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Overdraft is Over

The Federal Reserve announced Thursday new banking rules, which require consumers to opt-in before overdraft protection fees are allowed on their ATM and debit cards.  This is a huge win for consumers who are being soaked for close to $40 billion dollars in overdraft fees in 2009 alone.  These new rules will take effect on July 1, 2010.  What is missing from the Fed’s reform is a limit on the number of overdrafts charged in one period and a ban on the reordering of transactions.  Congress is promising even tighter overdraft reforms.

To be honest, I am shocked this reform came so quickly.  Banks will lose billions of dollars per year in fees and they can’t be happy about this.  As I wrote in my previous post, Plight of the Consumer, the banks arrogance in raising interest rates ahead of the deadline for the CARD Act has infuriated consumers and politicians alike.  And, it has caused a backlash by the Fed, who is under tremendous pressure to act like a bank regulator.

Federal Reserve Press Release

Image by Cliff 1066

Image by Cliff1066

“The Federal Reserve Board on Thursday announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act.” …

The Impact on Consumers

Overdraft charges are grossly unfair to consumers, because of the predatory way in which they have been implemented.  Even those who place blame directly with the consumer for overdrawing their bank account would have a hard time arguing the high fees are reasonable to cover the bank’s cost of an overdraft.  And, there is no justification to support the way banks reorder transactions to generate cascading fees.  Or, that banks pay third party vendors a percentage of the fees to maximizes overdrafts.

Here are some fun facts about the demographics of NSF fees:

  • Among young adult accounts (ages 18 to 25), 46.4 percent incurred NSF activity, compared with 12.2 percent of accounts held by seniors (over age 62).
  • More than 38 percent of low-income accounts had at least one NSF transaction, compared with 22 percent of upper-income accounts.
  • Customer accounts with 20 or more NSF transactions (4.9 percent of accounts) were charged $1,610 per year in NSF fees on average.

Source: FDIC Study of Bank Overdraft Programs

My Experience with Overdraft

Back in 2000, I opened a joint account for a widowed relative to help with her expenses.  This worked great until 2001, when the new overdraft policies went into effect.  Soon, I was being hit with hundreds of dollars in fees as she was now able to overdraw the account without any warning to her.  I went into the bank and asked them to remove the overdraft protection, but they said it wasn’t possible.  We both knew they were lying.  So, I promptly closed the account and will never do business with that bank again.

A different relative, racked up close to $1,000 in overdraft fees last year and he asked me for help.  He was foolish enough to buy a lot of small items using his debit card and in one week he incurred a cascading overdraft that cost him $250 in fees on about $25 in overages.  I asked the banker to reset the overdraft on his debit card to zero and he said that he couldn’t.  I told him that I knew that he could and asked him why he wouldn’t.  He quietly told me that he wasn’t allowed to.

In either case, we should have been able to set the overdraft limit to zero, which is exactly what this new reform will allow.  Consumers didn’t ask for overdraft.  It was forced on us by banks and they are profiting handsomely.  To give consumers a choice on overdraft is only fair and long overdue.

Props to Carolyn Maloney

Rep. Carolyn Maloney (D-NY)

Rep. Carolyn Maloney (D-NY)

I have never held back in criticizing our Government and lately there has been plenty to criticize.  However, there are some public servants who work tirelessly on our behalf and these people are rarely praised or recognized for their contributions.

For years, Carolyn Maloney has stood up to predatory banks on behalf of consumers.  She was the impetus for the Credit Card Bill of Rights, which was recently passed as the CARD Act of 2009.  And, she was a champion for the overdraft reform that was just implemented by the Federal Reserve.

Despite personal tragedy in her life and many setbacks from the powerful banking lobby, she stood up for the little guy and she won.  American consumers may save hundreds of billions of dollars in future years because of Carolyn Maloney and Chris Dodd (D-CT), Chairman of the Senate Banking Committee.  We owe them a debt of gratitude.

The Bottom Line

The bottom line is that banks have finally pushed the public too far and they are starting to pay for it.  The arrogance shown by banks after receiving a trillion dollar bailout has made voters fiercely angry and politicians are feeling the heat.  This has shifted political influence away from lobbyists and back to voters.  I just hope this reform lasts beyond the next election.

“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”

Dan Quayle – 44th Vice President

Recommended Reading

This post was featured on the Carnival of Money Hacks.  This is my first time submitting to the Carnival of Money Hacks and I am honored to be posted among such a talented group of bloggers.

