Read any good bank disclosure forms lately? Researchers at the Pew Charitable Trusts carefully read checking account disclosures from 12 of the nation’s largest banks and 12 of the largest credit unions to see what a new customer would face.
In a just-released report, Pew says the disclosure documents are long and confusing which can result in costly and unexpected penalty fees for overdrawing that account. By one estimate, Americans paid $29.5 billion in overdraft fees last year.
“They make it pretty complicated,” says Susan Weinstock, director of Pew’s Safe Checking in the Electronic Age Project. “Consumers tell us they don’t read these things because they’re impossible to read.”
Nessa Feddis, a spokesperson for the American Bankers Association, questions Pew’s findings and conclusions. “They seem to be saying that they don’t have much confidence in American consumers or their choices,” Feddis said.
The Pew report also calls for regulatory changes to increase transparency and protect bank customers from predatory practices.
Significant Finding No.1:
Financial institutions do not summarize important policies and fee information in a uniform, concise, and easy-to-understand format that allows customers to compare account terms and conditions.
“The forms are long and confusing. The text is very dense. It’s a lot of legalese and very hard for a consumer to wade through,” Weinstock says.
The median length of the checking account disclosure form at the banks was 69 pages. It was 31 pages at the credit union. But is shorter necessarily better?
“Although shorter, credit union disclosures often do not include information that would allow a customer to compare account fees, terms, and conditions,” the report says.
Another problem: there are no consistent names for the same fee. Pew researchers found credit unions had eight different names for “overdraft penalty fee,” while banks used five different names for “extended overdraft penalty fee.” This inconsistency makes it difficult to comparison shop for a checking account.
Significant Finding No. 2:
Financial institutions do not provide account holders with clear and comprehensive information about overdraft options and their costs.
Financial institutions typically let you choose from three overdraft options:
You can decide not to opt in;
You can agree to an “overdraft penalty plan” that lets you overdraw and pay a sizeable fee (median fee is $35 for banks, $25 for credit unions);
You can set-up an “overdraft transfer plan” that will move money into your checking account from a savings account – at a much lower cost – to prevent an overdraft.
Pew notes that banks and credit unions are not required to provide complete information about the various services available. As a result, some people may not learn about lower-cost options.
Significant Finding No. 3:
All 12 banks surveyed either reorder withdrawals from highest to lowest dollar amount or reserve the right to do so – without notice to the customer – thus maximizing overdraft fees.
There are no federal rules that spell out how financial institutions should process checking account transactions. It’s up to the bank or credit union. This makes it possible to maximize overdraft fees by processing deposits and withdrawals in a way that reduces the account balance as quickly as possible.
Here’s how this manipulation can cost you. Let’s say you have $500 in your account. You write a series of checks that day: $25, $75, $125 and $600. If the bank processes those checks in order, you would overdraw once and pay one overdraft fee.
But if the bank processed those checks from highest to lowest, you would overdraw the account with the $600 check and then the other three. That means the bank can hit you with four penalty fees.
“We don’t see any point for this, except that it maximizes overdraft fees,” Weinstock says. “Even a responsible consumer who wants to try to know what their balance is can’t if the bank is busy reordering your transactions trying to jack up the fee.”
Feddis of the ABA says many banks now process withdrawals from low to high or in consecutive order. But insists financial institutions should not be required to handle them that way. She says people’s preferences vary and some customers might want certain transactions processed from high to low.
Significant Finding No. 4:
Certain overdraft fees have increased.
Many banks charge an “extended overdraft penalty fee” if the customer does not deposit enough money to cover both the overdraft and the penalty fee within a specified period (normally around seven days).
Pew found that the median extended overdraft penalty fee has increased from $25 in 2010 to $33 today. That’s a 32 percent increase in just two years.
Recommendations for new rules, regulations or laws
Based on its findings, Pew says Congress or federal regulators must act to protect consumers, promote a competitive marketplace and create a level playing field for all financial institutions.
Pew would like to see banks and credit unions required to:
Summarize information about checking account terms, conditions, and fees in a uniform, concise, and easy-to-read format
Provide account holders with clear, comprehensive terms and pricing information for all available overdraft options
Post deposits and withdrawals in a fully disclosed, objective, and neutral manner that does not maximize overdraft fees – for example, in chronological order
Overdraft penalty fees be reasonable and proportional to the financial institution’s costs in providing the overdraft loan or to the size of the overdraft itself