Recently in Overdraft fees Category

Bank clinginess is an underrated factor in why a lot of people stay with banks they don't like. Between the difficulty of transferring bill pay and other services, and banks' fussy rules on how exactly an account can be closed, banks tend to get all "Fatal Attraction" (or "Fear," if you prefer your psychotic paramours to be male) on you when you try to break things off.

From Robin Sidel of The Wall Street Journal:

Consumers are discovering that it isn't always easy to break up with a big bank.

When Ray Parente decided to pull his money out of Wells Fargo & Co. last month, he was told that he would have to discuss the decision with a personal banker at his local branch in Orange City, Fla.

Rather than wait in a long line to see the banker, Mr. Parente went to a teller window and withdrew all his money -- except for two cents. "I kept as little as I could in there to keep it open just to screw with them," says the unemployed real-estate broker in Deltona, Fla.

From stall tactics to unexpected fees and awkward conversations, other customers of big banks are running into similar snags when trying to move their money elsewhere.

Forcing a customer to show up in person to say goodbye may seem innocuous, if a little inconvenient. But what if you're disabled or bedridden? Or you've moved to a city where the nearest branch of your old bank is 100 miles away?

And that's not even including the overdrawn-with-fees death spiral that can happen with accounts like the one mentioned in the WSJ article. If Parente fails to close that account with 2 cents in it, he'll probably begin incurring a monthly maintenance fee, as he probably won't meet the minimum balance or direct deposit requirements needed to waive the monthly maintenance fees on a typical checking account these days.

After that happens, his account will become overdrawn, and then he won't be able to close it without getting it back to zero, which will mean another trip to the bank and more money out of pocket. If he fails to do that, the bank will continue hitting the account with monthly maintenance fees, until it closes his account for him. Then Parente will probably be reported to ChexSystems, which will prevent him from getting another checking account for at least five years.

That type of spiral can have serious financial consequences, possibly consigning Parente to the ranks of the unbanked, who typically pay more than bank customers for things like cashing paychecks and making cash withdrawals.

I blogged about a bill introduced in October that would have made it easier to switch banks by banning just these sorts of shenanigans. The comments I got were interesting. Some were supportive of the legislation, but a few were more of the "less QQ, more pew-pew" variety; they were basically of the opinion that switching banks is easy enough and why don't you stop whining already. An example, from a reader who frequently posts on the banking blog under the nom de plume "Wolverine":

What's so hard about switching accounts now?

If we really need governments to make this easier, than there is something REALLY wrong with us. I've done this before and it was simple.

The problem with that line of reasoning is, what may be true in Wolverine's experience may not be for other bank customers. There doesn't seem to be any set standard for what banks can require from customers to close an account, and that opens customers up to tactics that can cause everything from annoying inconveniences to serious financial consequences for the crime of not wanting to be bank's customer anymore.

Objecting to a provision of the overdraft bill capping fees for covering insufficient funds at one per month and up to six per year, Citigroup Inc. (C) warned that as a result banks could stop paying overdrafts altogether, according to prepared testimony of John Carey, the chief administrative officer of Citigroup's North America Consumer Banking department.

"It is impossible for banks to predict which customers will be responsible for those losses, so a very real result may be that banks eliminate payment of overdrafts," Carey said in his remarks.

Banks have faced withering criticism from consumer groups over the fees they charge customers who make purchases without enough funds to cover their cost. In 2008, banks charged their clients $23.7 billion in overdraft fees, according to the Center for Responsible Lending. And most of those fees are incurred by a small percentage of consumers, the Federal Deposit Insurance Corporation found in a December 2008 report: 75% of customers made no overdrafts in the year-long period. It was the people with five or more annual overdrafts who paid 93% of the fees, according to the FDIC.

Consumer advocates noted that the people most likely to be charged repeated overdraft charges are those least likely to be able to afford them.

"In fact, limiting banks to one fee per month gives banks a financial incentive to limit unfunded purchases and withdrawals," Jean Ann Fox, Consumer Federation of America's director of financial services, said in her prepared remarks.

Consumer organizations and Citigroup also split on when banks should be required to get clients' consent to participate in overdraft programs, which few banks require now. The bill would require banks to obtain written consent before charging clients fees for overdrafts incurred with debit cards or ATM withdrawals.

Citigroup would prefer requiring consent at the point when the consumer is trying to make the withdrawal or purchase without sufficient funds. A consumer who has opted-out of any overdraft protection might not want to always be bound to that, Carey said. Consumer groups said instituting an opt-in provision at the transaction time would require further research.

