The Case for Safe Checking Accounts
A checking account is the financial cornerstone for the overwhelming majority of American families—often the bank product that provides consumer entry into the financial mainstream. Nine in 10 adult Americans have a checking account, representing a significantly larger proportion of the population than those holding a mortgage or credit card.10 Millions of consumers use bank or credit union checking accounts every day to collect their earnings and pay their bills. The federal government, through the Federal Deposit Insurance Corporation (FDIC), encourages the use of checking accounts by providing a guarantee that the money in them (up to $250,000 per account) is safe even if the bank fails.11 As a result of these factors, checking accounts have come to play a vital role in the American economy by facilitating the safekeeping and transfer of funds for consumers and offering a gateway to savings and credit required for investments such as the purchase of homes and higher education. It is to the benefit of banks and consumers, and the nation as a whole, that checking accounts be safe and user friendly.
Yet checking accounts lack some important types of consumer protections compared to other consumer financial products. For example, credit cards have limitations on the dollar amount of late fees and over-the-limit fees.12 In addition, their applications must clearly and concisely disclose key terms in what is known as a "Schumer Box" (see Figure 2).13 In contrast, checking accounts have neither limitations on fees nor any requirements that critical information be presented in a consolidated format.
Regulators are authorized by federal banking laws to reduce risks to consumers in checking accounts, but that authority has not been actively utilized.14 Checking accounts are subject to disclosure requirements under the Truth in Savings Act and the Electronic Fund Transfer Act.15 However, Pew's research shows that these requirements have not been effective in producing clear and useful information for consumers. In addition, the Electronic Fund Transfer Act and the Uniform Commercial Code provide certain dispute rights to consumers.16 The Expedited Funds Availability Act governs how long a bank may hold a deposit before posting it to a customer's checking account.17 Despite substantial advances in technology that speed the processing of a deposit, the Board of Governors of the Federal Reserve (the Fed) has only recently proposed the first update in over 20 years to the relevant regulations.18 Protections are also found in the Federal Trade Commission Act (FTCA), which defines "unfair or deceptive acts or practices" (UDAP) and allows certain banking regulators to ban such practices, yet no federal agency has ever applied these provisions to checking account practices.19
Nine of the 10 banks in our study are currently supervised by the Office of the Comptroller of the Currency.20 The Fed, under the FTCA, has the authority to write UDAP regulations governing providers of checking accounts and other consumer financial products.21 However, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 transfers rule-writing authority and supervision for all 10 of the banks that Pew examined to the new Consumer Financial Protection Bureau (CFPB), and its regulatory reach will include the power to ban those practices that are deemed to be "abusive" and "unfair or deceptive."22 Beyond this broad authority, the CFPB is also authorized to write regulations to ensure that the features of any consumer financial product or service are fully, accurately, and effectively disclosed.23
In October 2010, the Pew Health Group's Safe Checking in the Electronic Age Project began a study of checking account terms and conditions to examine both the state of the marketplace and the effect of current regulations covering checking accounts. This expansive research 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 deposit volume nationwide.25
To evaluate the safety and transparency of checking accounts, Pew sought to quantify both the types and size of fees, as well as the important bank policies that Americans are most likely to encounter while using their checking accounts. In researching checking accounts, Pew charted the median and the range for many fees; the variations in key practices; and the extent of certain practices, including some that are the subject of legal challenges.26 Pew researchers collected checking account data found both online and in paper copy at bank branches (see Appendix B: Methodology).27
From this research, we identified patterns that impose hidden, unnecessary, and potentially dangerous risks on consumers. Based on these findings, we segmented this paper into five topic areas: disclosure, overdraft options, overdraft fees, processing of deposits and withdrawals, and dispute resolution. Potential solutions to undue risks are also indentified.
2. Check Clearing for the 21st Century Act (Check 21), 12 U.S.C.S § 5001 et seq.
3. See, e.g., In re Checking Account Overdraft Litig., 734 F. Supp. 2d 1279 (S.D. Fla. 2010).
4. Press Release, Moebs Services, Overdraft Fee Revenue Drops to 2008 Levels for Banks and Credit Unions, (Sept. 15, 2010), available at http://www.moebs.com/Pressreleases/tabid/58/ctl/Details/mid/380/ItemID/193/Default.aspx.
