Consumer bureau doles out first overdraft penalty

The Consumer Financial Protection Bureau cracked down on a bank’s use of overdraft fees for the first time Tuesday, fining an Alabama bank $7.5 million for illegally reaping the fees.

Regions Bank will pay the fine, and has refunded $49 million in ill-gotten fees, in the first-ever time the CFPB has punished a bank for improperly collecting fees when accountholders withdraw more funds than they possess.

{mosads}The CFPB said that the bank, based in Birmingham, Alabama, improperly assessed overdraft fees on accountholders that did not opt in to the service, failed to fix the problem when they first found it, and misrepresented the existence of those fees when it came to certain financial products.

In 2010, the government established rules that barred banks from charging overdraft fees on customers that tried to withdraw money from an ATM or complete a debit-card transaction, unless those customers opted in to those fees initially. Instead, banks and credit unions were required to simply reject those transactions if there were insufficient funds, rather than automatically let accountholders overdraft their accounts and pay a resulting fee.

In announcing the latest action, the CFPB said that the use of overdraft fees has grown from an “occasional courtesy to a significant source of industry revenues.”

Regarding Regions Bank, the CFPB said that the bank failed to allow some accountholders to opt in to overdraft coverage, and still charged them overdraft fees of up to $36 per transaction.

Then, after discovering the issue, the bank waited nearly a year before it stopped charging those improper fees, according to the CFPB.

At the same time, the CFPB determined that the bank improperly charged overdraft and other fees tied to a deposit advance product, which is similar to a payday loan in that it is a small-dollar loan intended to be paid back in short order.

In that case, if the bank automatically collected on that loan from a checking account that was low on funds, one of two things could happen. Either the bank could overdraw the account and charge an overdraft fee, or the bank could reject its own attempt to withdraw funds, and charge the accountholder an insufficient funds fee. From November 2011 to August 2013, the CFPB determined the bank charged roughly $1.9 million in these types of fees to over 36,000 customers.

Under the regulatory action, the bank will pay a $7.5 million fine, and also has agreed to independently identify all accountholders charged improper fees and provide them a refund.