10 comments to Overdraft is Over

  • Holly

    Just curious…What will happen to those same people who often incur the NSF fees when their rent check bounces because they no longer have the overdraft ‘protection’? I’m sure the landlord won’t be happy when his bank charges him a fee for trying to deposit a ‘rubber’ check.

    • Holly,

      That’s a great question and I’m glad you asked it. Checks and recurring transactions will be honored without bouncing, as they have since 2001. Only, ATM and Debit card purchases will be declined, if that’s what the consumer chooses. So, the rent check will go through, but consumers won’t end up paying $39 for a latte. In the future, I’m sure consumers will be warned of the fees at the point of purchase and be able to proceed if they choose, just like at some ATMs.

      If you read the press release from the Fed, it is more specific than my article. Better yet, read the press release from Carolyn Malone, where she lays out what still needs to be accomplished.

  • Consumers who still want overdraft protection without overly-punitive overdraft charges should see if their bank or credit union offers an option that will take money from a separate savings account to cover accidental overdrafts. You’ll still get a penalty for the overdraft but it is much less. With my credit union, for example, it is only $2 (as opposed to the normal $25 or $35 overdraft fee).

    Len
    Len Penzo dot Com

    • Wow, $2 is amazingly cheap. I forgot how great credit unions are. I bank at WF and I pay $10 for the overdraft to roll over to my credit card. But, I don’t use this “feature” very often. Other people I know aren’t right on top of it and they usually get stuck for the whole $35.

  • Christopher White

    I know it’s been a while since you wrote this but my girlfriend and I have had two Largest Transaction First overdraft scenarios in the past week, largely due to my being laid off and her being a bit less experienced with the repercussions of not watching your account when it’s low.

    I have a comment on Holly’s question and a question of my own…

    First some background. Over a long holiday weekend (not sure which holiday, it’s not really important) almost 2 years ago, I was on the receiving end of the “Perfect Storm” of cascading overdraft chains. It was caused by the combination of an error on my part, my banks inability or, more likely unwillingness, to update online account information on non-business days, and a 4 day holiday weekend.

    The error on my part came a month earlier when I had set up a recurring draft to pay for my car, thinking I was making a one-time payment. This meant that this month when I went online to make the next payment (this time correctly but not realizing my earlier mistake), that another payment was actually already scheduled to be made. The first payment went through on the Thursday, leaving me with roughly $300 in my account, of which I had budgeted about $200 or so for Holiday Reveling with friends.

    The erroneously scheduled payment went through at the end of the day on Friday. Per my bank’s policy of only updating account information on Business Days, the payment did not post to my account and no record of it showed online from Friday until Wednesday morning. In other words, even though my car payment was $600 and I only had $300 in the bank my balance still showed about $90 on Tuesday night. This was a major bank, lets call them BankNxxxx, and this was only two years ago (not the dark ages) and yet they still did not have the ability to notify me of an account change this drastic for 5 full days. On a side note, knowing about this on Friday would only have helped me avoid most of the overdrafts, not all, since, of course, my auto finance company could not have helped me over the weekend either.

    My bank had no problem, however, allowing me to execute all of my planned transactions over the holiday weekend. Enough transactions, that when Wednesday rolled around and I was finally made aware of the situation, even AFTER I was able to get the second car payment reversed, I still had overdraft fees sufficient to put my account over $800 in the red.

    All told I was hit with over $1400 in Overdraft fees on purchases totalling less than $200. In addition, since it was my error that caused the double car payment, the bank was completely unwilling to reverse even a single fee. They used the same tired excuse for large payments being posted first. I ended up having to sell several major household items and borrow money to prevent additional fees from being posted, since even though the bank didn’t feel they needed to tell me of the situation until Wednesday, they still counted it as a transaction having occurred on the previous Friday and, as such, the account had already been overdraft for 5 days.

    Now, regarding Holly’s issue. I also am glad she brought it up because it underscores the blatant hypocrisy of the banks. If my bank is so concerned about my rent check or car payment bouncing then why was it willing to allow me to continue making purchases after it was already $300 negative on Friday. It was a holiday and I made many purchases most all of them small, food, drinks, movie tickets.