5. "Most banks (73.0 percent) with automated overdraft programs established overdraft coverage limits for customers in their written policies, consistent with the bank's lending policies. However, large banks were more likely than small banks to specify coverage limits on automated over draft programs in their written policies. About 83 percent of large banks established credit limits, compared with 65.2 percent of small banks. Automated overdraft coverage limits stipulated in written policies ranged from $85 to $10,000, and the median credit limit was $500. As with per-item fees, overdraft coverage limits established in policies also tended to be lower for small banks." Federal Deposit Insurance Corporation, "Study of Bank Overdraft Programs" (November 2008) p 16, available at http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_ v508.pdf.
6. Expedited Funds Availability Act, 12 U.S.C.S. § 4002 (regulating when deposited funds must be made available), 12 U.S.C.S. § 4004 (providing for disclosure to customers of a bank's funds availability policies). The FDIC and OTS have issued guidance to the financial institutions that they oversee regarding best practices and admonishing financial institutions for manipulating transaction order, but these guidelines fall short of binding federal regulation. Federal Deposit Insurance Corporation Supervisory Guidance for Overdraft Protection Programs and Consumer Protection FIL-81-2010 (Nov. 24, 2010); Office
of Thrift Supervision Guidance on Overdraft Protection Programs, 70 Fed. Reg. 8428 (Feb. 18, 2005), available at http://files.ots.treas.gov/480028.pdf.
7. The "loss, costs, and expenses" clauses are found in the account agreements of four banks: PNC Bank, "Disputes Involving Your Account," in Account Agreement for Personal Checking, Savings, and Money Market Accounts, 10 (2010); TD Bank, "Indemnity," in Personal Deposit Account Agreement, 20 (June 2010); SunTrust, "Adverse Claims," in Rules and Regulations for Deposit Accounts, 20 (June 2010); HSBC, "Reimbursement of Bank in the Event of a Dispute," in Rules for Deposit Accounts, 27 (June 2010).
8. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1028, 12 U.S.C.S. § 5518.
9. 12 C.F.R. § 226.5a.
10. Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach & Kevin B. Moore, "Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances," Federal Reserve Board - Division of Research and Statistics, February 2009, available at http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf.
11. Federal Deposit Insurance Act, 12 U.S.C.S. § 1821.
12. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, 111 Pub. L. No. 24, 15 U.S.C.S. § 1665d.
13. 12 C.F.R. §226.5a; Senator Charles E. Schumer, http://www.schumer.senate.gov/new_website/consumers.cfm.
14. Federal Deposit Insurance Act, 12 U.S.C.S. § 1811 et seq.; Truth in Savings Act, 12 U.S.C.S. § 4301 et seq.; Electronic Fund Transfer Act, 15 U.S.C.S. § 1693 et seq.; 12 C.F.R. § 205.1 et seq.; 12 C.F.R. § 230.1 et seq. Following implementation of the Wall Street Reform and
Consumer Protection Act on July 21, 2011, the Consumer Financial Protection Bureau will also be empowered to reduce the risks to consumers in checking accounts (Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1011 et seq., 12 U.S.C.S. § 5491 et seq.).
15. Truth in Savings Act, 12 U.S.C.S. §§ 4302-4304; Electronic Fund Transfer Act, 15 U.S.C.S. §§ 1693b-1693d; 12 C.F.R. §§ 205.4, .7-.9, .17, 230.3-.6, .11.
16. 12 C.F.R. 205.11; U.C.C. § 4-402 (2005).
17. Expedited Funds Availability Act, 12 U.S.C.S. § 4002.
18. 12 C.F.R. § 229.12; Proposed Rule, Availability of Funds and Collection of Checks, 76 Fed. Reg. 16862 (March 25, 2011).
19. Federal Trade Commission Act, 15 U.S.C.S. § 57a(f). The Board of Governors of the Federal Reserve issued regulations under the FTCA, including restrictions on unfair credit contract provision, misrepresentations to cosigners, and charging late fees for the untimely payment of late fees. 50 Fed. Reg. 16695 (April 29, 1985). Subsequently, the FTCA rules in Federal Reserve Board Regulation AA were reserved and replaced in Regulation Z by rules implementing the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, 111 Pub. L. No. 24, 15 U.S.C.S. § 1601 et seq.; 12 C.F.R. § 226.1 et seq.; 75 Fed. Reg. 7658 and 7926 (Feb. 22, 2010). Additionally, the Office of Thrift Supervision and National Credit Union Administration have limited their current regulation of unfair and deceptive practices to consumer credit contracts. 12 C.F.R. § 535.1 et seq.; 12 C.F.R. § 706.1 et seq. (these were not affected by the CARD Act). Agencies empowered to take action against unfair and deceptive acts or practices include the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation. Following implementation of the Wall Street Reform and Consumer Protection Act on July 21, 2011, the Consumer Financial Protection Bureau will also be empowered to take action
against unfair, deceptive, and abusive acts or practices. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1031, 12 U.S.C.S. § 5531.
