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Will aggressive overdraft fee practices be curbed?
With banks desperate for income, consumers have seen ever-rising overdraft fees. Bank practices in adminstering the fees have drawn lawsuits and calls for reform.
To banks, overdraft fees are part of overdraft service, which customers automatically get when they open an account. The "service" protects the customer from having their transactions blocked when they dip below zero balance.
Instead of the transaction being refused, you get an overdraft fee. And then another, for each purchase (no matter how small) made while the account is in the red. Consumers who don't keep a vigilant eye on their balance can rack up hefty fees before knowing they had insufficient funds.
As the Charlotte Observer points out, overdraft service made much more sense (to consumers) when people wrote more paper checks. An overdraft fee was better than the bank blocking the check, and having both bank and merchant slapping you with a fee for bouncing the check.
But in the days of debit cards and ATM machines, many consumers assume payment machines will prevent them from using their bank card to spend money that's not in the bank.
An FDIC report released at the end of 2008 found overdraft fees to range from $10 to $38, with a median fee of $27. And that was based on data from 2006.
Young consumers (18 -25) were the most likely to draw overdraft charges.
Those with many overdraft fees represented a vast majority of all fees charged. Customers with 20 or more overdraft fees in a year (4.9% of consumer accounts) represented 68% of all overdraft fees paid.
According to a consulting firm cited by the Observer, banks and credit unions "earned" almost $37 billion in revenues from consumer overdraft fees last year. According to the FDIC, 75% of all service fees banks got from deposit accounts came from overdraft fees.
As reported by the USA Today, one firm that consulted to most of the country's largest banks may have advocated for purposefully maximizing the number of overdraft fees. How? By slowing down the clearing of deposits, say by not clearing them for up to 5 days if received in a non-bank envelope, or removing time saving bar codes from bank issued deposit envelopes.
Methods such as these, or the order in which a bank chooses to clear transactions (which may maximize fees), have bee the subject of multiple lawsuits seeking class action status.
In terms of reform, the Federal Reserve is considering two primary options:
These proposals would apply only to ATM machine and point-of-purchase debit card transactions. Current overdraft policies would still apply to checks and to scheduled electronic payments (such as bills).
The new rules would also prevent temporary holds from forcing a person into overdraft. Merchants such as rental car companies can require a temporary hold of hundreds of dollars. These holds can take days to clear, causing consumers to run closer to zero than they know, as pointed out by Consumer Reports.