Complain about a product or service

Banks Levy Big Overdraft Loan Fees Without Permission, Study Finds

Consumers Paying Up to $22 Billion Per Year in Overdraft Fees

June 13, 2005
Over eighty percent of the nation's largest banks charge consumers high overdraft fees without their permission, according to a new study by the Consumer Federation of America. Consumers are only informed of these charges in the fine print of their account agreements, which can cause them to inadvertently overdraw their accounts when making an ATM or debit card transaction.

Overdrafts • Consumers Bilked of $17.5 Billion in Overdraft Loans • Overdraft Loan Survey Finds Problems For Consumers • New Banking Regulation Tightens Overdraft Fee Disclosure Rules • Banks Levy Big Overdraft Loan Fees Without Permission, Study Finds • Consumer Groups Want Full Disclosure of Bounce Loan Costs • Bank Regulators May Limit "Overdraft Protection" Plans

"Large banks are increasingly allowing consumers to unwittingly overdraw their accounts and then hit them with hidden fees," said Jean Ann Fox, director of consumer protection for Consumer Federation of America (CFA). "A loophole in Federal rules actually permits this deceptive and abusive practice."

While recent regulatory action by the Federal Reserve singles out smaller depository institutions that promote "courtesy" overdraft loans, the nation's largest banks have also included identical provisions in their checking accounts but do not advertise them.

"The Federal Reserve missed an opportunity to require banks to give customers information about the true cost of overdraft loans. As a result, banks can continue to hide the cost of these products," said Eric Halperin, policy counsel at the Center for Responsible Lending. "Federal regulators must do more to protect consumers from these abusive loans."

CFA's study, "Overdrawn: Consumers Face Hidden Overdraft Charges From Nation's Largest Banks," documents that the nation's biggest banks charge fees for discretionary overdrafts without consumer consent and that the overdraft fees charged by these banks exceed industry averages. CFA surveyed large banks controlling over half of all assets held in consumer deposit accounts.

The fees at the banks CFA surveyed average $28.57, five percent higher than average overdraft fees at two hundred bank accounts surveyed by BankRate.com in May 2005.

Banks that offer this discretionary "courtesy" overdraft coverage in their account agreement disclosures also state they are not bound to pay transactions that overdraw depositors' accounts. If consumers who receive "courtesy" overdraft loans do not repay the overdraft quickly enough, many banks tack on an additional sustained overdraft surcharge.

Penalty fees for insufficient funds checks and overdrafts are a huge and growing burden for accountholders. Consumers pay at least $10 billion per year and as much as $22.7 billion just for overdraft loans, according to estimates by the Center for Responsible Lending. These estimates are based on reports by industry analysts and publicly disclosed checking account service fee revenue.

"These days, consumers are having a much harder time managing their bank accounts to avoid unwanted overdraft fees," said Fox.

Increasing overdraft fees are the result of changes in the marketplace and in federal law and the broader use of overdraft fees for transactions other than those involving paper checks, including ATM withdrawals and debt card purchases. Money moves out of consumers' bank accounts faster than ever due to electronic processing allowed under the Federal "Check 21" act, while deposits can be held up for days before consumers are allowed access to their funds.

Big banks permit consumers to overdraw their accounts without warning them on more types of transactions. Many larger banks are also increasing the chances that consumers will overdraw their accounts by processing the largest checks ahead of smaller checks, whether or not they bank received the larger checks first. This can cause a larger number of smaller transactions to bounce for consumers with low account balances and increase fee revenue for banks.

The new generation of overdraft loans are more expensive than traditional overdraft protection, which requires that consumers agree ahead of time to pay for an overdraft from a linked savings accounts, credit card or revolving line of credit.

CFA's study found that most of the largest banks offered these contractual overdraft protection policies and these options would be cheaper for consumers than "courtesy" overdraft.

"Big banks should encourage consumers to use lower cost services that are already available. Responsible overdraft protection involves a guarantee that overdrafts will be paid, reasonable fees that are clearly disclosed and affordable repayment terms," Fox stated.

Report Your Experience
If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.

Back to the top |