As readers of the blog know, overdraft fees are big profit generators for the big banks. Tens of billions of dollars big. So, what's new? The CFPB sees these large fees (average of $34 per overdraft) and wonders whether consumers really understand what they are signing up for when they opt-in to overdraft protection. This current event is a good opportunity to blend a discussion about policy while helping your students better understand a checking account "gotcha."

Let's start at the beginning. What's an overdraft fee? From CFPB Press Release:

An overdraft occurs when consumers lack the funds in their account to cover a transaction, but the bank or credit union pays anyway. Financial institutions may charge a fee for this service, typically around $34 per transaction, and require that the account deficit be repaid with subsequent deposits. In 2010, federal regulations began requiring financial institutions to obtain a consumer’s consent in advance before charging overdraft fees on most debit card transactions and ATM withdrawals. Consumers who do not opt in to overdraft coverage will generally have debit card purchases and ATM withdrawals declined with no charge if their account doesn’t have enough funds to cover the transaction at the time they attempt it.

In addition to debit card transactions and ATM withdrawals, consumers can overdraw their account through checks, online bill payments, or direct debits from lenders or other billers. Banks and credit unions can charge overdraft fees on checks or electronic payments made through the Automated Clearing House system, and on debit card payments set up on a recurring basis. Charging these fees does not require the consumer to opt in, because those fees are not covered by the 2010 rule.

Good follow-up question for your students:

• What are the various types of banking transactions that can cause you to overdraw your account?
• Which require you to opt-in in order to be charged? 
• If you don't opt-in to overdraft protection and don't have enough money in your account, what are the consequences?

The CFPB also released a study indicating that a small percentage of borrowers make up most of the overdraft fees collected. Here's the key stat from that study:

The study found that 9 percent of accounts are frequent overdrafters and they incurred 79 percent of overdraft fees. Today’s study is based on data from several large banks that together account for well over 40 million consumer checking accounts.

So, what's the CFPB proposing? Better disclosure. From NY Times:

Now, the Consumer Financial Protection Bureau is taking a crack at redesigning the form used by banks to explain overdraft options to customers, and has published samples of four possible versions for public scrutiny.

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Check out the NGPF Fine Print to help your students understand the fees described in a Checking Account agreement. 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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