Banks Receive 31.5 Billion From Overdraft Charges Ahead of New Regulations
Section: Business & the Economy
A new Moebs report(pdf) shows that banks made 31.5 billion dollars in the past year from overdraft revenues. The $700 million increase came from a 3.6 percent increase in price and a 1.4 percent decrease in volume. The national median price for an overdraft went from $28 dollars in June, 2011 to $29 by June, 2012, a 3.6 percent increase. The report found that 26 percent of 144,000,000 consumer checking accounts frequently used overdrafts.
The Consumer Financial Protection Bureau(CFPB; see above video by Ron Howard) created by the current administration’s Dodd Frank Act will change overdraft regulations this year and early in 2013 for implementation in 2014. The delay is the result of conservative Democrats and Republicans wanting the program to pay for itself before the program begins and to give the new agency time to develop new regulations. Others have also claimed a political motive. They have argued that they hoped the regulations would be repealed if the President is not re-elected. The CFPB is currently investigating overdraft fees. Between July 21, 2011 and June 30, 2012, consumers submitted approximately 55,300 complaints about credit cards, mortgages, and other financial products and services to the CFPB.
“More importantly, the range of prices among the four major regions in the United States suggests that pricing in financial services is not homogeneous in the U.S. We’ve not seen this since we began surveying fees 30 plus years ago,”
The Moebs research found that overdraft charges varied from $8 to $45 with charges being $3 more in the South. However, that wide range was for small overdrafts of less than $40. For larger checks, the variability in overdraft prices was 61 times less!
The Moebs study found credit unions have a national median price of $27 per overdraft while the banks are $30 nationally. However, larger banks which are Presidential Candidate Romney’s strongest supporters but are opposed by the current administration, charged more (on average $35) while larger credit unions charged less (average $25). This bucked a trend in which big banks had lowered their overdraft prices to match those of other institutions.
The report also said that 57% of overdraft users go to payday lenders when they are short on funds.” Payday lenders may have extremely high long term interest rates but can be much lower in overcharge rates in the short term. The CFPB is currently investigating these practices. Some states (e.g., Minnesota) has passed legislation limiting profits from Payday loans which produced an outcry from some Republicans who argued this was interfering with the free market and was an example of excessive government regulation. For loans between $350 and $1,000, payday lenders cannot charge more than 33% annual interest plus a $25 fee. The Attorney general for Minnesota has filed eight lawsuits against Payday lenders.
Moebs also stated
“Most surprising to us was these retailers dropped the median price of a bad check from $30 to $25 in the past year, and 3.9 percent do not charge a fee for bad checks which is 10 times more than in 2011. This is more evidence the user wants price value and safety net convenience in payment processing,”
The financial industry’s response to these new regulations was consistent with past statements. They argued that the free market is giving consumer choices and that competition will reduce prices that have been rising under a deregulated environment since 2002, that consumers are irresponsible and should be more personally responsible, the buyer should beware and that any regulation would move us toward a nanny state.
However, others argued that banks are deceiving consumers into buying overdraft protections that profit the banks the most but are more costly to the consumer. If that is the case, then banks arguments would be an example of the Fundamental Attribution Error which attempts to blame victims for their problems.
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