Thursday, July 19, 2007

Look out for abusive overdraft charges at your bank!

How does your bank deal with overdraft charges?  Partly out of fear of this very thing, I keep way too much in my checking account, so I haven't had to deal with the issue.  But if I was smarter, I'd have a lower balance, and that might include the risk of an occasional overdraft.  And if I was less lucky and less fortunate, I might have no choice about cutting things close in my checking account.
So I was really disturbed to read this recent report from the Center for Responsible Lending  ( via Michelle Singletary's WaPo column).  Based on a study of 18 months of data including more than 3 million banking transactions, they estimate that Americans are paying $17.5 billion a year in abusive fees on overdraft loans-- for balances totaling only $15.8 billion and loan terms that average less than five days!
Basically, many banks and credit unions automatically enroll customers in what CRL calls "abusive overdraft loans" and the banks typically refer to as "bounce protection " or "courtesy overdraft coverage."  The programs are exempt from the Truth-in-Lending Act, and they're usually hidden in the fine print.  When customers overdraw their accounts, the bank automatically loans them the money to cover the charge-- but on the average loan of $27, the fees total an additional $34.  And since the bank recoups the total from the next deposit into the account, the term is very short, typically 5 days or less.  In contrast, even the priciest alternative-- covering the charges with a credit card or line of credit at 20% or 25% APR-- is markedly cheaper.  ($27 at a 25% APR is less than $7 a year, less than 50 cents a month.  According to CRL, the transfer fees for drawing on a line of credit are usually $5-$10.)
This is a growing problem, not only because the fees are more common (only 2.5% of banks and credit unions charged them in 1999 , but now most customers are enrolled in such a program), but because many banks have stopped declining debit-card charges when there are insufficient funds in the account.  Banks claim they're doing it as a service because customers would rather pay the fees than face the "embarrassment, inconvenience, merchant fees and other adverse consequences of having a check bounce or a transaction denied,"  but CRL did a survey that found that 53% of customers would prefer their card be declined and only 22% wanted the bank to cover it (the other 25% had no preference or didn't know).  Many banks also allow customers to overdraw their account at the ATM without any notification they're over the limit, even though 79% of users would cancel the transaction if warned rather than pay the fee.
The report also highlights some other unethical practices designed to increase the number of overdraft fees, like processing debits faster than deposits, and processing debits in whatever order maximizes the number of fees (ie, instead of processing small charges first and then the final big charge that leads to the overdraft, they can process the big charge first so that all of the small charges lead to additional fees).
So what can you do?  Read the fine print!  What will your bank do if you overdraw your account?  What are the fees?  Can you link your checking account to your savings account (preferred), or to a line of credit or credit card if necessary, to cover the balance rather than taking these bank "loans" with their higher fees?  Can you opt out of the overdraft protection and ask your bank to decline debit card and ATM transactions if you don't have the balance to cover them?  And what is your bank's policy on the order of processing debits?  If the answers are not what you'd like, perhaps you should consider other banks.  Of course it's important to monitor your balance closely and keep yourself safely in the black, but it's also wise to be informed and prepared for the worst, and this is more important the more often you find yourself skirting the edge.
CRL is also pushing for public policy solutions to address some of these issues.  They're backing a bill called HR 946 that would require banks to disclose their overdraft programs and get express written consent, warn customers when their ATM withdrawals will overdraw their accounts, and prohibit banks from manipulating the order of debits and the timing of deposits in order to increase fees. 
What do you think?  Do you know what your bank will do if you overdraw your account?  Do you think the laws need to be changed? (I do!)

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