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Abstract

Attention on the arguable pervasiveness of overdraft fees has

been increasing in recent years. Overdraft programs were originally

offered to banks’ trusted, high-dollar customers on a discretionary

basis. Technology brought about debit cards and electronic payment

methods along with direct deposit and enhanced the complexity of

processing transactions. Some practices increased the likelihood of

overdrafts. For example, reordering transactions such that they post

to the account from the largest to smallest dollar amount received

distinct scrutiny—and is discouraged by regulators. Today, the majority

of overdraft fees are paid by economically disadvantaged, vulnerable

consumers; more specifically, by Black and Hispanic consumers.

The cycle of poverty and historical racial inequities in

financial institutions likely contribute to this pattern. However, there

is evidence that some consumers expect overdraft fees and utilize

overdraft programs as a cheaper form of short-term credit. Access to

short-term credit is crucial for many Americans living paycheck-to-paycheck,

so it is important that they have clear and accurate information

about their options. Banks provide several disclosures at account

opening and it is not feasible to do away with overdraft fees

altogether. The Consumer Financial Protection Bureau recently proposed

a rule that would limit overdraft fee revenue for very large

financial institutions, and there is recently proposed legislation that

would amend the Dodd-Frank Act’s enforcement mechanism. This

Article discusses some potential implications of these actions, concluding

that while both approaches are interesting steps, there are

other considerations that should be proactively reviewed to avoid

further harm to vulnerable consumers.

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