Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts
Published: 2008-01-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2006, consumers paid over $36 billion in fees associated with checking and savings accounts, raising questions about consumers' awareness of their accounts' terms and conditions. GAO was asked to review (1) trends in the types and amounts of checking and deposit account fees since 2000, (2) how federal banking regulators address such fees in their oversight of depository institutions, and (3) the extent that consumers are able to obtain account terms and conditions and disclosures of fees upon request prior to opening an account. GAO analyzed fee data from private data vendors, publicly available financial data, and information from federal regulators; reviewed federal laws and regulations; and used direct observation techniques at depository institutions nationwide.
section_title: What GAO Found
paragraphs: Data from private vendors indicate that average fees for insufficient funds, overdrafts, returns of deposited items, and stop payment orders have risen by 10 percent or more since 2000, while others, such as monthly account maintenance fees, have declined. During this period, the portion of depository institutions income derived from noninterest sources--including fees on savings and checking accounts--varied but increased overall from 24 percent to 27 percent. Changes in both consumer behavior, such as making more payments electronically, and practices of depository institutions are likely influencing trends in fees, but their exact effects are unknown. Federal banking regulators address fees associated with checking and savings accounts primarily by examining depository institutions' compliance with requirements, under the Truth in Savings Act (TISA) and its implementing regulations, to disclose fee information so that consumers can compare institutions. They also review customer complaints but do not assess whether fees are reasonable. The regulators received relatively fewer consumer complaints about fees and related disclosures--less than 5 percent of all complaints from 2002 to 2006--than about other bank products. During the same period, they cited 1,674 violations of fee-related disclosure regulations--about 335 annually among the 17,000 institutions they oversee. GAO's visits to 185 branches of 154 depository institutions suggest that, despite the disclosure requirements, consumers may find it difficult to obtain information about checking and savings account fees. GAO staff posing as customers were unable to obtain detailed fee information and account terms and conditions at over one-fifth of visited branches and also could not find this information on many institutions' Web sites. Federal regulators examine institutions' written policies, procedures, and documents but do not determine whether consumers actually receive disclosure documents. While consumers may consider factors besides costs when shopping for accounts, an inability to obtain information about terms, conditions, and fees hinders their ability to compare institutions.

section_title: Letter
paragraphs: In 2006, consumers paid over $36 billion in various fees associated with  checking and savings accounts at depository institutions—banks, thrifts,  and credit unions. 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. Additionally, some have  questioned how regulators address fee practices in their oversight of  depository institutions and whether consumers, prior to opening a  checking or savings account, are able to obtain information on fees and  depository institution practices that influence when fees are assessed.
The Board of Governors of the Federal Reserve System (Federal Reserve)  has established regulations for checking and savings accounts that require  depository institutions to disclose certain information about the fees they  charge. Specifically, Regulation DD, which implements the Truth in Savings  Act (TISA), requires depository institutions to disclose (among other  things) the amount of any fee that may be imposed in connection with an  account and the conditions under which such fees are imposed.  Regulation E—the other primary federal regulation governing checking and  savings account fees—implements the Electronic Fund Transfer Act and  establishes the basic rights, liabilities, and responsibilities of consumers  who use electronic fund transfer services and of financial institutions that  offer these services. To ensure compliance with these and other relevant  laws and regulations, banks, thrifts, and credit unions are subject to  oversight at the federal and state level. This oversight includes on-site  examinations and other steps to ensure compliance with the laws and  regulations. In 2005, partly in response to concerns about the marketing,  implementation, and fees of overdraft protection programs being offered  by depository institutions, the OCC, Federal Reserve, FDIC and NCUA  jointly and the OTS separately issued guidance (interagency guidance)  outlining “best practices” that address, among other things, communicating  the features of these programs to customers.
You requested that we examine a number of issues related to the fees that  consumers pay on their checking and savings accounts. This report  discusses (1) the trends in the types and amounts of fees associated with  checking and deposit accounts since 2000 and available information on the  characteristics of consumers that incur fees; (2) ways that federal and  selected state banking regulators address checking and deposit account  fees in their oversight of depository institutions; and (3) the extent to  which consumers are able to obtain information on account terms and  conditions and on fees, including information about specific transactions  and bank practices that determine when such fees are assessed, upon  request prior to opening an account. In addition, appendix II of the report  presents information on issues related to providing real-time account  information at point-of-sale terminals and automated teller machines  (ATM) that could help consumers avoid certain fees.
For the first objective, we engaged the services of a private sector firm— Moebs $ervices, Inc.—to obtain data on selected fees associated with  checking and savings accounts from 2000 to 2007 and similar data from  another private sector firm—Informa Research Services, Inc.—from 2000  to 2006. We interviewed representatives of these two firms to understand  their methodology for collecting the data and ensuring its integrity. In  addition, we conducted reasonableness checks on the data we received to  identify any missing, erroneous, or outlying data and concluded that the  data were sufficiently reliable for use in our report. To determine the role  that these fees have played in depository institutions’ revenues, we also  obtained and analyzed quarterly financial data submitted by federally  insured banks, thrifts, and credit unions and maintained by FDIC and  NCUA. In our past work, we have found the quarterly financial data  maintained by FDIC and NCUA to be sufficiently reliable for the purposes  of our reports. We also reviewed the literature for studies or information on  the characteristics of consumers who might be likely to incur such fees and  interviewed representatives of the federal banking regulators about this  issue. To determine how federal and selected state banking regulators  address fees associated with checking and deposit accounts as part of their  oversight of depository institutions, we obtained and reviewed  examination manuals and guidance used by the five federal banking  regulators and state regulators in six states. We obtained and reviewed a  sample of 25 reports on examinations conducted during 2006 to identify  how these regulators carried out examinations for compliance with  Regulations DD and E. In addition, we obtained data from each of the  federal banking regulators on violations they cited for institutions’  noncompliance with Regulation DD and Regulation E disclosure-related  provisions, as well as enforcement actions that each regulator took against  institutions from 2002 to 2006. We also obtained annual data on consumer  complaints concerning checking and savings accounts at depository  institutions—particularly complaints related to fees and disclosures—as  well as complaints for other major products (credit cards and mortgage  loans) referred to these regulators from 2002 to 2006. To assess the  reliability of data from the five federal banking regulators, we reviewed  relevant documentation and interviewed agency officials. Finally, we  interviewed officials from each of the federal banking regulators and from  six state banking regulators about these issues.
To assess the extent to which consumers are able to obtain account terms  and conditions and disclosures of fees, we used direct observation  techniques and reviewed studies and reports by government agencies,  consumer groups, and other researchers. We also reviewed relevant federal  laws, regulations, and guidance issued by the federal banking regulators.  For direct observation, GAO employees posed as consumers shopping for  checking and savings accounts and visited 185 branches of 154 banks,  thrifts, and credit unions throughout the nation to request documents on  the fees associated with basic checking and savings accounts. We selected  these institutions to ensure a mix of institution type (bank, thrift, and credit  union) and size; however, the results cannot be generalized to all  institutions. These employees also reviewed information from the  institutions’ Web sites. To obtain information on issues related to providing  consumers with real-time account information during debit card  transactions at point-of-sale terminals and automated teller machines, we  reviewed available literature from the Federal Reserve and other sources  and met with officials from depository institutions, card associations, third- party processors, and trade organizations.
We conducted this performance audit from January 2007 to January 2008,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that the  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. Appendix I explains our  objectives, scope, and methodology in greater detail.
subsections: section_title: Background
paragraphs: Depository institutions—banks, thrifts, and credit unions—have attained a  unique and central role in U.S. financial markets through their deposit- taking, lending, and other activities. Individuals have traditionally placed a  substantial amount of their savings in federally insured depository  institutions. In addition, the ability to accept deposits transferable by  checks and other means has allowed depository institutions to become  principal agents or middlemen in many financial transactions and in the  nation’s payment system. Depository institutions typically offer a variety of  savings and checking accounts, such as ordinary savings, certificates of  deposits, interest-bearing checking, and noninterest-bearing checking  accounts. Also, the same institutions may offer credit cards, home equity  lines of credit, real estate mortgage loans, mutual funds, and other financial  products.
In the United States, regulation of depository institutions depends on the  type of charter the institution chooses. The various types of charters can  be obtained at the state or national level and cover: (1) commercial banks,  which originally focused on the banking needs of businesses but over time  broadened their services; (2) thrifts, which include savings banks, savings  associations, and savings and loans and which were originally created to  serve the needs—particularly the mortgage needs—of those not served by  commercial banks; and (3) credit unions, which are member-owned  cooperatives run by member-elected boards with a historic emphasis on  serving people of modest means.
All depository institutions have a primary federal regulator if their deposits  are federally insured. State regulators participate in the regulation of  institutions with state charters. Specifically, the five federal banking  regulators charter and oversee the following types of depository  institutions:  OCC charters and supervises national banks. As of December 30, 2006,  there were 1,715 commercial banks with national bank charters. These  banks held the dominant share of bank assets, about $6.8 trillion.
The Federal Reserve serves as the regulator for state-chartered banks  that opt to be members of the Federal Reserve System and the primary  federal regulator of bank holding companies, including financial holding  companies. As of December 30, 2006, the Federal Reserve supervised  902 state member banks with total assets of $1.4 trillion.
FDIC supervises all other state-chartered commercial banks with  federally insured deposits, as well as federally insured state savings  banks. As of December 30, 2006, there were 4,785 state-chartered banks  and 435 state-chartered savings banks with $1.8 trillion and $306 billion  in total assets, respectively. In addition, FDIC has backup examination  authority for federally insured banks and savings institutions of which it  is not the primary regulator.
OTS charters and supervises federally chartered savings associations  and serves as the primary federal regulator for state-chartered savings  associations and their holding companies. As of December 30, 2006, OTS  supervised 761 federally chartered and 84 state chartered thrifts with  combined assets of $1.4 trillion.
NCUA charters, supervises, and insures federally chartered credit  unions and is the primary federal regulator for federally insured state  chartered credit unions. As of December 30, 2006, NCUA supervised  5,189 federally chartered and insured 3,173 state chartered credit unions  with combined assets of $710 billion.
These federal regulators conduct on-site examinations and off-site  monitoring to assess institutions’ financial condition and compliance with  federal banking and consumer laws. Additionally, as part of their oversight  the regulators issue regulations, take enforcement actions, and close failed  institutions.
Regulation DD, which implements TISA, became effective with mandatory  compliance in June 1993. The purpose of the act and its implementing  regulations is to enable consumers to make informed decisions about their  accounts at depository institutions through the use of uniform disclosure  documents. These disclosure documents are intended to help consumers  “comparison shop” by providing information about fees, annual percentage  yields, interest rates, and other terms for deposit accounts. The regulation  is supplemented by “staff commentary,” which contains official Federal  Reserve staff interpretations of Regulation DD. Since the initial  implementation date for Regulation DD, several amendments have been  made to the regulation and the corresponding staff commentary. For  example, the Federal Reserve made changes to Regulation DD, effective  July 1, 2006, to address concerns about the uniformity and adequacy of  information provided to consumers when they overdraw their deposit  accounts. Credit unions are governed by a substantially similar regulation  issued by NCUA.
