Ed's Blog

Latest financial follies: "Bizarre" FHFA raising mortgage costs; CNBC Closing Bell overdraft debate

By Ed Mierzwinski
Senior Director, Federal Consumer Program

Over at the Consumer Law and Policy blog, Professor Alan White questions the latest antics of the "bizarre" Federal Housing Finance Agency (FHFA)--the government overseer of Fannie Mae and Freddie Mac. Professor White rips FHFA's proposal to punish several states that have successful foreclosure mediation programs designed to help keep consumers in their homes. Incredibly, FHFA czar Ed DeMarco wants to add a surcharge to the cost of mortgages in those states. It is well worth a look.

Meanwhile, yesterday I appeared on CNBC's Closing Bell with Maria Bartiromo and Bill Griffith (video link to our debate). In response to a study by bank consultant Moebs showing an increase in overdraft fee revenue, I debated "who is responsible?" for overdrafts with bank lobbyist Alex Sanchez, CEO of the Florida Bankers Association. As I explain, it's the banks' fault. Corporate irresponsibility has resulted in banks paying tens of millions (regional banks) to hundreds of millions (big banks) of dollars each in lawsuit settlements over their routine practice of re-ordering checks and debits from largest to smallest so more of them bounce. Also, I point out, the CFPB is investigating whether the way banks market the "opt-in" requirement for so-called "standard" overdraft protection is misleading. Along with others, we have repeatedly urged both the Congress and the CFPB to take further action to upgrade opt-in requirements and other modest overdraft reforms led by the Federal Reserve. Those reforms took effect in 2010. More background from Center for Responsible Lending.

There is some yelling involved on the video. Also, Alex uses a red herring when he starts talking about bank losses from fraudulent checks. Those fraudulent checks written by bad guys are a problem -- although not really as big as he claims -- but absolutely a red herring in this debate.  Checks and debits by actual customers (not bad guys) that bounce generally clear the second or third time through the system and well over 99% of the time. That is one reason banks offer "standard" overdraft protection, where they guarantee overdrafts for virtually any regular customer as a feature (you don't have to apply) of accounts. The second reason, of course, is that the development of this product that allows overdrafts of checks and debits for a fee turned bounced check operations from a cost center into a major profit center. The Federal Reserve should have never let banks call this particular product by the misleading name "standard" overdraft protection. It is vastly overpriced and designed to benefit the banks --  not you. Your best option, if you want to avoid overdraft penalties, is to apply for either a line of credit or an automatic transfer from savings to avoid overdrafts. These lower-cost options are much more effective. I do agree with one of Alex's earliest points -- if your bank offers text or email low balance alerts, sign up for that service.

And that's today's financial follies.

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