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Fees For Unauthorized Overdraft Loans Keep Going Up

Consumers need better protections to safeguard bank accounts

By James Limbach
ConsumerAffairs.com

July 28, 2009

According to the Consumer Federation of America (CFA), the Federal Reserve has failed to protect consumers from unauthorized bank overdraft loans and, as a result of this inaction, fees for these extremely expensive loans are escalating and multiplying.

Testifying before Congress recently in support of President Obama's proposed Consumer Financial Protection Agency, the CFA noted that regulatory inaction in just this one area is costing hard-pressed consumers over $17.5 billion during the worst economic downturn since the Depression.

In a typical overdraft loan program, banks unilaterally lend money to consumers without the consumer's knowledge or consent by paying or authorizing checks, debit card purchases, ATM withdrawals and preauthorized electronic payments when there is insufficient money in the account to cover the transaction.

Banks charge a flat fee per overdraft, taking funds directly from the next deposit into a consumer's bank account to repay the overdraft and cover the fee. A growing number of large banks charge additional fees when consumers are unable to repay the overdraft and fees within just a few days, diverting funds from consumers to their banks.

"For years, consumer advocates have complained about these anti-consumer practices and urged the Federal Reserve to force banks to comply with the Truth in Lending Act and get their customers' consent to use this extremely expensive form of credit, but the agency has turned a deaf ear to those requests," stated Jean Ann Fox, CFA's director of financial services. "Instead, the agency has continued to allow banks to collect billions of dollars in overdraft loan fees for credit extended without the customers' consent, and without providing either information on the cost to borrow or affordable repayment schedules."

CFA, along with many consumer and community groups, has voiced support for creation of the Consumer Financial Protection Agency to make consumer protection the top priority for an independent federal agency. The group also supports Rep. Carolyn Maloney's bill (H.R. 1456) to give consumers control over overdraft loans, and Sen. Dick Durbin and Rep. Jackie Speier's bills (S. 500, H.R. 1608) to extend the 36 percent annual rate cap on credit set by Congress to protect Service members to all Americans.

In July CFA updated its findings from a survey of the largest banks for comments to the Federal Reserve in March 2009. All of the largest banks unilaterally authorize payment of overdrafts at the bank's discretion and charge per-overdraft fees without advance consent or on-the-spot warning to customers. They also process withdrawals largest first, or retain the right to do so, a practice that optimizes the number of transactions that will trigger an overdraft fee when consumers live paycheck to paycheck -- maximizing the cost to consumers and the income to banks.

Key findings from the survey of the top sixteen banks' fee schedules and practices:

• The median overdraft fee is $35. The highest overdraft fee is $39, charged by Citizens Bank for the third overdraft in a year. Fourteen of the sixteen largest banks charge $35 or more per overdraft, either initially or after a few overdrafts in a year.

• For example, Regions Bank in Tennessee charges $26 for the first overdraft, $35 for the second, and $37 each for three or more. Fifth Third Bank switched to tiered fees and now charges $25 for the first, $33 for the second to fourth, and $37 for five or more overdrafts in a year. In February, Bank of America dropped its initial $25 fee and now charges $35 for every overdraft over $5 total overdrawn in one day (those tiny less-than-$5 total overdrafts still cost a $10 fee).

• Over 60 percent of the largest banks charge "sustained overdraft" fees when consumers are unable to repay the overdraft and fee in a few days. As of August 1, BB&T will impose its $30 extra fee after only five days, down from seven days. In June, Bank of America started charging a $35 sustained overdraft fee when its customers are unable to repay within five business days. Citizens Bank charges two sustained overdraft fees if its customers are unable to repay the overdraft and fees within ten days.

• The total cost of a single overdraft at the banks' highest fee if unpaid after seven days ranges from $74 at Citizens, $72 at SunTrust, and $70 at Bank of America to $34 at CitiBank and WaMu, neither of which charges a sustained or tiered overdraft fee. If unpaid after ten days, Citizens Bank charges $109 for a single overdraft.

• Ten of the largest banks set no limits on the number of overdraft fees charged per day. And the banks that set limits provide little relief for cash strapped customers. This year Bank of America doubled its limit to ten overdraft fees per day, the same that Wells Fargo Bank sets. Both TD Bank and US Bank charge up to six overdraft and six insufficient funds fees per day.

• In the last year, overdraft fees have gone up at half the surveyed banks. Citibank's fee jumped from $30 to $34. Fifth Third Bank dropped its flat $33 fee and now charges tiered fees up to $37. PNC increased its sustained overdraft fee by a dollar to $7 per day and SunTrust upped its fees from $35 to $36 for both an initial and sustained overdraft.

• The cost to borrow $100 via overdraft for seven days, if computed as a closed-end one week payday loan, ranges from 1,768 percent APR at CitiBank and WaMu to 3,848 percent APR at Citizens Bank. A Bank of America $100 overdraft repaid in one week costs $70 or 3,640 percent APR.

"Inaction by bank regulators to protect struggling consumers against astronomically expensive unauthorized overdraft loans illustrates why American consumers need the Consumer Financial Protection Agency to put consumer protection first," Fox stated. "Even now, after banks that brought the global economy to the brink of collapse have received billions in taxpayer bailouts, bank regulators appear to care more about protecting bankers' bottom lines than they do about protecting consumers' checking accounts and family budgets."

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