Regulation E, which implements the Electronic Fund Transfer Act, became  effective in May 1980. The primary objective of the act and Regulation E is  the protection of individual consumers engaging in electronic funds  transfers (EFT). Regulation E provides a basic framework that establishes  the rights, liabilities, and responsibilities of participants in electronic fund  transfer systems such as ATM transfers, telephone bill-payment services,  point-of-sale terminal transfers in stores, and preauthorized transfers from  or to consumer's bank accounts (such as direct deposit and Social Security  payments). The term “electronic fund transfer” generally refers to a  transaction initiated through an electronic terminal, telephone, computer,  or magnetic tape that instructs a financial institution either to credit or to  debit a consumer's asset account. Regulation E requires financial  institutions to provide consumers with initial disclosures of the terms and  conditions of EFT services. The regulation allows financial institutions to  combine the disclosure information required by the regulation with that  required by other laws such as TISA as long as the information is clear and  understandable and is available in a written form that consumers can keep.
Paying or honoring customers’ occasional or inadvertent overdrafts of their  demand deposit accounts has long been an established practice at  depository institutions. As shown in figure 1, depository institutions have  four options when a customer attempts to withdraw or access funds from  an account that does not have enough money in it to cover the transaction,  and fees can be assessed for each of these options. The institution can (1)  cover the amount of the overdraft by tapping a linked account (savings,  money market, or credit card) established by the customer; (2) charge the  overdraft to a linked line of credit; (3) approve the transaction (if  electronic) or honor the customer’s check by providing an ad hoc or  “courtesy” overdraft; or (4) deny the transaction or decline to honor the  customer’s check. The first two options require that customers have  created and linked to the primary checking account one or more other  accounts or a line of credit in order to avoid overdrafts. The depository  institution typically waives fees or may charge a small fee for transferring  money into the primary account (a transfer fee). Depository institutions  typically charge the same amount for a courtesy overdraft (an overdraft  fee) as they do for denying a transaction for insufficient funds (an  insufficient funds fee).
In addition to fees associated with insufficient funds transactions,  institutions may charge a number of other fees for checking and savings  account services and transactions. As shown in table 1, these fees include  periodic service charges associated with these accounts and special service  fees assessed on a per-transaction basis.
section_title: Some Fees on Checking and Savings Accounts Increased between 2000 and 2007, and Institutions’ Reported Increasing Revenues from Fees
paragraphs: Our analysis of data from private vendors showed that a number of bank  fees—notably charges for insufficient funds and overdraft transactions— have generally increased since 2000, while others have decreased. In  general, banks and thrifts charged higher fees than credit unions for  checking and savings account services, and larger institutions charged  more than smaller institutions. During this same period, the portion of  depository institutions revenues derived from noninterest sources— including, but not limited to, fees on savings and checking accounts— increased somewhat. Changes in both consumer behavior and practices of  depository institutions are likely influencing trends in fees, but limited data  exist to demonstrate the effect of specific factors. FDIC is currently  conducting a special study of the overdraft programs that should provide  important insights on how these programs operate, as well as information  on characteristics of customers who pay overdraft bank fees.
subsections: section_title: Since 2000, Checking and Savings Account Fees Have Increased for Some Transactions and Services and Declined for Others
paragraphs: Data we obtained from vendors—based on annual surveys of hundreds of  banks, thrifts, and credit unions on selected banking fees indicated that  some checking and savings account fee amounts generally increased  between 2000 and 2007, while a few fell, notably monthly maintenance  fees. For example, as shown in figure 2, average insufficient funds and  overdraft fees have increased by about 11 percent, stop payment order fees  by 17 percent, and return deposited item fees by 49 percent since 2000.
Across all institutions, average insufficient funds and overdraft fees were  the highest dollar amounts, on average, of the fees reported. For example,  the average insufficient funds fee among the institutions surveyed by  Moebs $ervices in 2006 was $24.02, while among the institutions surveyed  by Informa Research Services it was $26.07. Data from Informa Research  Services also indicated that since 2004 a small number of institutions  (mainly large banks) have been applying tiered fees to certain transactions,  such as overdrafts. For example, an institution may charge one amount for  the first three overdrafts in a year (tier 1), a higher rate for overdrafts four  to six of that year (tier 2), and an even higher rate for overdrafts seven and  beyond in a single year (tier 3). Of the institutions that applied tiered fees in  2006, the average overdraft fees were $26.74, $32.53, and $34.74 for tiers 1,  2, and 3, respectively.
The data from these vendors also indicate that fee amounts for some  transactions or services varied or generally declined during this period. For  example:  The average ATM surcharge fee (assessed by a depository institution  when its ATM is used by a nonaccount holder) among institutions  surveyed by Moebs $ervices was $0.95 in 2000, rising to $1.41 in 2003,  and declining to $1.34 in 2006. This variability was also evident in the  fees charged by institutions surveyed by Informa Research Services.
The average foreign ATM fee (assessed by a depository institution when  its account holders use another institution’s ATM) generally declined,  from $0.92 in 2000 to $0.61 in 2006 among institutions surveyed by  Moebs $ervices and from $1.83 to $1.14 over the same period among  institutions surveyed by Informa Research Services.
The average monthly maintenance fees on standard noninterest bearing  checking accounts decreased from $6.81 in 2000 to $5.41 in 2006 among  institutions surveyed by Informa Research Services (Moebs $ervices did  not provide data on this fee). Additionally, an increasing number of the  surveyed institutions offered free checking accounts (with a minimum  balance required to open the account) over this period. For example, in  2001 almost 30 percent of the institutions offered free checking  accounts, while in 2006 the number grew to about 60 percent of  institutions.
Finally, some fees declined in amount, as well as in terms of their  prevalence. For example, Moebs $ervices reported that the institutions it  surveyed charged annual ATM fees, generally for issuing a card to  customers for their use strictly at ATMs, ranging from an average of $1.37 in  2000 to $1.14 in 2003. However, Moebs $ervices stopped collecting data on  this fee because, according to a Moeb’s official, fewer and fewer  institutions reported charging the fee. Similarly, Moebs $ervices reported  that the institutions it surveyed charged an annual debit card fee, generally  for issuing a card to customers for their use at ATMs, averaging from $0.94  in 2000 to $1.00 in 2003; but, it stopped collecting this data as well. (Informa  Research Services reported data on these fees through 2006, when they  averaged $0.44 and $0.74, respectively.) Appendix III contains further  details on the data reported by Moebs $ervices and Informa Research  Services, in both nominal and real dollars.
A number of factors may explain why some fees increased while others  decreased. For example, greater use of automation and lower cost of  technology may explain why certain ATM fees have decreased or been  eliminated altogether. Additionally, competition among depository  institutions for customers likely has contributed to the decrease in monthly  maintenance fees and the increased prevalence of “free checking”  accounts. Factors that may be influencing trends in fees overall are  discussed subsequently in this report.
section_title: Fees Generally Varied by Type and Size of Institution
paragraphs: Using data supplied by the two vendors, we compared the fees for checking  and savings accounts by type of institution and found that, on average,  banks and thrifts charged more than credit unions for almost all of them  (the exception was the fee for returns of deposited items). For example,  banks and thrifts charged on average roughly three dollars more than credit  unions for insufficient funds and overdraft fees throughout the period.  However, on average credit unions charged almost $6.00 more than banks  and thrifts on returns of deposited items.
The amounts institutions charged for certain transactions also varied by  the institution’s size, as measured by assets. Large institutions—those with  more than $1 billion in assets—on average charged more for the majority of  fees than midsized or small institutions—those with assets of $100 million  to $1 billion and less than $100 million, respectively. Large institutions on  average charged between $4.00 and $5.00 more for insufficient funds and  overdraft fees than smaller institutions. Further, on average, large banks  and thrifts consistently charged the highest insufficient funds and overdraft  fees, while small credit unions consistently charged the lowest.  Specifically, in 2007 large banks and thrifts charged an average fee of about  $28.00 for insufficient funds and overdraft fees, while small credit unions  charged an average fee of around $22.00. While large institutions in general  had higher fees than other sized institutions, smaller institutions charged  considerably more for returns of deposited items. The results of our  analysis are consistent with the Federal Reserve’s 2003 report on bank fees,  which showed that large institutions charged more than medium- and  small-sized institutions (banks and thrifts combined) for most fees.
Our analysis of Informa Research Services data also showed that,  controlling for both institution type and size, institutions in some regions of  the country, on average, charged more for some fees, such as insufficient  funds and overdraft fees, than others. For example, in 2006 the average  overdraft fee in the southern region was $28.18, compared with a national  average of $26.74 and a western region average of $24.94.
section_title: Financial Institutions’ Income from Noninterest Sources, Including Fees, Has Increased since 2000
paragraphs: Between 2000 and 2006, the portion of depository institutions’ income from  noninterest sources, including income generated from bank fees, varied but  generally increased. As shown in figure 3, banks’ and thrifts’ noninterest  income rose from 24 to 27 percent of total income between 2000 and 2006  (peaking at 33 percent in 2004) and credit unions’ noninterest income rose  from 11 to 14 percent (peaking at 20 percent in 2004). The percent of  noninterest income appeared to have an inverse relationship to changes in  the federal funds rate—the interest rate at which depository institutions  lend balances at the Federal Reserve to other depository institutions— which is an indicator of interest rate changes during the period. Low  interest rates combined with increased competition from other lenders can  make it difficult for banking institutions to generate revenues from interest  rate “spreads,” or differences between the interest rates that can be  charged for loans and the rates paid to depositors and other sources of  funds.
However, noninterest income includes revenue derived from a number of  fee-based banking services, not all of them associated with checking and  savings accounts. For example, fees from credit cards, as well as fees from  mutual funds sales commissions, are included in noninterest income. Thus,  noninterest income cannot be used to specifically identify either the extent  of fee revenue being generated, or the portion that is attributable to any  specific fee.
Among other financial information, banks and thrifts are required to report  data on service charges on deposit accounts (SCDA), which includes most  of the fees associated with checking and deposit accounts. Specifically,  SCDA includes, among other things, account maintenance fees, charges for  failing to maintain a minimum balance, some ATM fees, insufficient funds  fees, and charges for stop payment orders. As figure 4 shows, banks’ and  thrifts’ SCDA, and to a somewhat greater extent credit union’s fee income  as a percentage of total income, increased overall during the period, with a  slight decline in recent years. However, it should be noted that credit union  fee income includes income generated from both deposit accounts and  other products that credit unions offer, such as fees for credit cards and  noncustomer use of proprietary ATMs; thus, the percentage of fee income  they report is not directly comparable to the service charges reported by  banks and thrifts.
