by Kathleen M. Conley, Supervisory Consumer Financial Services Analyst, Federal Reserve Board
As part of a study requested by Congress, employees of the U.S. Government Accountability Office (GAO) recently visited 185 branches of banks, thrifts, and credit unions nationwide to request documents on the fees associated with basic checking and savings accounts. The GAO, an independent agency known as Congress's "watchdog," found that consumers shopping for accounts may find it difficult to obtain account information (fees, terms, and conditions) upon request before opening an account. The GAO reached this conclusion after its employees were unable to obtain a comprehensive list of all checking and savings account fees, when requested, at 40 (22 percent) of the branches visited. The GAO was also unable to obtain the terms and conditions for accounts, including information on when deposited funds became available and how overdrafts were handled, at 61 (33 percent) of the branches.
These findings are included in a report issued by the GAO in March 2008. The full report (GAO-08-281), titled "Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts," can be found on the GAO's website.1
According to the GAO report, in 2006 consumers paid over $36 billion in various fees associated with checking and savings accounts at depository institutions. Members of Congress, consumer groups, and others have raised a variety of concerns about these fees, for example, whether depository institutions have increased fees as a source of revenues and, if so, the impact of this trend on consumers. In addition, some questioned how regulators address fee practices in their oversight of depository institutions.
As a result of these concerns, Rep. Carolyn B. Maloney (D-NY), chair of the House Subcommittee on Financial Institutions and Consumer Credit, requested that the GAO conduct a study to examine three things: (1) the trends in the types and amounts of checking and deposit account fees, (2) how banking regulators address such fees in their oversight of depository institutions, and (3) the extent to which consumers are able to obtain information on account fees, terms, and conditions, upon request, prior to opening an account.
In its study, the GAO found that average fees for some checking and savings account features (such as overdrafts, insufficient funds, returns of deposited items, and stop payment orders) have increased since 2000, while other fees (such as monthly account maintenance fees) have generally declined. For example, the average overdraft fee increased about 11 percent (after an inflation adjustment) between 2000 and 2007. The GAO indicates that changes in both consumer behavior and the practices of depository institutions are likely influencing these trends in fees. Consumers are increasingly using electronic forms of payment that result in rapid or even immediate debits, a development that may mean an increasing number of charges for insufficient funds or overdrafts. Additionally, many depository institutions have automated overdraft protection programs that have been increasingly marketed to customers.
The GAO also found that interagency examination procedures2 do not require examiners to verify whether new or potential customers are actually able to obtain the required disclosure documents before opening an account. Nor do the procedures require examiners to assess whether fees are reasonable. Examiners currently focus on reviewing an institution's policies, procedures, and advertisements for compliance with Regulation DD and on reviewing a sample of account disclosure documents for accuracy and completeness as well as for regulatory compliance. The GAO's finding that its employees did not always receive disclosure information from institutions led the GAO to conclude that while consumers may consider convenience or other factors besides costs when shopping for checking or savings accounts, the inability to obtain information about fees and the conditions under which fees are assessed prior to opening an account "hinders their ability to make meaningful comparisons among institutions."3
In addition, the GAO reviewed information from the institutions' websites and found that information on account fees, terms, and conditions was not readily available on the Internet. The GAO recognized that depository institutions are not required to have a comprehensive list of account fees, terms, and conditions on websites if these sites are merely advertising and do not allow consumers to open an account online.
After the release of the GAO study, Rep. Maloney stated in a March 3, 2008, press release: "It's troubling that many consumers may find it difficult to obtain account terms and information about fees before opening an account. You don't have to buy a car before you find out how many miles per gallon it gets, and you don't have to buy a house before you find out what your taxes will be. Why should consumers be forced to walk blindly into the terms and conditions of a bank account? Americans devote a lot of their hard-earned money to bank fees. Many of these fees are for useful services that most consumers are happy to pay for; banks have the right to make money for these valuable services. Problems arise, however, when consumers get smacked with unexpected bank fees - that's just not fair." Rep. Maloney introduced H.R. 946, which is intended to address abusive overdraft fees and equip bank customers with more control and information about overdraft fees.
What do the GAO findings mean for your bank? In its report, the GAO recommended that the federal banking regulators, including the Federal Reserve, strengthen their bank examinations to ensure that consumers receive appropriate disclosures for account fees, terms, and conditions associated with deposit accounts prior to opening an account.
Interagency examination procedures have always included steps to determine whether account disclosures are provided to a consumer upon request. But since the release of the GAO report, banks can expect a greater focus on these requirements by examiners. In fact, the agencies recently issued updated examination procedures with steps for examiners to use that emphasize the existing requirement to provide full account disclosures of fees, terms, and conditions to a consumer, upon request, regardless of whether the consumer is an existing or a prospective customer.
What can your institution do to ensure it complies with Regulation DD? Train, maintain, and retain:
The GAO concludes its report by emphasizing the importance to consumers of effective account disclosures as they shop for deposit accounts in the current environment of upward trending fees. As a result of the GAO's findings, banks can expect questions from examiners on how banks ensure that consumers receive disclosure information from bank employees when requested.
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Kenneth Benton, Editor
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