Complain about a product or service

Despite Rules Changes, Banks Still Depend On Overdraft Fees

Customers remain at risk of getting dinged with "courtesy" charges

By Mark Huffman and James Limbach
ConsumerAffairs.com

October 15, 2009

"None of the largest banks reduced their overdraft fees, which average $35 per overdraft, or dropped sustained overdraft fees tacked on if consumers cannot repay in just days," noted Jean Ann Fox, Director of Financial Services for the Consumer Federation of America. "For a $100 overdraft repaid in one week at that $35 fee, consumers are paying 1,820 percent APR if computed in the same way as a short-term loan. A single $10 overdraft loan can still cost up to $70 if not repaid in just five days."

Banks extend credit when they cover overdrafts for a fee. However, the Federal Reserve does not require banks to comply with the credit laws that apply to other short-term cash loans. As a result, consumers are permitted to overspend their checking accounts without affirmative consent, do not get comparable cost-to-borrow information, and are not warned when a transaction will trigger an overdraft.

It now appears the Federal Reserve will change rules requiring banks to allow customers to decide whether they want their banks' "courtesy" overdraft protection, in which the bank covers the overdraft but charges the consumer an overdraft fee of about $30 per overdraft. Fed Governor Daniel Tarullo told the Wall Street Journal that change is likely.

JP Morgan Chase, Wells Fargo and Bank of America, anticipating these changes, recently announced liberalization of their policies that assess consumers a hefty service charge when they make debit purchases that exceed the funds in their accounts. Some consumers who routinely draw their checking account down to the bare minimum can end up paying hundreds of dollars a month in overdraft fees.

"Overdraft loans are one of the most expensive and exploitative credit products on the market," said Chi Wu, National Consumer Law Center Staff Attorney. "A few limited reforms by a half dozen banks aren't going to stop the abuses. These reforms are too little and too late, coming after years in which banks made billions off of overdraft abuses."

Recently announced changes in overdraft programs by some large banks are unlikely to reduce costs significantly to customers, said the groups. Some banks have changed the threshold that triggers overdraft fees and have lowered the total number of overdraft fees a consumer can be charged in one day. But none of the banks are lowering the fees charged for initial or sustained overdrafts.

Chase Bank plans to permit its existing and new customers to sign up affirmatively to use overdraft loans, while other large banks have announced that they will permit existing customers to opt out of using the banks' most expensive form of credit.

In some cases, banks will permit only new customers to opt in to some forms of overdrafts in the future. Citibank does not permit its customers to incur overdrafts when using debit cards or at ATMs, and Citibank customers can incur four overdraft fees per day for checks.

"The Consumer Financial Protection Agency, under consideration this month by the House Financial Services Committee, is needed to restore consumer protections to bank overdraft lending," said Travis Plunkett, CFA's Legislative Director. "The Consumer Financial Protection Agency will monitor these types of transactions and provide a floor of protections for consumers so that Americans are not left to the mercy of the banks to decide on fundamental protections and fair transactions going forward."

What to watch out for

Consumers burned by these charges on a regular basis are unlikely to agree to continue the bank's "overdraft protection" once they have the choice, so bank revenue from these fees will probably drop sharply.

But banks still depend on fees to bolster profits and consumers should be aware of them. To make up for the loss of overdraft fees, these other fees might increase, and new fees might be added.

For example, when a credit card company offers you an attractive deal on a credit card if you will transfer balances from another card, keep in mind that transfer can come at a cost. Some banks charge up to five percent for a balance transfer, meaning the cost of moving $10,000 can cost $500.

The same is true for a cash advance. To take out a "loan" from your credit card, the bank will assess a fee, or surcharge, often between two and five percent. That can make a cash advance an expensive proposition -- something that shouldn't be considered except in a dire emergency.

Using the ATM can also come with fees, though most banks don't charge their customers for using the machines within the bank's network. But using a "foreign" ATM, or one outside the bank's network, can be expensive. Your bank will charge a fee, as will the "foreign" bank. A way to avoid these fees is to make a debit purchase at a store where you can get cash back. That transaction, in most cases, doesn't carry a fee.

Most banks also charge for checking services unless the customer meets certain conditions. For example, the fee might be assessed when the balance in the checking account falls below a certain level.

Usually, that minimum balance isn't all that high, so if a consumer has a savings account, it would be much better to keep the savings in a checking account, to maintain the minimum balance. Avoiding a monthly surcharge usually offsets the less than one percent interest usually paid on a passbook savings account.

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.

Share		Follow us on Twitter.

Back to the top |