Because institutions do not have to report SCDA by line item, it is difficult  to estimate the extent to which specific fees on checking and deposit  accounts contributed to institutions’ revenues or how these contributions  have changed over the years. Further, some fees that banking customers  incur may not be covered by SCDA. For example, institutions report  monthly account maintenance fee income as SCDA, but not income earned  from fees charged to a noncustomer, such as fees for the use of its  proprietary ATMs. Similarly, credit unions’ reported fee income cannot be  used to identify fee revenues from specific checking and savings account  fees.
section_title: Changes in Consumer Behavior and Depository Institution Practices May Affect Trends in Bank Fees
paragraphs: Since the mid-1990s, consumers have increasingly used electronic forms of  payment such as debit cards for many transactions, from retail purchases  to bill payment. By 2006 more than two-thirds of all U.S. noncash payments  were made by electronic payments (including credit cards, debit cards,  automated clearing house, and electronic benefit transfers), while the  number of paper payments (e.g., checks) has decreased due to the rapid  growth in the use of debit cards. Generally, these electronic payments are  processed more quickly than traditional paper checks. For example, debit  card transactions result in funds leaving customer’s checking accounts  during or shortly after the transaction, as opposed to checks, which may  not be debited from a customer’s account for a few days (although  depository institutions have also begun to process checks faster, in part, as  a result of the Check Clearing for the 21st Century Act (Check 21 Act) and  implementing regulations, which became effective in late 2004). Despite  this overall shortening of time or “float” between the payment transaction  and the debiting of funds from a consumer’s account, depository  institutions can hold certain nonlocal checks deposited by a consumer for  up to 11 days. According to consumer groups and bank representatives,  this creates the potential for increased incidences of overdrafts if funds are  debited from a consumers account faster than deposits are made available  for withdrawal. The shift in consumer payment preferences has occurred  rather quickly, and we identified little research on the extent to which the  increased use of electronic payments, such as debit cards, has affected the  prevalence of specific deposit account fees, such as overdraft or  insufficient fund fees.
Additionally, some institutions have internal policies for posting deposits to  and withdrawals from customer accounts that can affect the incidence of  fees. For example, consumer group representatives, bank representatives,  and federal regulatory officials told us that many institutions process the  largest (highest dollar amount) debit transaction before the smallest one  regardless of the order in which the customers initiated the transactions.  This practice can affect the number of overdraft fees charged to a  customer. For example, if a customer had only $600 available in their  account, processing a payment for $590 first before three transactions of  $25 each would result in three instances of overdrafts, whereas reversing  the order of processing payments from smallest to largest would result in  one instance of overdraft. Banking officials said that this processing of  largest to smallest transactions first ensures that consumers’ larger, and  presumably more important payments, such as mortgage payments, are  made. One of the federal banking regulators—OTS—issued guidance in  2005 stating that institutions it regulates should not manipulate transaction  clearing steps (including check clearing and batch debit processing) to  inflate fees. We were unable to identify comprehensive information  regarding the extent to which institutions were using this or other methods  (chronological, smallest-to-largest, etc.) of processing payments.
Further, some depository institutions have automated the process used to  approve overdrafts and have increasingly marketed the availability of  overdraft protection programs to their customers. Historically, depository  institutions have used their discretion to pay overdrafts for consumers,  usually imposing a fee. Over the years, to reduce the costs of reviewing  individual items, some institutions have established policies and automated  the process for deciding whether to honor overdrafts, but generally  institutions are not required to inform customers about internal policies for  determining whether an item will be honored or denied. In addition, third- party vendors have developed and sold automated programs to institutions,  particularly to smaller institutions, to handle overdrafts. According to the  Federal Reserve, what distinguishes the vendor programs from in-house  automated processes is the addition of marketing plans that appear  designed to (1) promote the generation of fee income by disclosing to  account holders the dollar amount that the consumer typically will be  allowed to overdraw their account and (2) encourage consumers to use the  service to meet short-term borrowing needs. An FDIC official noted that  some vendor contracts tied the vendor’s compensation to an increase in the  depository institution’s fee revenues.
We were unable to identify information on the extent to which institutions  were using automated overdraft programs developed and sold by third- party vendors or the criteria that these programs used. Representatives  from a few large depository institutions told us that they are using software  programs developed in-house to determine which account holders would  have overdrafts approved. According to consumer groups and federal  banking regulators, software vendors appear to be primarily marketing  automated overdraft programs to small and midsized institutions. The 2005  interagency guidance on overdraft protection programs encouraged  depository institutions to disclose to consumers how transactions would  be processed and how fees would be assessed. An FDIC official noted that,  while no empirical data are available, institutions’ advertising of overdraft  protection programs appears to have diminished since publication of the  interagency guidance.
section_title: No Public Data Currently Exist on Characteristics of Consumers That Incur Bank Fees, but FDIC May be Able to Provide Some Information in the Future
paragraphs: Because fees for overdrafts and instances of insufficient funds may be  more likely to occur in accounts with lower balances, there is some  concern that they may be more likely among consumers who traditionally  have the least financial means, such as young adults and low- and  moderate-income households. We were not able to analyze the  demographic characteristics of customers that incur bank fees because  doing so would require transaction-level data for all account holders—data  that are not publicly available. We identified only two studies—one by an  academic researcher and one by a consumer group—that discussed the  characteristics of consumers who pay bank fees. Neither study obtained a  sample of customers who overdraw that was representative of the U.S.  population. According to the academic researcher’s study, which used  transaction level account data for one small Midwest bank, overdrafts were  not significantly correlated with consumers’ income levels, although  younger consumers were more likely to have overdrafts than consumers of  other ages. However, the results of this study cannot be generalized to the  larger population because the small institution used was not statistically  representative of all depository institutions. The consumer group study,  which relied on a survey in which individuals with bank accounts were  interviewed, found that those bank customers who had had two or more  overdrafts in the 6 months before the date of the interview were more often  low income, single, and nonwhite. However, this study also had  limitations, including the inherent difficulty in contacting and obtaining  cooperation from a representative sample of U.S. households with a  telephone survey and because it relied on consumers’ recall of and  willingness to accurately report past events rather than on actual reviews  of their transactions. While we cannot fully assess the quality of results  from these two studies, we note them here to illustrate the lack of  definitive research in this area.
Partly in response to consumer concerns raised by overdraft protection  products, FDIC is currently conducting a two-part study on overdraft  protection products offered by the institutions it supervises. The results of  this study may provide information on the types of consumers who pay  bank fees. For both parts, FDIC is collecting data that are not currently  available in the call reports or other standard regulatory reports. During the  first phase of its study, FDIC collected data from 500 state-chartered  nonmember banks about their overdraft products and policies. Data from  the first phase will reveal how many FDIC-regulated banks offer overdraft  protection programs and the details of these programs, such as how many  of them are automated. FDIC expects to complete the data collection effort  at the end of 2007. The second phase involves collecting transaction-level  data on the depositors who use the overdraft products for 100 of the 500  institutions for a year. As part of this phase, FDIC plans to use income  information by U.S. Census Bureau tract data as a proxy for account  holder’s income to try and determine the characteristics of consumers who  incur overdraft fees. FDIC expects to complete the analysis at the end of  2008.
section_title: Regulators Focus on Depository Institutions’ Compliance with Federal Disclosure Requirements
paragraphs: Federal regulators assess depository institution’s compliance with the  disclosure requirements of Regulations DD and E during examinations by  reviewing an institution’s written policies and procedures, including a  sample of disclosure documents. In general, regulators do not review the  reasonableness of such fees unless there are safety and soundness  concerns. Since 2005, NCUA has included examination procedures  specifically addressing institutions’ adherence to the 2005 interagency  guidance concerning overdraft protection products and, in September  2007, all of the regulators revised their Regulation DD examination  procedures to include reviews of the disclosures associated with such  products offered by institutions that advertise them. In general,  examinations are risk-based—that is, targeted to address factors that pose  risks to the institution—and to help focus their examinations of individual  institutions, the regulators review consumer complaints. Our analysis of  complaint data from each of the federal regulators showed that while they  receive a large number of checking account complaints, a small percentage  of these complaints concerned the fees and disclosures associated with  either checking or savings accounts. The federal regulators reported  identifying a number of violations of the disclosure sections of Regulations  DD and E during their examinations but collectively identified only two  related formal enforcement actions from 2002 through 2006. Finally,  officials from the six state regulators told us that, while they may look at  compliance with Regulations DD and E, their primary focus is on safety  and soundness issues and compliance with state laws and regulations, and  they reported receiving few consumer complaints associated with checking  and savings account fees and disclosure issues.
subsections: section_title: Federal Regulators Primarily Review Policies, Procedures, and Disclosure Documents
paragraphs: Our review of the examination handbooks and examination reports  indicated that the five federal regulators used similar procedures to assess  compliance with Regulations DD and E (as discussed below, NCUA also  includes steps to assess credit unions’ adherence to the 2005 interagency  guidance on overdraft protection products, but that is distinct from  assessing compliance with regulatory requirements). In general, the  Regulation DD and E compliance examination procedures for each of the  five federal banking regulators called for examiners to  verify that the institution had policies or procedures in place to ensure  compliance with all provisions of the regulations;   review a sample of account disclosure documents and notices required  by the regulation to determine whether contents were accurate and  complete; and   review a sample of the institution’s advertisements to (1) determine if  the advertisements were misleading, inaccurate, or misrepresented the  deposit contract and (2) ensure that the advertisements included all  required disclosures.
Federal regulators’ examination procedures for Regulations DD and E do  not require examiners to evaluate the reasonableness of fees associated  with checking and savings accounts. According to the Federal Reserve, the  statutes administered by the regulators do not specifically address the  reasonableness of fees assessed. Additionally, officials of the federal  regulators explained that there were no objective industry-wide standards  to assess the “reasonableness” of fees. OCC officials told us that an  industry-wide standard would not work because, among other things, fees  vary among banks that operate in different geographical areas and that  competitive conditions in local markets determine fees. According to the  federal regulatory officials, each depository institution is responsible for  setting the fee for a particular product and service, and regulators look at  rates or pricing issues only if there is a safety and soundness concern. For  example, NCUA officials told us that an examiner’s finding that fee income  was excessive could create safety and soundness issues, depending on the  way the fees were generated and how the resulting revenues were spent.
The regulators stated that while they did not evaluate the reasonableness of  fees, the disclosure requirements of Regulations DD and E were intended  to provide consumers with information that allow them to compare fees  across institutions. Additionally, they told us that market forces should  inhibit excessive fees since the financial institution would likely lose  business if it decided to charge a fee that was significantly higher than its  competitors.
section_title: Recent Revisions to Regulation DD Examination Procedures Require Further Review of Disclosures for Institutions Advertising Overdraft Protections
paragraphs: On September 13, 2007, the Federal Financial Institutions Examination  Council’s Task Force on Consumer Compliance—a formal interagency  body composed of representatives of the Federal Reserve, FDIC, NCUA,  OCC, and OTS—approved revised interagency compliance examination  procedures for Regulation DD. Officials of each of the federal regulators  told us that their agencies either had begun or were in the process of  implementing the updated examination procedures. Among other changes,  the revised examination procedures address the Regulation DD disclosure  requirements for institutions that advertise the payment of overdrafts.  Specifically, the revised examination procedures ask the examiners to  determine whether the institution clearly and conspicuously discloses in its  advertisements (1) the fee for the payment of each overdraft, (2) the  categories of transactions for which a fee may be imposed for paying an  overdraft, (3) the time period by which a consumer must repay or cover  any overdraft, and (4) the circumstances under which the institution will  not pay an overdraft.
These items are among those that were identified as “best practices” by the  2005 interagency guidance. According to the guidance, clear disclosures  and explanations to consumers about the operation, costs, and limitations  of an overdraft protection program are fundamental to using such  protection responsibly. Furthermore, the guidance states that clear  disclosures and appropriate management oversight can minimize potential  customer confusion and complaints, as well as foster good customer  relations. The interagency guidance identifies best practices currently  observed in or recommended by the industry on marketing,  communications with consumers, and program features and operations.  For example, the best practices include marketing the program in a way  that does not encourage routine overdrafts, clearly explaining the  discretionary nature of the program, and providing the opportunity for  consumers to opt out of the program.