20. For a list of the roles of the various federal banking regulators, please see: U.S. Securities and Exchange Commission, "Banking Regulators," available at http://www.sec.gov.
21. Federal Trade Commission Act, 15 USCS § 57a(f).
22. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1031, 12 U.S.C.S. § 5531.
23. Id. § 1032, 12 U.S.C.S. § 5532. The Act requires that the disclosure information provide consumers with the ability to understand the costs, benefits, and risks associated with the product or service. The Act specifically allows the CFPB to include in its rulemaking the use of a model form that includes plain language, clear format and design, and succinct information. Any financial institution that uses the model form will be deemed to be in compliance with the CFPB's disclosure requirements.
24. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1031(d), 12 U.S.C.S. § 5531(d).
25. The proliferation of so many checking accounts among only 10 banks is largely due to state-by-state variations for each type of checking account a bank offered. For example, although Bank of America only offered three types of checking accounts online in October 2010— Advantage with Tiered Interest, eBanking, and MyAccess Checking—they actually had 38 unique checking accounts in this study because the terms and conditions for each of those three types of checking accounts are not the same in all 50 states.
26. See, e.g., In re Checking Account Overdraft Litig., 734 F. Supp. 2d 1279 (S.D. Fla. 2010).
27. Payments Source Database, "Total Deposits" (October 2010).
28. Truth in Savings Act, 12 U.S.C.S. § 4303(a), (d).
29. Id. § 4308 (providing authority to issue regulations and model forms); § 4309 (providing authority to enforce compliance with TISA requirements). See also, id. § 4303(e) (noting that disclosures must be clear, in plain language, and readily understandable).
30. Electronic Fund Transfer Act, 15 U.S.C.S. § 1693c(a).
31. Id. §§ 1693o, 1693b(b).
32. 12 C.F.R. § 230.4(b)(3)(i)(A), (4).
33. Id. § 230.3(a).
34. 12 C.F.R. § 230 Supp. I 230.3(a)(1)(i), (iv).
35. Id. § 230.3(a)(1)(ii)-(iii).
36. 12 C.F.R. § 205.7(b)(1), (4)-(5).
37. Id. § 205.7(a) (regulation requires disclosure "at the time a consumer contracts for an electronic fund transfer service or before the first electronic fund transfer is made…").
38. Id. § 205.17(b)(1), (c).
39. Protecting Consumers from Abusive Overdraft Fees: The Fairness and Accountability in Receiving Overdraft Coverage Act Hearing, Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Congress (Nov. 17, 2009) (testimony of John P. Carey, Citigroup North America Consumer Banking), available at http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_ id=5fc3d6c8-2f17-4f94-a30f-37d28a69e6d0; Andrew Martin, "Bank of America to End Debit Overdraft Fees," N.Y. Times, March 9, 2010, available at http://www.nytimes.com/2010/03/10/your-money/credit-and-debit-cards/10overdraft.html.
40. Bank of America, Deposit Agreement and Disclosures—Effective June 19, 2010—Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Virginia and Washington D.C., available at https://www3. bankofamerica.com/deposits/odao/popup/disclosure_popup.cfm?template=dad&Requ estTimeout=300; Citibank, Client Manual— Consumer Accounts—Including Our Privacy Notice—U.S. Markets—Effective July 1, 2010, available at https://online.citibank.com/JRS/popups/ao/Client_Manual_20100701.pdf.
41. 12 C.F.R. § 204.2(d)(2). For overdraft transfers that link to a line of credit or credit card, the accountholder will pay a minimal amount of interest in addition to the overdraft transfer fee.
42. 12 C.F.R. § 205.17(a), (b), (d)(5).
43. 12 C.F.R. § 205 App. A-9. The current model disclosure issued by the Federal Reserve only recommends the following statement: "We also offer overdraft protection plans, such as a link to a savings account, which may be less expensive than our standard overdraft practices. To learn more, please ask us about these plans."
44. Federal Deposit Insurance Corporation, "Study of Bank Overdraft Programs" (November 2008), available at http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf.
45. Banks typically assess an extended overdraft fee (explained in a subsequent paragraph) after a balance is negative for seven days.We use this seven-day period in our calculation for this reason.
46. 12 C.F.R. § 204.2(d)(2).
