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Overdraft Loan Fees Increase at Nation's Ten Largest Banks

New survey details increasing costs without customer consent

August 7, 2008

Some consumer groups have told the Federal Reserve and other financial regulators that proposed FTC Act rules on bank overdraft "services" fail to protect cash-strapped families from high cost and unfair loans. The proposed rules require customers to opt-out of bank overdraft loans to avoid future fees.

Banks lend money to consumers by paying or authorizing checks, debit card purchases, ATM withdrawals and preauthorized electronic payments despite insufficient money in the account to cover the transaction. Banks charge a fee per overdraft and collect payment directly out of the next deposit into the account. Consumers pay at least $17.5 billion a year for unauthorized overdraft loans, many triggered by small debit card purchases that in the past were denied for no fee, the groups maintain.

"Banks should have to get their customers' affirmative consent before signing them up for their most expensive loans," said Jean Ann Fox, Consumer Federation of America's director of financial services. "It is unfair for banks to make overdraft loans without consumer consent, a firm contract to cover overdrafts, notice that a transaction will trigger an overdraft fee, and cost information on borrowing by overdraft."

"Overdrafts are a type of credit, and they are one of the most costly types imaginable," said Chi Chi Wu, staff attorney at the National Consumer Law Center. "Yet the banks that make these loans don't have to provide Truth in Lending disclosures, which would inform consumers how expensive this form of credit really is."

The groups called on the agencies to require banks to get affirmative consent before enrolling their current and prospective customers in fee-based overdraft loans to require banks to comply with Truth in Lending, and to prohibit banks from manipulating the order of processing withdrawals to drive up the number of fees that can be charged.

Key findings from the survey include:

• The average highest fee charged for overdrafts is $34.65, up 15 percent from the $30.30 average highest fee charged by the same ten banks in 2005. The highest fee is $37.50 per overdraft at U.S. Bank after four overdrafts in a year.

• Half of the largest banks use a tiered overdraft fee structure, charging escalating fees for more than one overdraft over a rolling thirteen month time period. For example, PNC Bank charges $31 for the first three overdrafts in a year, $34 for four to six loans, and $36 for seven or more overdrafts in a year. Bank of America charges $25 for the first overdraft, then $35 each. In 2005 only three large banks used tiered overdraft fees (Bank of America, National City Bank, and U.S. Bank).

• Sixty percent of the largest banks add a sustained overdraft fee if an overdraft is not repaid within a few days. These banks add $6 to $8 per day until the overdraft and fees are repaid or charge a flat fee. For example, Chase charges a flat $12.50 if an overdraft is not repaid after five days while SunTrust adds an additional $35 fee on the seventh day an overdraft is unpaid.

• The total cost of a single overdraft at the bank's highest fee that is unpaid after seven days ranges from $70 at SunTrust to $30 at CitiBank. U.S. Bank's combined fees total $69.50. National City charges $68 and Fifth Third Bank's combined fees total $57.

• Only thirty percent of the largest banks set a maximum number of transactions that can trigger an overdraft fee in a single day. Bank of America permits up to seven in one day, up from five last year, for a maximum of $245 per day in fees. U.S. Bank limits customers to six paid overdrafts and six insufficient funds transactions in one day for a total of $450 per day in fees. WaMu limits overdrafts at five per day or a maximum of $170 per day in fees.

• The largest banks process withdrawals largest first (or disclose they pay withdrawals in any order the bank chooses), which results in additional fees when smaller subsequent transactions overdraw an account.

"Bankers claim that paying the largest check first helps consumers make sure that the mortgage or rent gets paid, even if more transactions bounce or overdraw the account," stated Ms. Fox. "Only 13 percent of consumers in a national poll agreed with bankers. Most consumers want their banks to pay transactions smallest first or in the order they arrive at the bank."

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