Prior to the revised Regulation DD examination procedures, NCUA had  adopted procedures to assess the extent to which institutions it examines  followed the interagency guidance. In December 2005, NCUA adopted  “bounce protection” (that is, overdraft protection) examination procedures  as part of the agency’s risk-focused examination program. The examination  procedures were developed to coincide with the issuance of the 2005  interagency guidance on overdraft protection programs, according to an  NCUA official. In an NCUA letter to credit unions, the agency stated that  “credit unions should be aware the best practices are minimum  expectations for the operation of bounce protection programs.” NCUA’s  examination procedures included a review of several key best practices.  For example, the examination procedures assess whether credit unions  provided customers with the opportunity to elect overdraft protection  services or, if enrollment in such a program was automatic, to opt out. In  addition to other areas of review, the examination procedures include a  review of whether the credit union distinguished overdraft protection from  “free” account features, and if the credit union clearly disclosed the fees of  its overdraft protection program.
To a more limited extent, OTS had overdraft protection examination  procedures in place that address its guidance, but these were limited to a  review of compliance-related employee training and the materials used to  market or educate customers about the institution’s overdraft protection  programs. Officials from the Federal Reserve, OCC, and FDIC reported  that, beyond the recent revisions to Regulation DD examination  procedures, their agencies did not have specific examination procedures  related to the 2005 interagency guidance because the best practices are not  enforceable by law. These officials told us that, while not following a best  practice from the interagency guidance did not constitute a violation of  related laws or regulations, they encourage institutions to follow the best  practices. An FDIC official noted that a deviation from the guidance could  serve as a “red flag” for an examiner to look more closely for potential  violations.
section_title: While Federal Regulators Received a Large Number of Checking Account Complaints, a Small Percentage Were Related to Fees and Disclosures
paragraphs: Officials of the federal banking regulators explained that examiners use  complaint data to help focus examinations that they are planning or to alter  examinations already in progress. For example, according to one regulator,  if consumers file complaints because they have not received a disclosure  document prior to opening an account, this could signify a violation of  Regulation DD, which the examiners would review as part of the  examination for this regulation. The officials noted that consumer  complaints could be filed and were often resolved at the financial  institution involved, in which case the consumer would not be likely to  contact a federal banking regulator. However, if the consumer is not  satisfied with the financial institution's response, a consumer would then  likely file a complaint with the federal banking regulator. Consumers may  also file a complaint directly with federal regulators without contacting the  financial institution about a problem. In either case, regulators are required  to monitor the situation until the complaint is resolved.
According to the regulators’ complaint data, most of the complaints  received from 2002 to 2006 involved credit cards, although a significant  number of complaints were related to checking accounts and a somewhat  smaller number involved savings accounts (fig. 5). In analyzing complaints  specifically about checking and savings accounts from 2002 through 2006,  we found that, on average, about 10 percent were related to fees, and 3  percent were related to disclosures. (For information on how the Federal  Reserve, FDIC, OCC, and OTS resolved complaints, see app. IV.)  Collectively fee and disclosure complaints represented less than 5 percent  of all complaints received during this period. Officials of the banking  regulators told us that the overwhelming bulk of complaints they received  on checking and saving accounts concerned a variety of other issues,  including problems opening or closing an account, false advertising, and  discrimination.
Among the regulators, OCC included in its complaint data the specific part  of the regulation that was the subject of the complaint. Of the consumer  complaints about fees that OCC received from 2002 through 2006, 39  percent were for “unfair” fees (concerning the conditions under which fees  were applied), 2 percent were for new fees, 6 percent were for “high” fees  (the amount of the fees), and 53 percent concerned fees in general. The  majority of disclosure-related complaints that OCC received during this  period were for the Regulation DD provision that, in part, requires that  depository institutions provide account disclosures to a consumer before  an account is opened or a service is provided, whichever is earlier, or upon  request. OCC’s analysis of these complaints serves to identify potential  problems—at a particular bank or in a particular segment of the industry— that may warrant further investigation by examination teams, supervisory  guidance to address emerging problems, or enforcement action.
section_title: Federal Regulators Identified a Number of Violations of Fee-Related Disclosure Provisions during Their Examinations but Took Few Related Enforcement Actions
paragraphs: The federal banking regulators’ examination data for the most recent 5  calendar years (2002 through 2006) showed a total of 1,674 instances in  which the regulators cited depository institutions for noncompliance with  the fee-related disclosure requirements of Regulations DD (1,206 cases) or  E (468 cases). On average, this is about 335 instances annually among the  nearly 17,000 depository institutions that these regulators oversee. As  shown in table 2, most of the disclosure-related violations were reported by  FDIC—83 percent of the Regulation DD disclosure-related violations (998  of 1,206) and 74 percent of the Regulation E disclosure-related violations  (348 of 468). According to FDIC officials, one reason for the larger number  of fee-related violations identified by FDIC is the large number of  institutions for which it is the primary federal regulator (5,220 depository  institutions as of December 31, 2006). Also, differences among the  regulators may appear due to the fact that they do not count the numbers of  violations in exactly the same way.
According to our analysis of the regulators’ data, the most frequent  violation associated with the initial disclosure requirements of Regulation  DD was noncompliance with the requirement that disclosure documents be  written in a clear and conspicuous manner, in a form that customers can  keep, and reflect the terms of the legal obligation of the account agreement  between the consumer and the depository institution (1,053 cases).  Examiners reported violations of two other disclosure provisions of  Regulation DD. First, they found violations of the requirement that  depository institutions provide account disclosure documents to a  consumer before an account is opened or a service is provided, whichever  is earlier, or upon request (124 cases). Second, they reported violations of  the requirement that disclosure documents state the amount of any fee that  may be imposed in connection with the account or an explanation of how  the fee will be determined and the conditions under which it may be  imposed (29 cases).
The most frequent violation associated with the initial disclosure  requirements of Regulation E was of the requirement that financial  institutions make the disclosure documents available at the time a  consumer contracts for an EFT or before the first EFT is made involving  the consumer’s account (321 cases). Other disclosure provisions from  Regulation E for which examiners cited violations included those that  required disclosure statements to be in writing, clear and readily  understandable, and in a form that customers can keep (5 cases) and to list  any fees imposed by the financial institution for EFTs or for the right to  make transfers (142 cases).
According to officials of the federal banking regulators, examiners are  typically successful in getting the financial institutions to take corrective  action on violations either during the course of the examination or shortly  thereafter, negating the need to take formal enforcement action. FDIC,  NCUA, OCC, and Federal Reserve officials reported that from 2002 to 2006  they had not taken any formal enforcement actions solely related to  violations of the disclosure requirements from Regulations DD and E, while  OTS reported taking two such actions during the period.
section_title: State Regulators Relied on and Worked with Federal Regulators to Review Regulations DD and E and Reported Few Consumer Complaints about Fees and Disclosures
paragraphs: Officials of all six of the state banking regulators that we contacted told us  that the primary focus of their examinations is on safety and soundness  issues and compliance with state laws and regulations. Officials of four of  the six state banking regulators we contacted told us their examiners also  assess compliance with Regulation DD, and three of these four indicated  that they assess compliance with Regulation E as well. Representatives of  the four state banking regulators also told us that if they identify a violation  and no federal regulator is present, they cite the institution and forward  this information to the appropriate federal banking regulator. The other  two state banking regulators said that they review compliance with federal  regulations, including Regulations DD and E, only if the federal banking  regulators have identified noncompliance with federal regulations during  the prior examination.
Officials in four states said that their state laws and regulations contained  additional fee and disclosure requirements beyond those contained in  Regulations DD and E. For example, according to Massachusetts state  banking officials, Massachusetts bank examiners review state-chartered  institutions for compliance with a state requirement that caps the fees on  returns of deposited items. In another example, an Illinois law restricts  institutions from charging an ATM fee on debit transactions made with an  electronic benefits card (a card that beneficiaries used to access federal or  state benefits, such as food stamp payments), according to Illinois state  banking officials. Additionally, these state officials told us that Illinois state  law requires all state-chartered institutions to annually disclose their fee  schedules for consumer deposit accounts. According to an official at the  New York state banking department, their state has a number of statutes  and regulations concerning bank fees and their disclosure to consumers  and their state examiners review institutions’ compliance with these  requirements. The laws and regulations cover, among other things,  permissible fees, required disclosure documents, and maximum  insufficient fund fees, according to the New York state officials.
Two of the states reported that, in conducting examinations jointly with the  federal regulators, they had found violations of the Regulation DD and E  disclosure provisions from 2002 to 2006 (one state reported 1 violation of  Regulation DD, and one state reported 16 violations of Regulation DD and  10 violations of Regulation E). Four of the states did not report any  violations (in one case, the state agency reported that they did not collect  data on violations). Three states also reported that they had not taken any  formal enforcement actions against institutions for violations of Regulation  DD or E disclosure provisions; two states reported that they did not collect  data on enforcement actions for violations of these regulations; one state  did not report any data to us on enforcement actions. Regarding consumer  complaints, officials in two states said that they did not maintain complaint  data concerning fees and disclosures associated with checking and savings  accounts, and the other four states reported relatively few complaints  associated with fees and disclosures. For example, Massachusetts reported  a total of 89 complaints related to fees and disclosures during the period, in  comparison to 4,022 total complaints over the period.
section_title: Despite Federal Regulations and Compliance Examinations, We Experienced Difficulty Obtaining Fee Information
paragraphs: The results of our requests for information on fees or account terms and  conditions at depository institutions we visited, as well as our visits to  institutions’ Web sites, suggest that consumers may find it difficult to  obtain such information upon request prior to opening a checking or  savings account. A number of factors could explain the difficulties we  encountered in obtaining comprehensive information on fees and account  terms and conditions, including branch staff potentially not being  knowledgeable about federal disclosure requirements or their institution’s  available disclosure documents. Further, federal banking regulators’  examination processes do not assess whether potential customers can  easily obtain information that institutions are required to disclose.  Potential customers unable to obtain such information upon request prior  to opening an account will not be in a position to make meaningful  comparisons among institutions, including the amounts of fees they may  face or the conditions under which fees would be charged.
subsections: section_title: Federal Laws and Regulations Require Disclosures so That Consumers Can Make Meaningful Comparisons among Institutions
paragraphs: As we have seen, TISA requires, among other things, that depository  institutions provide consumers with clear and uniform disclosures of the  fees that can be assessed against all deposit accounts, including checking  and savings accounts, so that consumers may make a meaningful  comparison between different institutions. Depository institutions must  provide these disclosures to consumers before they open accounts or  receive a service from the institution or upon a consumer’s request.  Regulation DD and the accompanying staff commentary specify the types  of information that should be contained in these disclosures, including  minimum balance required to open an account;  monthly maintenance fees and the balance required to avoid them;  fees charged when a consumer opens or closes an account;  fees related to deposits or withdrawals, such as charges for using the  institution’s ATMs; and  fees for special services—for example, insufficient funds or charges for  overdrafts and stop payment order fees on checks that have been  written but not cashed.