47. "Excessive overdraft fees are analogous to loan flipping," in Comments of Center for Responsible Lending, Consumer Federation of America, National Consumer Law Center (on behalf of its low-income clients) and Consumer Action, Consumers Union, National Association of Consumer Advocates,U.S. PIRG, on FDIC's Proposed Overdraft Payment Supervisory Guidance FIL 47 2010, (September 27, 2010), 10.
48. Dennis Campbell, Asis Martinez Jerez & Peter Tufano, Bouncing Out of the Banking System: An Empirical Analysis of Involuntary Bank Account Closures (Harvard Business School, June 6, 2008). See also Michael S. Barr, Financial Services, Savings and Borrowing Among Low- and Moderate-Income Households: Evidence from the Detroit Area Household Financial Services Survey (University of Michigan Law School, March 30, 2008) (finding that among those surveyed who formerly had a bank account, 70% chose to close the account themselves, citing moving, worrying about bouncing checks, and excessive fees as their reasons for closing the account. The remaining formerly banked, 30%, reported that their bank closed their account; the primary reason was bounced checks and overdrafts).
49. Federal Deposit Insurance Corporation Supervisory Guidance for Overdraft Protection Programs and Consumer Protection, FIL-81¬2010 (Nov. 24, 2010).
50. 12 C.F.R. § 227.1 et seq.; 12 C.F.R. § 535.1 et seq.; 12 C.F.R. § 706.1 et seq.
52. Federal Deposit Insurance Corporation Supervisory Guidance for Overdraft Protection Programs and Consumer Protection, FIL-81¬2010 (Nov. 24, 2010).
53. Office of Thrift Supervision Guidance on Overdraft Protection Programs, 70 Fed. Reg. 8428 (Feb. 18, 2005), available at http://files.ots.treas.gov/480028.pdf.
54. Center for Responsible Lending, "Overdraft Loans: Survey Finds Growing Problem for Consumers" (April 24, 2006), available at http:// www.responsiblelending.org/overdraft-loans/research-analysis/ip013-Overdraft_Survey-0406. pdf; Federal Deposit Insurance Corporation, "Study of Bank Overdraft Programs" (November 2008), available at http://www.fdic.gov/bank/analytical/overdraft/FDIC138_ Report_Final_v508.pdf.
56. Pew Health Group, "Unbanked by Choice: A look at how low-income Los Angeles households manage the money they earn" (July 2010), available at http://www.lafla.org/pdf/Unbanked_PEW2010.pdf.
57. The Overdraft Protection Act of 2009: Hearing Before H. Comm. on Financial Services, 111th Cong. 7-9 (2009) (statement of Nessa Feddis, VP and Senior Counsel, American Bankers Ass'n).
58. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, 111 Pub. L. No. 24, 15 U.S.C.S. § 1665d(a).
60. 12 C.F.R. § 226.52(b).
61. Due to rapid developments related to bank re-ordering practices, Pew researchers continued to monitor changes for these practices until publication of this report in late April 2011.
62. Chase, Account Rules and Regulations—Your Guide To: Checking, Savings, Certificates of Deposit, Overdraft Protection, Privacy Notice (Jan. 1, 2011).
63. Dickler, Jessica, "Good news on overdrafts! Citi will pay small checks first," CNN Money, Apr. 4, 2011, available at http://money.cnn.com/2011/04/04/pf/citi_check_cashing/index. htm.
64. A few state laws address the issue, mostly with a "good faith" requirement.
65. Federal Deposit Insurance Corporation Supervisory Guidance for Overdraft Protection Programs and Consumer Protection, FIL-81¬2010 (Nov. 24, 2010).
66. Gutierrez v. Wells Fargo Bank, 730 F. Supp. 2d 1080, 1114 (N.D. Cal. 2010) (Wells Fargo's expert witness is quoted as follows: "Even if they were to read, word for word…some of those lengthy documents, such as the account agreement…it would be impossible for [customers] to predict the exact balance [of their checking accounts] at any particular point in time.").
67. Prior to Gutierrez, 730 F. Supp. 2d 1080, numerous lawsuits challenged high-to-low posting order policies that increased the number of overdraft and NSF fees customers incurred. These lawsuits were brought under state contract and consumer protection laws. See, e.g., Hill v. St. Paul Fed. Bank for Savings, 329 Ill. App. 3d 705 (Ill. App. Ct. 2002) (consumer fraud, UCC, and deceptive business practices claims failed); Hassler v. Sovereign Bank, 644 F. Supp. 2d 509 (D. N.J. 2009) (consumer fraud, unjust enrichment, and contract claims failed). Regardless of the legal theory presented, all of these plaintiffs failed in their lawsuit. Since the $203 million judgment was handed down in Gutierrez, several banks have settled similar class action suits for millions of dollars. See, e.g., Trombley
v. National City Bank, 2011 U.S. Dist. LEXIS 2509 (D.D.C. 2011). In addition, a multidistrict litigation case is pending in the Southern District of Florida. This case is a consolidation of many class action suits from around the country challenging various banks' high-to-low posting order policies. In total, 31 banks are or were defendants, including 27 of the 44 largest financial institutions by deposit volume and all ten Pew analyzed. In re Checking Account Overdraft Litig., 2010 U.S. Dist. LEXIS 85494 (J.P.M.L. 2010).
