Consumers overwhelmingly want limits and additional disclosures on bank overdraft fees, according to a survey released by the Consumer Federal of America (CFA). Yet Congress has done nothing to fix the problem since it held hearings late last year and banks continue to make billions on overdraft fees. The Center for Responsible Lending (CRL) estimates that consumers paid $23.7 billion for overdraft fees in 2008, which is an increase of 35% over just two years.
CRL reported that 50 million Americans overdrew their checking accounts at least once over a 12-month period with 27 million account holders paying five or more overdraft or insufficient funds fees per year.
The Federal Reserve is implementing new rules requiring banks to get customers' consent on overdrafts when they get a debit card, but the new rules do nothing to rein in the high fees or provide real-time disclosures. The rule does mandate an opt in at the time one opens an account, but does not require banks to discuss the opt out provision after a customer experiences an overdraft.
Legislation is pending in the House and Senate to curb the cost and frequency of fees, prohibit banks from manipulating the processing of payments to drive up overdrafts, and to require banks to provide a warning at the ATM before a transaction triggers an overdraft fee, but the bills seem to be stuck in committee. Both the CFA and the Center for Responsible Lending support passage of these bills as soon as possible, they indicated in a press conference Thursday.
They also urge consumers to just say no to the option of overdraft fees. Better options would be to link their checking accounts to their savings accounts, an established line of credit or their credit cards, where the fees for the overdraft protection are much cheaper.
The bills pending in Congress would limit overdrafts of no more than once per month and six per year. Once these limits are reached, institutions could then continue charging for overdrafts but only through a lower cost program like an overdraft line of credit.
"Changes to bank overdraft programs announced by some of the largest banks last fall have not cut the steep cost of overdraft fees or provided consumers real control over their checking accounts," Jean Ann Fox, director of financial services for the CFA, noted. She went on to explain that under the most restrictive voluntary limit of three overdraft fees per day, a consumer could still rack up 90 overdrafts in a day at $35 per overdraft. This could result in a total of fees per month of $3,150. "That's an exorbitant amount of money for overdraft fees, and that's why we need Congress to rein in these practices," Fox said."
So which banks are the worst offenders?
Big bank overdraft fees range from a low of $19 for the first U.S. Bank overdraft in a year to $39 charged by Citizens Bank after a customer has overdrawn twice in one year. The typical highest fee is $35 per transaction that overdraws an account. Eight of the largest banks charge a flat overdraft fee, regardless of the number of times a customer overdraws in a year.
Tiered fees are charged by seven of these banks. For example, Fifth Third Bank charges $25 for the first overdraft, $33 for two to four overdrafts, and $37 each if a customer overdraws five or more times in a year. Wachovia charges $22 for the first overdraft and $35 for subsequent ones.
In addition to the initial overdraft, 60% of the largest banks charge additional fees when the overdraft and original fee are not repaid within days. TD Bank adds $20 if an overdraft is not repaid in 10 days. In some states, Chase adds up to $25 after five days, while Bank of America adds a second $35 fee if the overdraft is not repaid in five days. SunTrust adds another $36 fee on the seventh day and BB&T charges a $30 "Overdrawn Account Collection Fee" on the fifth day the account is overdrawn.
Other banks impose per day fees for sustained overdrafts; for example, Fifth Third charges $8 per day after an overdraft is unpaid for three days. The combination of original and sustained overdraft fees escalates the cost of a single overdraft
to consumers. In addition to the initial $36 overdraft fee, PNC Bank charges $7 per day after four days up to a maximum $98. A PNC customer with one $20 overdraft unpaid in two weeks could be charged $134. Citizens Bank charges two sustained overdraft fees of $35 each if the overdraft and fees are not repaid in 10 days for a total of up to $109 for a single overdraft.
Another major problem is the order of transaction processing to maximize fees. For example, large institutions usually clear the largest transaction first, causing more transactions to overdraw the account. This practice generates more in overdraft revenues because the institution can charge an overdraft fee for each transaction once the account is below zero.
At least one bank is changing its practices. Chase announced that it would process payments in real time in the order received by the bank. Representatives of CRL and CFA said they were aware of no other banks that have committed to this change.
Clearly it's time to for Congress to pass legislation to protect consumers from the growing problem and abuses of overdraft fees. Banks are looking to replace lost income now that the Credit Card Act takes affect this month. Overdraft fees have been on their radar ever since the Federal Reserve first announced it credit card protections about 12 months ago.
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