Regulation DD also requires depository institutions to disclose generally  the conditions under which a fee may be imposed—that is, account terms  and conditions. For example, institutions must specify the categories of  transactions for which an overdraft fee may be imposed but do not have to  provide an exhaustive list of such transactions.
While depository institutions are required to provide consumers with clear  and uniform disclosures of fees to enable meaningful comparisons among  institutions, consumers may consider other factors when shopping among  institutions. For example, federal banking regulators and one consumer  group told us that convenience factors, such as locations of branches or  ATMs, are typically the factors that consumers consider the most besides  costs, when choosing where to open a checking and savings account.
section_title: We Encountered Difficulties in Obtaining a Comprehensive List of Fees or Terms and Conditions during Our Visits to Depository Institution Branches and Web Sites
paragraphs: Our visits to branches of depository institutions nationwide suggested that  some consumers may be unable to obtain, upon request, meaningful  information with which to compare an institution’s fees and how they are  assessed before opening a checking or savings account. We also found that  the institutions’ Web sites generally did not provide comprehensive  information on fees or account terms and conditions. Further, the  documents that we did obtain during our visits did not always describe  some key features of the institutions’ internal policies and procedures that  could affect the incidence or amount of overdraft fees assessed by the  institution.
subsections: section_title: Information Was Not Always Available during Visits to Depository Institution Branches
paragraphs: To assess the ease or difficulty in obtaining a comprehensive list of fees and  account terms and conditions associated with checking and savings  accounts, GAO staff from 12 cities across the United States visited 185  branches of banks, thrifts, and credit unions. Collectively, these branches  represented 154 different depository institutions. Posing as potential  customers, we specifically requested a comprehensive list of fees and  terms and conditions for checking and savings accounts that would allow  us to compare such information across depository institutions. The  results are summarized here.
Comprehensive list of fees. We were unable to obtain a comprehensive  list of fees for checking and savings accounts from 40 (22 percent) of the  branches (representing 36 institutions). Instead, we obtained brochures  describing only the features of different types of checking and savings  accounts. Some of these brochures contained information on monthly  maintenance fees and the minimum balance needed to avoid them. But  these brochures did not contain information on other fees, such as  overdraft or insufficient fund fees.
While our success in obtaining a comprehensive list of fees varied  slightly among institutions of different sizes, we did note greater  variations among banks, credit unions, and thrifts. For example, we  were unable to obtain a comprehensive list of fees at 18 percent of the  103 bank branches and 20 percent of the 46 credit union branches we  visited (representing 14 banks and 9 credit unions, respectively), while  among the 36 thrift branches visited (representing 13 thrift institutions)  it was 36 percent.
Account terms and conditions. We were unable to obtain the terms and  conditions associated with checking and savings accounts from 61 of  the 185 branches (representing 54 depository institutions) that we  visited (33 percent). Instead, as described earlier, we were provided  with brochures on the different types of checking and savings accounts  offered by the institution.
We also observed little differences in our ability to obtain account terms  and conditions information from institutions of different sizes but again  found differences by types of institutions. For example, we were unable  to obtain this information at 32 percent of the small or midsized  institutions (34 of 108), compared with 35 percent of the large  institutions (27 of 77). With respect to the type of depository institution,  we were unable to obtain these documents at 30 percent of the bank  branches (31 of 103 branches, representing 25 banks), 35 percent of the  credit union branches (16 of 46 branches, representing 16 credit  unions), and 39 percent of the thrift branches (14 of 36 branches,  representing 13 thrift institutions).
For both the comprehensive list of fees and descriptions of account terms  and conditions, we observed some differences among branches of a single  depository institution. For example, we visited multiple branches of 23  depository institutions (that is, more than one branch of each of the 23).  For four of these institutions, we were able to obtain all of the documents  we requested from all of the branches. For the other 19 institutions, we  encountered inconsistencies among the different branches in our ability to  obtain the full set of information we requested.
The results of our direct observations are generally consistent with those  reported by the U.S. Public Interest Research Group (PIRG). In 2001, PIRG  had its staff pose as consumers and visit banks to request fee brochures  and reported that, in many cases, its staff members were unable to obtain  this information despite repeated requests. Further, our results seem to be  in accord with the violations data provided by the regulators; as noted  previously, the most frequent violation of the fee-related disclosure  provisions of Regulation DD cited by the regulators between 2002 and 2006  was noncompliance with the requirement that disclosure documents be  written in a clear and conspicuous manner and in a form that customers  can keep.
section_title: Information Was Not Available on Many Institutions’ Web Sites
paragraphs: While depository institutions are not required to have the comprehensive  list of fees and account terms and conditions on Web sites if these sites are  merely advertising and do not allow consumers to open an account online,  we visited these Web sites as part of our effort to simulate a consumer  trying to obtain information to compare checking and savings accounts  across institutions. In visiting the Web sites of all the institutions that we  visited in person, we were unable to obtain information on fees and  account terms and conditions at more than half of them. For example, we  were unable to obtain a comprehensive list of fees from 103 of the 202 Web  sites (51 percent). In addition, we were unable to obtain the terms and  conditions from 134 of the 202 (66 percent). Figure 6 compares the results  of our visits to branches and Web sites of depository institutions.
Some of the depository institutions’ Web sites nevertheless contained  information on certain fees associated with checking and savings accounts.  For example, most of the Web sites had information on monthly  maintenance fees and ATM fees associated with checking accounts.  Smaller percentages had information on fees for overdrafts and insufficient  fund fees. For example,   87 percent provided information on monthly maintenance fees,  62 percent had information on ATM withdrawal fees,  41 percent contained information on overdraft fees, and  37 percent provided information on insufficient fund fees.
section_title: Several Factors Could Explain Why We Had Difficulty Obtaining Information Concerning Fees
paragraphs: Among branches at which we were unable to obtain a comprehensive list of  fees, branch staff offered explanations suggesting that they may not be  knowledgeable about federal disclosure requirements. As previously noted,  depository institutions are required to provide consumers, upon request,  with clear and uniform disclosures of the fees that can be assessed against  checking and savings accounts so that consumers may make a meaningful  comparison between different institutions. However, during our visits to  branches of depository institutions,  representatives at 14 branches we visited told us that we had all the  information on fees we needed to comparison shop—even though we  determined that the documents they provided did not include a  comprehensive list of fees that consumers opening accounts there might  have to pay,  representatives at seven branches told us that no comprehensive fee  schedules were available, and   representatives at four branches told us that we had to provide personal  information or open an account in order to obtain a comprehensive list  of fees.
In addition, we observed differences in our ability to obtain the  comprehensive list of fees and account terms and conditions among  branches of 19 of the 23 depository institutions we visited that had multiple  branches. This variation among branches of the same institution suggests  that staff knowledge of the institution’s available disclosure documents  may have varied.
Further, the examination procedures that federal banking regulators use to  assess compliance with Regulation DD do not require examiners to verify  whether new or potential customers are actually able to obtain the required  disclosure documents before opening an account. (Rather, the examination  procedures call for the examiner to review written policies and procedures  and disclosure documents to ensure that they contain information required  under the regulation.) As a result, examination results would not provide  officials of depository institutions with information showing whether  potential customers were experiencing difficulty obtaining information at  particular branches.
Because the results of our visits cannot be generalized to other institutions,  and because the federal banking regulators do not assess the extent to  which consumers are actually able to obtain disclosure documents, neither  we nor the regulators know how widespread this problem may be, nor—to  the extent that it does exist among institutions—the reasons for it.  However, regardless of the cause, if consumers are unable to obtain key  information upon request prior to opening an account, they will be unable  to make meaningful distinctions regarding charges and terms of checking  and savings accounts.
section_title: Conclusions
paragraphs: The amounts of some fees associated with checking and savings accounts  have grown over the past few years, while others have varied or declined.  During the same time period, the portion of depository institutions’  incomes derived from noninterest sources, including fees, has varied  somewhat but has risen overall. Changes in both consumer behavior, such  as increased use of electronic forms of payment, and in the terms and  conditions of accounts offered by depository institutions may be  influencing these trends in fees, but available data do not permit  determining their exact effects. Similarly, we could find little information  on the characteristics of consumers who are most likely to incur fees.  However, the general upward trend in fees puts a premium on the effective  disclosure of account terms and conditions, including the amounts of  individual fees and the conditions under which they will be assessed, to  consumers who are shopping for savings and deposit accounts.
While consumers may consider convenience or other factors, as well as  costs, when choosing a depository institution, Regulation DD, as well as  guidance issued by the federal banking regulators, is intended to ensure  that consumers receive information needed to make meaningful  comparisons among institutions regarding the savings and deposit  accounts they offer. While the federal regulators take consumer complaints  into account when determining the scope of their examinations of specific  institutions, their examinations of compliance with Regulations DD and E  consist of reviewing institutions’ written policies, procedures, and  disclosure documents. On this basis, the regulators have cited numbers of  institutions for violating the disclosure requirements. Further, the  regulators are in the process of implementing revised examination  procedures for Regulation DD compliance that will include assessing the  extent to which depository institutions follow requirements governing the  advertisement of overdraft protection programs. This will be particularly  important given that fees associated with overdrafts were among the  highest of the types of fees for which we obtained data. However, even  under the revised procedures, the regulators’ examinations do not  determine whether consumers actually receive required disclosure  documents before opening an account.
While the results of our visits to 185 branches of depository institutions  cannot be generalized to all institutions, they raise some concern that  consumers may find it difficult to obtain upon request, important  disclosure documents prior to opening an account. We were unable to  obtain detailed information about fees and account terms and conditions at  over one-fifth of the branches we visited and, in many cases, we found  inconsistencies among branches of the same depository institution.  Because the federal banking regulators, in their compliance examinations,  do not assess the extent to which consumers actually receive required  disclosure documents before opening an account, they are not in a position  to know how widespread this problem may be among the institutions they  supervise, or the reasons for it. Incorporating into their oversight a means  of assessing the extent to which consumers can actually obtain information  to make meaningful comparisons among institutions, and taking any  needed steps to assure the continued availability of such information,  would further this goal of TISA.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that consumers can make meaningful comparisons between  depository institutions—we recommend that the Chairman, Federal  Deposit Insurance Corporation; Chairman, Board of Governors of the  Federal Reserve System; Chairman, National Credit Union Administration;  Comptroller of the Currency, Office of the Comptroller of the Currency;  and Director, Office of Thrift Supervision assess the extent to which  consumers receive specific disclosure documents on fees and account  terms and conditions associated with demand and deposit accounts prior  to opening an account, and incorporate steps as needed into their oversight  of institutions’ compliance with TISA to assure that disclosures continue to  be made available.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested and received written comments on a draft of this report from  FDIC, the Federal Reserve, NCUA, OCC, and OTS that are presented in  appendixes V through IX. We also received technical comments from FDIC  and the Federal Reserve, which we have incorporated in this report as  appropriate. In their written responses, all five banking regulators  indicated agreement with our report and stated that they will be taking  action in response to our recommendation. For example, OCC stated that it  would incorporate steps, as needed, into its oversight of institutions’  compliance with TISA to assure that disclosures continue to be made  available. The Federal Reserve and NCUA specifically mentioned the need  to revise, improve, or strengthen the current interagency Regulation DD  examination procedures. All five agencies indicated that they plan to  address this issue on an interagency basis. In addition, FDIC stated that it  would provide further instructions to state nonmember banks about their  ongoing responsibility to provide accurate disclosures to consumers upon  request and would also provide further instructions to its examiners of the  importance of this requirement; NCUA stated that it would send a letter to  credit unions reiterating the disclosure requirements for fees and account  terms; the Federal Reserve stated that it would expand its industry  outreach activities to facilitate compliance and promote awareness of  Regulation DD disclosure requirements.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Ranking  Member, Subcommittee on Financial Institutions and Consumer Credit,  Committee on Financial Services, House of Representatives, and other  interested congressional committees and the heads of the Federal Reserve,  FDIC, NCUA, OCC, and OTS. We also will make copies available to others  upon request. In addition, this report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-8678 or woodd@gao.gov. Contact points for our  Office of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made key contributions to this  report are listed in appendix X.