68. E.g., In re Checking Account Overdraft Litig., 694 F. Supp. 2d 1302 (S.D. Fla 2010).
69. The Overdraft Protection Act of 2009: Hearing Before H. Comm. on Financial Services, 111th Cong. 7-9 (2009) (statement of Nessa Feddis, VP and Senior Counsel, American Bankers Ass'n). See also, Gutierrez v. Wells Fargo Bank, 730 F. Supp. 2d 1080, 1107 (N.D. Cal. 2010) ("Some banks argued that most customers prefer high-to-low posting because it results in their largest bills being paid first.").
70. In his opinion, the judge in Gutierrez found that "the only motives behind the challenged practices were gouging and profiteering" and high to low processing is "a trap—a trap that would escalate a single overdraft into as many as ten through the gimmick of processing in descending order. It then exploited that trap with a vengeance, racking up hundreds of millions off the backs of the working poor, students, and others without the luxury of ample account balances." Gutierrez v. Wells Fargo Bank, 730 F. Supp. 2d 1080, 1112, 19 (N.D. Cal. 2010).
71. See, e.g., Larin v. Bank of America, 725 F. Supp. 2d 1212 (S.D. Cal. 2010); Montgomery v. Bank of America, 515 F. Supp. 2d 1106 (C.D. Cal. 2007).
72. Gutierrez v. Wells Fargo Bank, 730 F. Supp. 2d 1080 (N.D. Cal. 2010). A federal court in Missouri also rejected the preemption argument in September 2010. Joseph v. Commerce Bank N.A., 2010 U.S. Dist. LEXIS 97664 (W.D. Mo. 2010).
73. Gutierrez, 730 F. Supp. 2d 1080, 1124.
74. In re Checking Account Overdraft Litig., 734 F. Supp. 2d 1279 (S.D. Fla. 2010).
75. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, 111 Pub.
L. No. 24, 15 U.S.C.S. § 1665d(e); 12 C.F.R. 226.52(b).
76. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1032(d), 12 U.S.C.S. § 5532(d).
77. David S. Schwartz, "Mandatory Arbitration and Fairness," 84 Notre Dame Law Review 3 (June 1, 2009); Amanda Perwin, "Mandatory Binding Arbitration: Civil Injustice by Corporate America" (August 2005), Center for Justice & Democracy: New York, available at http:// www.centerjd.org/archives/issues-facts/ArbitrationWhitePaper.pdf.
78. Federal Arbitration Act, 9 USC § 2; Tillman v. Commer. Credit Loans, Inc., 655 S.E.2d 362, 370 (N.C. 2008). See Johnson v. Keybank Nat'l Ass'n (In re Checking Account Overdraft Litig.), 718F. Supp. 2d 1352, 1358 (S.D. Fla. 2010).
79. In re Checking Account Overdraft Litig., 694F. Supp. 2d 1302 (S.D. Fla 2010); Johnson v. Keybank Nat'l Ass'n (In re Checking Account Overdraft Litig.), 718 F. Supp. 2d 1352, 1358
(S.D. Fla 2010).
80. Big Lots Stores v. Luv N' Care, 302 Fed. Appx. 423, 426 (6th Cir. 2008); Miles v. The N.Y. State Teamsters Conf. Pension & Ret. Fund Employee Pension Benefit Plan, 698 F.2d 593, 601-02 (2d Cir. 1983); Southwest Marine, Inc. v. Campbell Indus., 796 F.2d 291, 292-93 (9th Cir. 1986) (Noonan, J., concurring).
81. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 111 Pub. L. No. 203, § 1028(a), 12 U.S.C.S. § 5518(a).
82. Id. § 1028(b), 12 USCS § 5518(b).
83. U.C.C. § 4-403 (2005) "(b) A stop-payment order is effective for six months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in a record within that period. A stop-payment order may be renewed for additional six-month periods by a record given to the bank within a period during which the stop-payment order is effective." Available at http://www.law.cornell.edu/ucc/4/article4.htm#s4-303.