D.C. misses the point about overdraft: It helps consumers
House Democrats want legislation limiting overdraft fees to one per month for each consumer, and no more than six fees in a single year. But draconian steps like this and others like it would remove a safe and convenient option for consumers managing their budget and expenses.
The Consumer Financial Protection Bureau expressed a similarly heavy-handed view on overdraft in an August report indicating the belief that consumers may not fully understand the overdraft product. The CFPB released four sample disclosures to make it easier for users to evaluate the costs and risks of overdraft coverage. These new forms are currently being tested on consumers.
The CFPB apparently feels that all consumers are ignorant. CFPB Director Richard Cordray said consumers “need to better understand how an overdraft works and whether they want to take the risk of paying overdraft fees on debit-card transactions and ATM withdrawals.” But this point seems to overlook the reality that debit cards, ACH and ATM withdrawals — not checks — are how most consumers conduct business today.
In early October, the CFPB released its “National Financial Well-Being Survey,” which found that 40% of Americans struggle to pay bills. The report is based on how 6,400 consumers responded to 10 questions concerning how they feel about their finances.
The CFPB’s 112-page report failed to mention that one way these consumers survive when they have difficulty making their rent or mortgage payment, purchasing groceries and medicine, and making health insurance payments is by overdrawing their checking account.
For example, a consumer typically must pay his or her rent, buy groceries and purchase required medication one week prior to payday. If a bank is only permitted to charge one overdraft fee per month, then two of these payments will be returned as insufficient funds.
Financial institutions are giving consumers an easy, safe and convenient way to survive by permitting an overdraft. But if financial institutions cannot charge a fee to pay an overdraft, then the financial institutions will refuse to pay the item. If someone overdraws an account with a check or ACH payment, the payment will then be returned and an insufficient funds fee will be charged to the consumer.
In addition, if consumers are restricted on the number of times they may overdraw their accounts, then they may resort to using payday loan companies, loan sharks and other less convenient, more dangerous and potentially more expensive alternatives.
How does it benefit the consumer when they can no longer make necessary payments and purchases?
How does it benefit the consumer when merchants will no longer accept their checks, because of previous checks being returned for insufficient funds, and when the consumer is charged a $30 to $50 fee by the merchant for a returned check or ACH item?
Most banks limit a consumer that has the overdraft service to being overdrawn not more than 15 to 30 continuous days. If that limit is exceeded, then the overdraft service is suspended. In addition, some banks revoke the overdraft service if the service is suspended three times in a 12-month period. These measures are intended to help prevent the consumer from developing a habit of perpetual overdrafts.
Community bankers will frequently hear from customers that they like their local bank’s overdraft checking program. Who knows, perhaps even members of Congress benefit from this service.