section_title: Objectives, Scope, and Methodology
paragraphs: Our report objectives were to determine (1) the trends in the types and  amounts of fees associated with checking and deposit accounts since 2000;  (2) how federal and selected state banking regulators address checking and  deposit account fees in their oversight of depository institutions; and (3)  the extent to which consumers are able to obtain account terms and  conditions and disclosures of fees, including information about specific  transactions and bank practices that determine when such fees are  assessed, upon request prior to opening an account.
subsections: section_title: Available Data on the Types and Amounts of Bank Fees and Characteristics of Consumers Who Incur These Fees
paragraphs: To provide information on the average amounts of various checking and  savings account fees, we purchased data from two market research firms  that specialize in the financial services industry; Moebs $ervices and  Informa Research Services. Moebs $ervices provided us with an electronic  file that contained data from 2000 to 2007 on the following fees:  annual automated teller machine (ATM) fees,  overdraft transfer fees from a line of credit,  overdraft transfer fees from a deposit account,  return deposited item fees,  stop payment order fees and  debit card annual fees.
Moebs $ervices collected its data through telephone surveys with financial  service personnel at each sampled institution. In the surveys, callers used a  “mystery shopping” approach and requested rates and fees while posing as  potential customers. The surveys were completed in June for each of the  years we requested (the 2006 survey was conducted in December), and we  obtained data from the following number of institutions (table 3): The statistical design of the survey was developed for Moebs $ervices by  Professor George Easton of Emory University. The design consisted of a  stratified random sample by (1) institution type (banks and thrifts  combined, and credit unions), (2) institution size (as shown in table 4), and  (3) regions of the country defined by metropolitan statistical area.
We took the data we obtained from Moebs $ervices and computed average  fees for institutions overall, as well as for institutions by type, size, and  region.
We interviewed Moebs $ervices representatives to understand their  methodology for collecting the data and ensuring its integrity. In addition,  we conducted reasonableness checks on the data we received and  identified any missing, erroneous, or outlying data. We also worked with  Moebs $ervices representatives to ensure our analysis of their data was  correct. Finally, for the years 2000 through 2002, we compared the average  fee amounts we calculated with averages the Board of Governors of the  Federal Reserve System (Federal Reserve) had calculated using Moebs  $ervices data for their “Annual Report to the Congress on Retail Fees and  Services of Depository Institutions.” We found our averages to be  comparable to those derived by the Federal Reserve and determined that  the Moebs $ervice’s data were reliable for the purposes of this report.
Informa Research Services also provided us with an electronic file that  included summary level fee data from 2000 to 2006. The data included  information for the same fees that Moebs $ervices had provided, but, also  included the following fees:  monthly fees for checking and savings account;  insufficient funds and overdraft tiered fees;  check enclosure and imaging fees;  foreign ATM balance inquiry fees; and   foreign ATM denied transaction fees.
In addition to fee data, Informa Research Services also provided us with  data on the minimum balances required to open an account, the monthly  balances needed to waive fees, and the maximum number of overdrafts or  insufficient funds fees that an institution would charge per day. Informa  Research Services collected its data by gathering the proprietary fee  statements of the financial institutions, as well as making anonymous in- branch, telephone, and Web site inquiries for a variety of bank fees.  Informa Research Services also receives the information directly from its  contacts at the financial institutions. The data are not statistically  representative of the entire population of depository institutions in the  country because the company collects fee data for particular institutions in  specific geographical markets so that these institutions can compare their  fees against their competitors. That is, surveyed institutions are self- selected into the sample, or are selected at the request of subscribers. To  the extent that institutions selected in this manner differ from those which  are not, results of the survey would not accurately reflect the industry as a  whole. Informa Research Services collects data on over 1,500 institutions,  including a mix of banks, thrifts, credit unions, and Internet-only banks.  The institutions from which it collects data tend to be large institutions that  have a large percentage of the deposits in a particular market. Additionally,  the company has access to individuals and information from the 100 largest  commercial banks. Table 5 shows the mix of institutions for which Informa  Research Services collected fee type data from 2000–2006.
The summary level data Informa Research Services provided us for each  data element included the average amount, the standard deviation, the  minimum and maximum values, and the number of institutions for which  data were available to calculate the averages. Informa Research Services  also provided this summary level data by the same categories of institution  type and size as the Moebs $ervices data. In addition, Informa Research  Services provided us with data for nine specific geographic areas:    California, Eastern United States, Florida, Michigan, Midwestern United  States, New York, Southern United States, Texas, and Western United  States.
We interviewed Informa Research Services representatives to gain an  understanding of their methodology for collecting the data and the  processes they had in place to ensure the integrity of the data. We also  conducted reasonableness checks on the data and identified any missing,  erroneous, or outlying data and worked with Informa Research Services  representatives to correct any mistakes we found. As we did with the  Moebs $ervices data, we compared the average fee amounts Informa  Research Services had calculated for selected fees for 2000, 2001, and 2002  with the Federal Reserve’s “Annual Report to the Congress on Retail Fees  and Services of Depository Institutions.” We found the averages to be  comparable to those derived by the Federal Reserve and determined that  the Informa Research Services data were sufficiently reliable for this  report. To evaluate bank fee trends, for both the Moebs $ervices and  Informa Research Services data, we adjusted the numbers for inflation to  remove the effect of changes in prices. The inflation adjusted estimates  used a base year of 2006 and Consumer Price Index calendar year values as  the deflator.
To determine the extent to which bank fees are contributing to depository  institutions’ revenue, we obtained data from the quarterly financial  information (call reports) filed by depository institutions and maintained  by the Federal Deposit Insurance Corporation (FDIC). From this data, we  analyzed interest income, noninterest income, and service charges on  deposit accounts for commercial banks and thrifts from 2000 to 2006. We  analyzed the data for all institutions, as well as by institution type (banks  versus thrifts) and institution size (assets greater than $1 billion, assets  between $100 million and $1 billion, and assets less than $100 million).  Similarly, for credit unions, we reviewed the National Credit Union  Administration’s (NCUA) “Financial Performance Reports,” which  provided quarterly data for interest income, noninterest income, and fee  income for all federally insured credit unions from 2000 to 2006. Based on  past work, we have found the quarterly financial data maintained by FDIC  and NCUA to be sufficiently reliable for the purposes of our reports.
To determine the effect, if any, of changing consumer payment preferences  and bank processing practices on the types and frequency of account fees  incurred by consumers, we reviewed the 2004 and 2007 Federal Reserve  payment studies on noncash payment trends in the United States. We also  reviewed data on payment trends in debit and credit card transactions from  the EFT Data Book. In addition, we spoke with multiple industry experts,  including bank representatives and consumer group representatives, such  as the Consumer Federation of America, the Center for Responsible  Lending, and the U.S. Public Interest Research Group to understand what  practices banks employ to process transactions on deposit accounts, how  these practices have changed over the past few years, and the potential  impact these practices have had on consumers incurring fees, such as  overdraft fees. Furthermore, we reviewed studies that analyzed electronic  payment preferences and identified one study that used transaction-level  data to determine how payment preferences influence overdraft fees.
To determine what data are available on the characteristics of consumers  who pay bank fees, we reviewed two studies on the topic; one by an  academic researcher and another by a consumer group. The academic  study used transaction-level account data and regression models to  estimate the probability of overdrawing an account. The data included  customer information and all transactions with associated balances from  May-August 2003, from one small Midwestern bank. The second study  used data collected by telephone surveys of 3,310 adults, who were 18  years or older, between October 2005 and January 2006. Both studies  suffer from limitations that preclude making inferences to the broader  populations of banking customers who pay fees, but they represent the  only relevant research at this point, and are suggestive of the  characteristics of these customers. We also reviewed documentation on  and interviewed officials at the FDIC about their ongoing study of overdraft  protection programs, including the phase of their study in which they will  review transaction-level data. Finally, we interviewed two academic  researchers and representatives of eight consumer groups; five depository  institutions; two software vendors; and four industry trade associations,  including the American Bankers Association, Independent Community  Bankers of America, America’s Community Bankers, and the Credit Union  National Association, to determine what research had been done on the  topic.
section_title: How Regulators Address Fees Associated with Checking and Deposit Accounts
paragraphs: To assess the extent that federal and selected state banking regulators  review fees associated with checking and deposit accounts as part of their  oversight of depository institutions, we obtained and reviewed  examination manuals and guidance used by the five federal banking  regulators—Federal Reserve, FDIC, NCUA, the Office of the Comptroller of  the Currency (OCC), and the Office of Thrift Supervision (OTS)—and  conducted interviews with agency officials. We also obtained and reviewed  a sample of 25 compliance examination reports, on examinations  completed during 2006, to identify how the federal regulators carried out  examinations for compliance with Regulations DD and E. We selected five  examination reports from each regulator based on an institution’s asset size  and geographic dispersion, in an attempt to capture a variety of  examinations. The asset size of the institutions ranged from $2 million to  $1.2 trillion. In addition, we obtained information on the regulatory efforts  of six states. We selected the states based on recommendations from the  Conferences of State Banking Supervisors, New York State Banking  Department, and Massachusetts Division of Banks and to achieve  geographical dispersion. The selected states were: California, Connecticut,  Illinois, Maine, Massachusetts, and New York. We reviewed compliance  examination manuals and guidance used by the six state regulators and  asked specific questions to each state’s appropriate banking officials.
To determine the number of complaints that the regulators received on  checking and savings accounts, in addition to complaints about fees and  disclosures, we requested complaint data, including data on resolutions,  for calendar years 2002 through 2006. For the complaint data, we obtained  data on the banking products or services involved, the complaint category  and, in some cases, the citation of the regulation. While our estimates of the  proportions of complaints related to fees depend on how the banking  regulators coded the subjects of the complaint they received, and how we  combined those related to fees, we judge any possible variations to be  slight. For the complaint resolution data, we obtained information about  the resolution (outcomes) of complaints and the banking products or  services involved. The data came from five different databases: (1) OCC’s  REMEDY database, (2) the Federal Reserve’s Complaint Analysis  Evaluation System and Reports (CAESAR), (3) FDIC’s Specialized Tracking  and Reporting System (STARS), (4) OTS’ Consumer Complaint System  (CCS), and (5) NCUA’s regionally based system on complaints. We obtained  data from OCC, the Federal Reserve, FDIC, OTS, and NCUA that covered  calendar years 2002 through 2006. For purposes of this report, we used data  from the regulators’ consumer complaint databases to describe the number  of complaints that each regulator received related to fees and disclosures  for checking and savings accounts, as well as complaints received by four  major product categories—checking accounts, savings accounts, mortgage  loans, and credit cards. With respect to the data on complaint resolutions,  we used the regulators’ data to describe the number of cases each regulator  handled, what products consumers complained about, and how the  regulators resolved the complaints. To assess the reliability of data from  the five databases, we reviewed relevant documentation and interviewed  agency officials. We also had the agencies produce the queries or data  extracts they used to generate the data we requested. Also, we reviewed  the related queries, data extracts, and the output for logical consistency. We  determined these data to be sufficiently reliable for use in our report.
