One hundred eleven pages. That is the median length of the checking account disclosures consumers are supposed to read and understand before opening an account at any of the 10 largest banks, according to documents analyzed in a new report from the Pew Health Group's Safe Checking in the Electronic Age Project. Failure to provide clear and comprehensive disclosure can expose account holders to hidden and potentially dangerous risks.
The study, Hidden Risks: The Case for Safe and Transparent Checking Accounts, also finds that overdraft penalty fees are disproportionate to the size of the average overdraft amount and are costing consumers billions of dollars each year. In fact, these charges are estimated to cost Americans $38.5 billion in 2011, which is an increase of $18.6 billion since 2000. While banks have to incur a risk that they will not be repaid, most institutions manage this by limiting the overdraft amount given to any customer.
Pew's research unveiled that the median overdraft penalty fee is $35, which is an increase from $27 in 2007. Likewise, the FDIC documents the median overdraft amount is $36. If overdraft were treated like a short-term loan with a repayment period of seven days, then the annual percentage rate, or APR, on the typical overdraft would be over 5,000 percent. Additionally, Pew found that as of October 2010, when the data was collected, 100 percent of the accounts that were examined retained the right to re-order withdrawals from the highest to lowest amount and 8 out of the 10 banks reserved the right to post withdrawals before deposits. Since then, several banks have reformed these practices but the playing field is not level.
“It is exceedingly difficult for the average consumer to find the basic information needed to either select a checking account or to responsibly manage the one they currently have,” said Shelley A. Hearne, managing director of the Pew Health Group. “We are calling on policy makers to ensure that overdraft fees are reasonable and proportional. They must also address both the length and clarity of checking account disclosures, which are often 111 pages.”
The report is the first of a series from Pew's Safe Checking in the Electronic Age Project,which encourages policies that better protect and inform American checking accountholders. For this study, Pew analyzed more than 250 types of checking accounts offered online by the 10 largest banks in the United States, which hold nearly 60 percent of all deposits nationwide.
Key findings show that as of October 2010:
- Customers cannot easily find important account terms and conditions. Accounts had a median of 111 pages of disclosure documents, including account agreements, addendums to account agreements, fee schedules and pages on the bank's website.
- Bank overdraft penalty fees are disproportionate to the size of the average overdraft amount.
- Accountholders are not provided complete information about the costs of overdraft options. Institutions are not required to provide complete information about all the services available at the time a customer opts in, including lower-cost options. These plans have significantly different features and fees. For instance, Pew found the median overdraft penalty fee to be $35, compared to the median transfer fee of $10.
- Banks reserve the right to re-order transactions in a manner that will maximize overdraft fees. 80 percent of checking accounts contain binding mandatory arbitration agreements or fee-sharing provisions that on their face require the accountholder to pay the bank's “loss, costs, and expenses” in a legal dispute regardless of the outcome to the case. “Congress acted nearly two years ago and passed the Credit CARD Act of 2009, which protected credit card holders from practices deemed ‘unfair' or ‘deceptive',” said Eleni Constantine, director of the Financial Security Portfolio at the Pew Health Group. “Now is the time for policy makers to further protect American families by ensuring that our checking accounts are safer, easier to use and more transparent.”
Hidden Risks includes a number of recommendations for policy makers, including:
- requiring banks to provide information about checking account terms, conditions and fees in a concise, easy-to-read format, similar to the Schumer Box used for credit cards;
- directing depository institutions to provide accountholders with clear, comprehensive pricing information for all available overdraft options;
- requiring that overdraft penalty fees be reasonable and proportional to the bank's costs in providing the overdraft loan. According to the FDIC, in order to assess risk, most banks establish credit limits for accountholders' overdrafts.
- making depository institutions post deposits and withdrawals in a fully disclosed, objective and neutral manner; and
- urging the Consumer Financial Protection Bureau to examine the prevalence of binding arbitration clauses, fee shifting provisions and “loss, costs and expenses” clauses in checking accounts, and assess whether such provisions prevent consumers from obtaining relief.
For more information on the Safe Checking in the Electronic Age Project and the issues it covers, please visit www.pewtrusts.org/safechecking.