    Many people believe that the banks are all about screwing the little guy, and many people will counter that if the little guy would just learn how to balance a checkbook, the banks would be unable to do so. The truth is, both sides are right and both sides are wrong. The problem lies in most likely a policy specifically geared toward a market segment of the population that has a marked propensity for being unable (and yes, many times unwilling) to manage their finances. This is combined with a financial industry that steadfastly pushes back against the adoption of any practice that might hurt this quarter’s bottom line, regardless of whether such a practice might prove beneficial to its customers. Worse yet, many in the industry go even further and actively research new ways to make it more difficult for the average consumer to really, truly understand their current financial status. They benefit from our confusion.

    I’ll tell you one thing, I no longer have an account at BankNxxxx. But banks are bought all the time and when I joined BankNxxxx it was a small local bank that cared about my account.

    So my question, finally, with attitudes such as these prevailing in the financial industry and with banks and lenders constantly seeking new ways to milk the herd, so to speak, what are we, the herd, supposed to do about it? Has the time come to stampede? The problem I see with this is that the industry has gone out of its way to leave us with no other choice but to have a bank account. In these days of multi-million dollar bonuses being given to the heads of corporations which, a year ago were begging us to help them, has anyone ever stopped to wonder when the was the last time that a bank bailed US out?

  • Christopher White

    One last thing, the overdraft issue seems a bit like a sleight of hand to me. I was able to get my bank to raise my overdraft limit to $0 and have at every bank since this happened. I think banks have been doing this and make far more money from the Largest First rule. I would bet that they are secretly ecstatic about this bill because they got off really light… If you are correct, you still have to ASK to have it raised. It should, at a minimum, be automatic unless you ask for it to be lowered.

    When will we learn?

    • Christopher,

      The way Overdraft Protection has been implemented is more than just a “sleight of hand”, in my opinion it borders on fraud. The way banks reorder transactions and cascade fees is unconscionable and it should have been illegal, in the first place.

      If you were able to get your bank to set your overdraft to zero, you were pretty lucky. I have asked two banks on three occasions and they always refuse. But, soon they will have no choice. In fact, it will be set to zero by default. Then, banks will have to try to convince customers to turn it back on. I believe a high percentage of customers will leave it at zero, especially customers that have had a bad experience with overdraft fees. And, that is only fair, because customers should have a choice.

  • David

    I can appreciate Rep. Carolyn Maloney’s efforts to help us out. My problem with these efforts is the fact that they are always looked at from a champions view. That is to say what the good honest solution is to problems, and it is not just this issue, but all legislation. Our representatives really need to look at what the industry will do in response to bills passed. It seems as though they plug one hole and two more pop open. I believe this is the situation here with overdraft fees. My bank not only will re-order items from that particular day, but items from days past as well. I will check my balance online and it says that these particular items came in on this particular date, and were paid. 2 days later Isee more items added to that list in retro. I incurred over 4 thousand dollars in fees last year due to these practices. Many were due to my own negligence, but many were not. My wife and I have now started a cash only budget to help cure the situation. I wish I had all that money spent in fees from last year now…I could really use a nice vacation!

    • David,

      I have followed banking regulation closely for many years. This is an issue that concerns me greatly. Although some people are irresponsible with their debit and credit cards, it’s no excuse for banks to hit customers with thousands of dollars in fees. And, it’s not just banks. Oil, gas, electric, insurance, financial, phone, medical and virtually every other company with a lobby are allowed to take full advantage of customers and it’s not right. Very few in the government are looking out for us. They are looking out for those who fund their elections.

      You are correct that the Overdraft protections were watered down before they became law. What happened was Congress was trying to pass legislation, but the Federal Reserve stepped in and implemented first. Since the Fed is not a Government agency, but a central bank, I’m not surprised they left loopholes for other banks to exploit. The main item missing from the Fed protection is a cap on the number of overdrafts a bank can charge. So, now consumers have a choice of no overdraft or cascaded fees. The Fed has shrewdly left consumers at risk, with a lot of fee potential for banks.

      The solution to all of these loopholes is something that was proposed by the Democrats, a Consumer Protection Agency. This hasn’t been a wildly popular idea, because the last thing anyone wants is another expensive, overlapping agency. But, I think it’s a very good idea. The reason consumers aren’t protected is because elected officials are swayed by moneyed interests. And, groups like the Fed are basically regulating themselves. It’s no wonder we have no protections. If we had an agency whose mission was to protect us and they had the proper authority to do so, I believe consumers would be much better off. And, protections would be more comprehensive, with fewer loopholes.

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