Finally, we obtained data from each of the federal regulators on violations  they cited against institutions for noncompliance with Regulation DD and  Regulation E provisions. Specifically, we asked for data on the total  number of violations that each regulator cited for all examined provisions  of Regulations DD and E during 2002 to 2006, as well as for data on  violations of selected disclosure provisions. The Regulation DD sections  that we requested and obtained data on were: §§ 230.3, 230.4, 230.8, and  230.11. The Regulation E sections that we requested and obtained data on  were: §§ 205.4 and 205.7. We compiled the data and summarized the total  number of violations found for all of the federal regulators during 2002 to  2006. We also obtained data from 2002 through 2006 on the total number of  enforcement actions that each regulator took against institutions for  violations of all provisions of Regulations DD and E and the selected  disclosure provisions. To assess the reliability of data from the five  databases, we reviewed relevant documentation and interviewed agency  officials. We also had the agencies produce the queries or data extracts  they used to generate the data we requested. Also, we reviewed the related  queries, data extracts, and the output for logical consistency. We  determined these data to be sufficiently reliable for use in our report.  Finally, we also requested information from each state regulator on  consumer complaint, violation, and enforcement data pertaining to bank  fees and disclosures, state specific bank examination processes, and any  additional state laws pertaining to bank fees and disclosures. We did not  receive all our requested data because some states’ systems did not capture  complaint, violation, or enforcement data related to bank fees and  disclosures. For those states where information was available, the number  of complaints and violations were minimal and not consistently reported  among states. We, therefore, attributed the limited information on  complaints, violations, and enforcement actions to state officials and did  not assess the reliability of this data.
section_title: Effective Disclosures of Fees to Consumers
paragraphs: To assess the extent to which consumers, upon request prior to opening a  checking and savings account, are provided disclosures of fees and the  conditions under which these fees are assessed, GAO employees visited  103 bank branches, 36 thrift branches, and 46 credit union branches of 154  depository institutions throughout the nation. We selected these  institutions to ensure a mix of institution type (bank, thrift, and credit  union) and size; however, the results cannot be generalized to all  institutions. We reviewed the federal Truth-in-Savings Act (TISA) and  Regulation DD, which implements TISA, to determine what disclosure  documents depository institutions were required to provide to new and  potential customers. Using a standardized, prescribed script, GAO  employees posed as consumers and specifically requested a  comprehensive fee schedule and terms and conditions associated with  checking and savings accounts. The branches were located in the following  cities: Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois; Dallas,  Texas; Dayton, Ohio; Denver, Colorado; Huntsville, Alabama; Los Angeles,  California; Norfolk, Virginia; San Francisco, California; Seattle,  Washington; and Washington, D.C.
The GAO employees visiting these branches also reviewed the institutions’  Web sites to determine if these sites had comprehensive fee schedules and  terms and conditions associated with checking and savings accounts. After  both visiting branches and reviewing Web sites, GAO employees used  standardized forms and recorded whether or not they were able to obtain  the specific documents (examples were provided) and whether or not they  were able to locate specific information on each institutions’ Web site.
To obtain information on issues related to providing consumers with real- time account information during debit card transactions at point-of-sale  terminals and automated teller machines (see app. II), we reviewed  available literature from the Federal Reserve, including a 2004 report on  the issues in providing consumers point-of-sale debit card fees during a  transaction. We also reviewed other sources that described the payment  processing system related to debit card transactions at merchants and  ATMs. In addition, we conducted structured interviews with officials from  five banks, two card associations, three third-party processors, four bank  industry associations, and one merchant trade organization, and  summarized our findings.
We conducted this performance audit in Atlanta, Georgia; Boston,  Massachusetts; Chicago, Illinois; Dallas, Texas; Dayton, Ohio; Denver,  Colorado; Huntsville, Alabama; Los Angeles, California; Norfolk, Virginia;  San Francisco, California; Seattle, Washington; and Washington, D.C., from  January 2007 to January 2008 in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
section_title: Issues with Providing Consumers Real-Time Account Information at Point-of-Sale Terminals and ATMs When Using a Debit Card
paragraphs: According to debit card industry representatives we contacted, providing  consumers with their “real-time” account balance information during a  debit card transaction is technically feasible but presents a number of  issues that would need resolution. These issues include the costs  associated with upgrading merchant terminals and software to allow for  consumers’ account balances to be displayed at the terminals; the potential  difficulty of determining a consumer’s real-time account balance, given the  different types of transactions that occur throughout the day; concerns  over privacy and security raised by account balances potentially being  visible to others besides account holders; and the increased time it would  take to complete a transaction at merchant locations.
subsections: section_title: Challenges Stem in Part From Existing Technology and Steps Used to Accomplish Transactions
paragraphs: A consumer using a debit card to make a purchase at a merchant’s  checkout counter (referred to as a point-of-sale debit transaction) has two  options for completing the transaction: (1) entering a personal  identification number (PIN) or (2) signing for the transaction (similar to a  credit card transaction). The consumer is typically prompted at the point- of-sale terminal to choose either “debit” (in which case the transaction is  referred to as “PIN-based”) or “credit” (in which case the transaction is  referred to as “signature-based”). Regardless of which option the consumer  chooses, the transaction is a debit card transaction. PIN- and signature- based debit card transactions differ not only with respect to the input  required from the consumer but also the debit networks over which the  transactions are carried and the number and timing of steps involved in  carrying out the transactions. Similarly, transactions initiated at ATMs can  differ in how they are processed. Customers can make withdrawals and  deposits not only at ATMs owned by their card-issuing institutions but also  at ATMs owned by other depository institutions or entities. An ATM card is  typically a dual ATM/debit card that can be used for both ATM and debit  card transactions, both PIN-based and signature-based, at participating  retailers.
section_title: PIN-Based Debit Card Transactions
paragraphs: PIN-based debit card transactions are referred to as “single message”  because the authorization—the approval to complete the transaction— and  settlement—the process of transmitting and reconciling payment orders— of the transaction take place using a single electronic message. As shown  in figure 7, PIN-based debit card transactions involve a number of steps  between the merchant’s terminal and the consumer’s deposit account.  Generally, at the locations of large national merchants, after the consumer  has swiped the card a message about the transaction is transmitted directly  to the electronic funds transfer (EFT) network. (For other merchants, the  transaction reaches the EFT network via the merchant’s processor, also  known as the merchant acquirer.) The message identifies the consumer’s  institution and account, the merchant, and the dollar amount of the  purchase. The EFT network routes the transaction to the card issuer (or to  the card issuer’s processor, which then passes it to the card issuer). The  card issuer—usually the consumer’s depository institution—receives the  message and uses the identifying information to verify that the account is  valid, that the card has not been reported lost or stolen, and that there are  either sufficient funds available in the account or the account is covered by  an overdraft protection program (that is, the issuer covers the transaction  even if there are insufficient funds in the account, which is also known as  bounce protection). If these conditions are met, the issuer authorizes the  debit transaction. Specifically, the issuer then debits the consumer’s  account and sends an authorization message to the EFT network, which  sends it to the merchant’s acquirer, which forwards the authorization to the  merchant’s terminal. The entire sequence typically occurs in a matter of  seconds.
section_title: Signature-Based Debit Card Transactions
paragraphs: Signature-based debit card transactions involve two electronic messages:  one to authorize the transaction and another to settle the transaction  between the merchant and the card issuer, at which time the consumer’s  account is debited. To conduct a signature-based debit card transaction,  the customer typically has a VISA- or MasterCard-branded debit card linked  to a deposit account. As shown in figure 8, after the card is swiped, a  message about the transaction travels directly (or indirectly, through the  merchant’s acquirer) to the VISA or MasterCard network, from which the  transaction proceeds directly (or indirectly, through the card-issuing  institution’s processor) to the card-issuing institution. As in a PIN-based  debit card transaction, if the issuer verifies the relevant information, it  authorizes the transaction and routes it back through the VISA or  MasterCard network to the merchant’s acquirer with the authorization. The  merchant acquirer then forwards the authorization to the merchant’s  terminal, and the consumer signs the receipt. The settlement of the  transaction between the merchant and card issuer (and the actual debiting  of the consumer’s account) occurs after a second message is sent from the  merchant to the issuer, usually at the end of the day.
section_title: ATM-Based Transactions
paragraphs: The steps involved in ATM transactions depend upon whether a consumer  is using an ATM owned by the issuer of his or her card (typically referred to  as a “proprietary” ATM), or an ATM owned by a depository institution or  entity other than the card-issuing institution (typically referred in the  industry as a “foreign ATM”). A foreign ATM transaction is processed in  essentially the same manner as a PIN-based debit card transaction, with  one exception: the ATM operator (or its processor) routes the transaction  to the EFT network, which then routes it to the card issuer. The card- issuing institution authorizes the transaction via the EFT or debit card  networks. In contrast, when a consumer uses a proprietary ATM, the  transaction stays within the issuer’s network and does not require the use  of an external EFT network (fig. 9). Card issuers that are depository  institutions—such as banks—may have the capability of providing a notice  to their customers at a proprietary ATM that a withdrawal will result in the  account being overdrawn and then allow the customer to decide whether  or not to proceed with the transaction. Officials from one of the banks that  we spoke with stated that they employed this capability at their proprietary  ATMs.
section_title: Point-of-Sale Terminal and Software Upgrade Challenges
paragraphs: As of March 2007, there were over 5 million point-of-sale terminals in the  United States. According to industry representatives, most point-of-sale  terminals are not currently equipped to display a consumer’s checking  account balance and, in these cases, merchants would either need to  replace the terminal entirely or upgrade the software in the terminal.  Industry representatives were hesitant to estimate the costs associated  with this because the number of terminals that would need to be replaced  versus those that would only need a software upgrade is not currently  known. The industry representatives explained that the cost of upgrading  the point-of-sale terminals to display account balance information would  be primarily borne by merchants.
In addition to upgrading point-of-sales terminals, industry representatives  identified the following other costs that would be incurred:  Upgrading software used by the EFT networks and depository  institutions in order to transmit balance information from the card- issuing institution to the merchant. As described above, currently a  debit card transaction is authorized by verifying a consumer’s checking  account balance and sending back an approval or denial message— which does not include account balance information.
Increasing the communications infrastructure of the EFT networks to  allow for additional message traffic, namely consumers’ acceptances or  declinations of a transaction once they have viewed their account  balances. These messages would constitute a second message from the  point-of-sale terminal to the card-issuing institution for each  transaction.
An associated cost with this process would be training employees who  work at the terminals how to handle these debit card transactions and the  cost of additional time to accomplish transactions, which we discuss here.
