WASHINGTON—The Consumer Financial Protection Bureau, preparing to propose a fresh rule to rein in bank overdraft fees, announced an enforcement action on Thursday against Santander Bank N.A. over alleged illegal overdraft practices.

The agency entered into a settlement with Santander, in which the lender was ordered to pay $10 million for allegedly using a telemarketing vendor that signed up bank customers to its overdraft program without their consent.

Santander didn't admit or deny the allegations and said it is terminating its relationship with the vendor. It also said it regretted not sufficiently supervising the vendor between 2010 and 2014, when the incidents occurred.

Santander, a Wilmington, Del.-based unit of Spain's Santander Group, is the second bank the CFPB has cited this year for alleged violations of a 2010 law that prohibits banks from charging overdraft fees on ATM and one-time debit-card transactions unless the consumer agrees in advance.

The CFPB is preparing to propose a new rule later this year to restrict overdraft programs, a significant source of income for banks. According to an estimate by Moebs Services, a research firm, banks, thrifts and credit unions collected $32.5 billion in overdraft revenue last year, up 2.1% from 2014.

For a typical fee of $35 per overdraft, most banks allow customers to overdraw their accounts when there isn't enough money to cover a transaction and to repay the amount covered out of the next deposit. Without such a feature, the customer's check would bounce and a debit-card purchase would be rejected if the account lacks sufficient funds. Banks and merchants charge fees for bounced checks.

Regulators have zeroed in on such fees in recent years because they disproportionately hit lower-income consumers living from paycheck to paycheck. A recent survey by Pew Charitable Trust showed nearly seven in 10 heavy overdrafters—those defined as paying $100 or more in overdraft fees in the past year, had incomes under $50,000 a year. More than two in five heavy overdrafters paid $300 or more in overdraft fees in the past year.

Such fees can be costly compared to the size of the overdrafts. The CFPB's 2014 research showed the median purchase amount for transactions that generated overdraft fees was $50 and $24 for purchases made with debit cards.

In February, CFPB Director Richard Cordray requested banks to consider offering low-cost no-overdraft bank accounts to consumers.

In the latest case, the CFPB alleges that in addition to enrolling customers in its overdraft program without their consent, call representatives misled some customers into believing that the service was free or they would be charged overdraft fees regardless of whether they signed up for the program or not.

Besides the fine, the CFPB ordered Santander to contact all customers enrolled in its overdraft program and ask if they wished to opt in.

In addition to terminating the relationship with the vendor, Santander is "continuing to implement additional controls to ensure more effective oversight of our vendors and our processes," said Ann Davis, a Santander spokeswoman.

Write to Yuka Hayashi at yuka.hayashi@wsj.com

 

(END) Dow Jones Newswires

July 14, 2016 21:15 ET (01:15 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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