The bill also proposes restricting fees to a "reasonable and proportional" amount rather than as a deterrent to dissuade customers from making such transactions.

Last month, some major banks announced minor changes in their overdraft policies. They were hoping to head off new federal regulation of a business that is designed to ambush ordinary people and siphon off as much money as possible. We were unimpressed with those steps at the time, and a recent study by a nonpartisan research group confirms that the banks have grown addicted to the easy billions they reap from these policies.

They clearly will not renounce them unless the government forces them to do so.

In the new report, the Center for Responsible Lending estimates that banks and credit unions raked in nearly $24 billion in overdraft income in 2008, a jump of 35 percent from two years earlier. The author, Leslie Parrish, suggests that the take will be even bigger this year.

The banks have managed this feat by driving up overdraft charges to an average of $34 per incident, removing caps on the number of charges that may be incurred in one day and charging additional fees to accounts that remain overdrawn for several days. In general, cardholders are not notified that they have been charged $34 each for purchases as innocuous as a cup of coffee, a bottle of aspirin or a magazine until it is too late.

When asked in a national telephone survey, about 8 in 10 people said that they would rather the bank deny the transaction than charge them a fee. But banks typically do not inform people at the point of purchase that they are about to be overdrawn.

The banks typically enroll customers in these euphemistically named "overdraft protection" programs without their knowledge and often make it difficult for them to escape. American families now spend more on overdraft fees every year than on books, breakfast cereal or fresh vegetables and only slightly less than they spend on major appliances.

The charges are especially onerous for students, who practically live on debit cards, and for Social Security recipients, who can unknowingly eat up their meager incomes buying food, medication and other essentials.

Federal regulators, who have failed the country in so many other ways, have yet to rein in these practices. So it is up to Congress, which should pass a bill introduced by Representative Carolyn Maloney, a Democrat of New York, that would require people to opt into these programs. Banks would also have to warn the customer of the pending overdraft and give them the option of canceling the transaction. Beyond that, Congress should create the strong consumer protection agency that was proposed by the Obama administration, which would prohibit not just the overdraft abuses but other scams that will surely arise in the future.

DURHAM, N.C., Oct. 6 /PRNewswire-USNewswire/ -- Banks and credit unions collected nearly $24 billion in overdraft fees last year, an increase of 35 percent from just two years earlier, a new study by the Center for Responsible Lending shows. [See the full report at http://www.responsiblelending.org/overdraft-loans/research-analysis/crl-overdraft-explosion.pdf.]

The explosion in overdraft charges has drained the wallet of as many as 51 million Americans whose accounts become overdrawn annually. It is particularly harmful to financially vulnerable families already hit hard by the recession.

"Banks and credit unions have become so sophisticated in driving up overdrafts that Americans now pay more in overdraft fees every year than they do for books, cereal, or fresh vegetables," said CRL senior researcher Leslie Parrish. "These billions of dollars drained from consumers each year represent lost opportunities for families to save for a rainy day or buy necessary goods and services that could help spark the economy."

The most common trigger of overdraft fees are small debit card transactions that could easily be denied for no fee. This is how things used to work, and according to a 2008 nationally representative survey, it's what the large majority of people prefer.

Thousands of bank and credit union customers have complained to federal regulators that overdraft policies are unfair. Customers typically haven't explicitly agreed to these high-cost overdraft loan programs but are automatically enrolled by their bank. When consumers try to avoid these abusive fees, they often find themselves tripped up when, for example, institutions needlessly delay posting deposits or process purchases from largest to smallest to purposely generate multiple overdrafts. And because overdrawing an account by just a few dollars triggers a fee averaging $34, cash-strapped households--particularly younger adults and seniors on fixed-incomes--often are thrust even further into debt by this overdraft "protection."

The changes to their overdraft programs several banks announced last month do not address some of the most abusive features of the programs and can easily be reversed once the spotlight shifts. Reform of overdraft practices should be set into law--and soon. Policymakers should:

·                                 Require that institutions deny debit card purchases and ATM withdrawals, without charge, if the funds aren't there. As a limited exception, an overdraft fee could be charged if the lender gives the customer a real-time warning and chance to decline.

·                                 Require that overdraft fees bear some relationship to a lender's cost of covering a shortfall.

·                                 Limit the number of fees that can be charged to a customer during a year before the institution must enroll the customer in a reasonably priced overdraft product, such as a line of credit, if it wants to keep charging for overdrafts.

·                                 Consolidate and streamline existing federal consumer protection authority by housing it in one organization: the proposed Consumer Financial Protection Agency, which would focus solely on what's in the best interest of consumers.