The costs and risks of overdraft protection are not well understood by many Americans. So it’s no surprise that a new study using mystery shoppers found that big banks’ explanations of overdraft protection programs are inconsistent and unclear.
That was one major finding in a report by the California Reinvestment Coalition, Woodstock Institute, Reinvestment Partners and New Economy Project. The four organizations are calling upon the Consumer Financial Protection Bureau and federal banking regulators to toughen up consumer protections.
A little background: Banks used to automatically enroll customers in so-called overdraft protection, which enabled the bank to cover the overdraft and then charge the customer a fee. In 2009, a new federal rule said customers would have to choose or opt in to this overdraft program if they wanted it. It’s clear that many people are still confused.
“The numerous conflicting and confusing messages given to the secret shoppers in more than 60 visits to bank branches should be great cause for concern for banks and for their regulators. These visits show that the $35 cup of coffee ($5 for coffee, $30 for overdraft fee) is alive and well. Overdraft opt-in rules are clearly not enough to protect consumers from this expensive product,” said Paulina Gonzalez, executive director of the California Reinvestment Coalition.
In the study, 64 mystery shopper visits were made to 39 big-bank branches in New York City, Oakland, Calif., Chicago and Durham, N.C. Four of the biggest banks in each city were selected. For each bank, the shoppers visited two branches in predominantly white neighborhoods and two branches in communities of color, the release said.
Some of the other findings:
- Inconsistency. The banks’ explanations of overdraft programs were “highly inconsistent, and often unclear and incorrect,” suggesting that consumers would be unable to make informed decisions about them, the release said.
- Triggers. In many cases, bank employees did not adequately explain how overdraft fees are triggered.
- Opt in. Instead of explaining that the overdraft program for ATM and debit cards has an opt-in requirement, as dictated by federal regulations, bank employees often led consumers to believe the feature was automatic.
- White vs. non-white. “In two of the cities, bank branches visited in predominantly non-white neighborhoods had limited staff availability and long wait times, in stark contrast to well-staffed branches in predominantly white neighborhoods,” the release said.
The press release said:
“Overdraft on ATM withdrawals and debit purchases is a debt trap that pushes lower-income people out of the banking system. Regulators should ban this product,” said Josh Zinner, co-director of New Economy Project.
Banks generated $31.9 billion in revenue from overdrafts in 2013. “Banks derive the vast majority of overdraft revenue from a relatively small percentage of struggling customers who repeatedly overdraft, and who are disproportionately lower income or people of color,” the report said.
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