The banks are dealing with significant trust and image issues, so they're trying to be seen as a partner," Wolfe said in an interview.
Chase, the retail arm of JPMorgan, warns customers who don't opt for the overdraft protection that they will "need to make sufficient deposits so that everyday debit card purchases will be approved," according to a letter from the bank posted on the website mainstreet.com in February.
Susan Weinstock, director of the Safe Checking in the Electronic Age Project at the Pew Charitable Trusts in Washington, said that marketing has led to consumer confusion.
Pew conducted two focus groups on overdrafts during April 2011 and found that people frequently misconstrued the notion of opting out, Weinstock said.
"We did focus groups where people said, 'I opted in so I won't have to pay the overdraft fee,'" Weinstock said.
Beyond the question of marketing, the Center for Responsible Lending and other consumer groups have maintained that the Fed's rule should have gone further.
"Especially where one party's incentives are so strong to entice consent, disclosure will not prevent abuses," said Rebecca Borne, senior policy counsel at the center. "You need substantive reforms of the product."
The center has called on regulators to require that fees be "reasonable and proportional" to the costs incurred by banks in covering overdrafts.