With respect to providing account balance information at foreign ATMs,  one industry representative explained that this would require all entities  involved in ATM transactions (banks, ATM operators, ATM networks, and  the Federal Reserve) to agree on a common message format to display  balances, as well as a new transaction set for ATMs that would provide  consumers with the option not to proceed with the transaction once they  saw their balances. Two industry representatives we spoke with said that it  could take a number of years for all of the entities involved in ATM  transactions to agree on a standard format.
section_title: Challenges in Providing Accurate Real-Time Account Balance Information
paragraphs: Debit card industry representatives explained that the account balance that  is used to authorize a debit card transaction—and which would be  displayed to the consumer—may not necessarily reflect the true balance in  the consumer’s checking account at the time of the transaction. One of the  reasons for this is that, while a depository institution may attempt to get as  close to a real-time balance as possible, it may be unable to capture all of  the transactions associated with the account as they occur throughout the  day. For example, one depository institution official told us that it updates  its customers’ account balances throughout each day; it refers to these  updated balances as a customer’s “available balance.” This available  balance is updated throughout the day to reflect debit card transactions at  point-of-sale terminals and ATMs, as well as other transactions such as  those that occur online. This balance, however, might not take into account  checks that will be clearing that day, deposits made at a foreign ATM, or  some transactions that would come in via the Automated Clearing House  (ACH). An example of the latter is a transaction in which a consumer  electronically transfers funds from a mutual fund to a checking account.  The net result of the inability to provide consumers with a real-time  balance is that the consumer may be presented with a balance that is not  reflective of all the transactions that will be processed as of that day.
Another reason why a depository institution may be unable to provide  consumers with a real-time balance is that the institution may not update  balances throughout the day. Most institutions “batch process” transactions  at night, then post the revised customer account balances. The following  day, the institutions update the customer’s account balance for debit card  authorizations and certain other transactions that occur throughout the  day. However, according to a card association, some small banks only post  the account balance from the batch process to the customer’s account and  do not update account balances as transactions occur throughout the day.
Finally, if a depository institution uses a third-party processor to authorize  debit card transactions, the balance that the third-party processor uses may  also not reflect all the transactions that occur throughout the day. For  example, transactions involving a bank teller, such as deposits or  withdrawals, do not require a third-party processor to authorize  transactions, thus the processor would not be able to update its balance to  reflect these transactions.
section_title: Challenges Associated with Privacy and Security Issues
paragraphs: One of the major concerns raised by the debit card industry representatives  we spoke with regarding providing consumers with real-time balances at  point-of-sale terminals was a concern over privacy. Unlike ATM  transactions, which are transactions between a consumer and the machine,  under which consumers tend to be cognizant of the need for privacy, point- of-sale terminals are generally more visible to others, according to these  representatives. For example, the balance on a point-of-sale terminal could  be visible to the cashier and customers in line at a merchant location. In  addition, at restaurants, the waiter or other staff could view this  information out of sight of the consumer. The industry representatives  stated that most consumers would likely be uncomfortable having their  account balance information visible to others.
Another related concern raised by these representatives was one of  security, in that cashiers or possibly other customers might be able to view  a consumer’s account balance. Thus, the industry representatives stated  that providing balances at a point-of-sale terminal could increase the risk of  fraud. One industry representative told us that providing a balance at a  point-of-sale terminal would be a departure from current privacy and  security approaches with point-of-sale transactions.
section_title: Challenges Related to Increased Transaction Processing Time
paragraphs: Industry representatives explained that allowing consumers to accept or  decline a transaction once they have viewed their balance would likely  increase the time it takes to get customers through a check-out line.  According to a retail merchant’s trade association that we contacted,  merchants depend on moving customers quickly through check-out lines.  The retail merchants’ trade association stated that adding a step in the  check-out process would add time, resulting in lower sales volume per unit  of time for each cashier, and potentially greater costs associated with  adding cashiers to maintain the same volume of transactions.
Industry officials also stated that there were some circumstances during a  point-of-sale transaction for which providing consumers with real-time  balances would not be possible or would be problematic. For example,  during “stand-in” situations, such as when a card issuer’s systems are  offline for maintenance, EFT networks review and authorize (or deny)  transactions in accordance with instructions from the issuer. The networks  would not have real-time access to account balance information when the  issuer’s system is down. Another example would be merchants, such as fast  food outlets, who perform quick swipes of debit cards for low dollar  transactions. At the time of the swipe, the merchant has not actually routed  the transaction to the card issuer and thus has not yet accessed the  consumer’s account balance. In these cases, the merchant has accepted the  risk of not being paid if there are insufficient funds in the account in order  to move customers through lines more quickly. Finally, one industry  representative questioned how the industry would be able to provide  consumers with real-time balances if consumers make debit card  purchases online or over the telephone.
section_title: Other Options Short of Providing Real-Time Account Balance Information at Point-of-Sale Terminals or ATMs Have Their Challenges and Limitations
paragraphs: There are other options short of providing real-time account balances at  point-of-sale terminals and ATMs that might assist in warning consumers of  a potential overdraft, but each of these options has challenges and  limitations. For example, one option involves sending a warning with the  authorization message instead of a real-time balance. The warning would  indicate that the transaction could result in an overdraft. As indicated  above, one of the banks we met with currently provides a similar warning  on its proprietary ATMs. The consumer would then have the option to  accept or deny the transaction. This option would require two messages to  complete a debit card transaction rather than one message. Further, under  this option, depository institutions would still be unable to base their  authorization decisions on a real-time balance because of the various types  of transactions that may occur in a day, and thus no warning message  would be triggered—yet once the institution reconciles all accounts, a  consumer could be faced with an overdraft fee. This option would also  likely slow down transactions and raise costs for merchants. However,  unlike providing real-time account balance information at a point-of-sale  terminal, this option would not present privacy or security concerns  because the balance in the consumer’s account would not be transmitted.
Another option short of providing consumers with real-time account  balance information is printing a consumer’s available balance on a receipt  after a transaction has been completed. This is currently possible when  consumers use their card issuers’ proprietary ATMs and some foreign  ATMs, according to industry representatives. Under this option, the  consumer would not receive a warning that the transaction could subject  them to an overdraft, and they would not have a choice to accept or decline  the transaction. Further, under this option, the consumer would not be  provided his or her account balance until after the transaction was  completed. However, once consumers obtained their balance, they could  change their spending behavior to avoid a fee on subsequent transactions.  This option would entail certain costs for upgrading terminals or software  in order to print the consumer’s real-time balance on the receipt, as well as  costs of upgrading software to transmit the real-time balance from the  card-issuing institution to the merchant terminal. The option would not  address an institution’s ability to provide an actual real-time balance and  would introduce privacy and security concerns because if the receipt were  inadvertently dropped, others could view the balance. However, this option  would not slow down the time it takes to complete a transaction because  the consumer would not be given the option of accepting or declining a  transaction.
Finally, industry representatives noted that consumers currently have a  number of ways to check their account balances (e.g., by phone and  Internet), which might help them avoid overdraft fees. According to  Federal Reserve officials, this would require “near-time” processing and a  system that synchronizes the balance information reported through the  phone and Internet banking systems with the balance information that is  transmitted by the institution to the ATM/EFT network. Three of the four  large banks we spoke with stated that their customers currently have the  ability to sign up for a feature in which the bank will send a message to the  consumers’ e-mail accounts or cell phones—“E-alerts”—when their  balances reach a designated “threshold” amount. Under this option,  consumers receiving an E-alert could change their spending patterns to  avoid incurring an overdraft situation and fees. Table 6 compares the   E-alert option with other potential options for warning consumers that they  may incur an overdraft fee and the associated issues surrounding the  particular option.
section_title: Analyses of Select Bank Fees Data
paragraphs: Using the methodology we noted earlier, we analyzed select bank fee data  obtained from two firms, Moebs $ervices and Informa Research Services.  Some bank fees have increased since 2000, while a few, such as monthly  fees, have decreased. As noted earlier in the report, we analyzed data in  aggregate for all depository institutions and also by institution type and  size. According to data we obtained, banks and thrifts charged more than  credit unions for almost all select fees analyzed, and larger institutions  charged higher fees than midsized and smaller institutions. We found slight  variations in fees charged by region, with certain regions charging less than  the national average for some select bank fees analyzed. For example,  California and the Western United States consistently charged less than the  national average for almost all select fees analyzed according to the  Informa Research Services data.
For both the Moebs $ervices and Informa Research Services data, banks  and thrifts were combined into one institution type category, with credit  unions as the other institution type. For both sets of data, the following  asset size categories were used:  small institutions had assets less than $100 million,  midsized institutions had assets between $100 million and $1 billion, and   large institutions had assets greater than $1 billion.
For the Moebs $ervices data, we computed average amounts ourselves, but  statistics were provided to us for the Informa Research Services data. We  identified all instances in which the information presented was based on  data provided by less than 30 institutions and did not include those  instances in this report because averages based on a small number of  institutions may be unreliable. The information presented for the Moebs  $ervices data is statistically representative of the entire banking and credit  union industry, but the Informa Research Services data is not. For  additional information on the select fees analyzed and the number of  institutions surveyed, see appendix I.
subsections: section_title: Analysis of Moebs $ervices Data
paragraphs: Table 7 provides a detailed comparison of the Moebs $ervices data for all  institutions for select bank fees for the 8-year period, 2000–2007.
section_title: Analysis of Informa Research Services Data
paragraphs: Table 8 provides a detailed comparison of the Informa Research Services  data for all institutions for select bank fees for the 7-year period, 2000– 2006. The data is presented for a variety of types of checking and savings  accounts.
section_title: Resolution of Complaints Related to Fees and Disclosures Associated with Checking and Savings Accounts
paragraphs: In analyzing the resolution of complaints for fees and disclosures  associated with checking and savings accounts, we found similar outcomes  among complaints received by the Federal Reserve, FDIC, OCC, and OTS.  As shown in figure 10, these federal regulators reported resolving  complaints in the following order of decreasing frequency: 1. Finding that the bank was correct. This included instances in which the  regulator determined that the financial institution did not err in how it  administered its products and/or services to the consumer.  2. Providing the consumer with additional information without any  determination of error. This included instances in which the regulator  told the consumer that the dispute was better handled by a court or  where the regulator determined that rather than wrongdoing there was  miscommunication between the bank and its customer. 3. Other, including instances in which the consumer did not provide  information needed by the regulator or withdrew the complaint. 4. Determining that the bank was in error. This included instances in  which the regulator determined that the bank erred in administering its  products and/or services to the consumer (errors could include  violations of regulations). 5. Complaint in litigation, in which the regulator tabled the complaint  because it was involved in legal proceedings. This includes instances in  which the regulator can not intervene because the issues raised in the  complaint are the subject of either past, current, or pending litigation.
section_title: Comments from the Federal Deposit Insurance Corporation
section_title: Comments from the Board of Governors of the Federal Reserve System
section_title: Comments from the National Credit Union Administration
section_title: Comments from Office of the Comptroller of the Currency
section_title: Comments from the Office of Thrift Supervision
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Harry Medina, Assistant  Director; Lisa Bell; Emily Chalmers; Beth Faraguna; Cynthia Grant; Stuart  Kaufman; John Martin; Marc Molino; José R. Peña; Carl Ramirez; Linda  Rego; and Michelle Zapata made key contributions to this report.