We’ve all heard about overdraft protection, but most people probably don’t understand exactly what it is and how it works... As several recent news articles have highlighted, this service:
1) Offers No Protection. Standard interpretations of protection would lead a consumer to believe that he or she is protected from over drafting their account – i.e. a consumer will not be able to spend more than they have.
2) Is instead an automated loan with a high fixed interest rate.
According to Moebs Services, most Wall Street banks charge $35 dollars per check or debit paid without sufficient funds. In essence, that $1.50 Snickers bar you bought at the convenience store will end up costing $36.50. This may seem like an exaggeration or oversimplification of the process, but it is not. The Center for Responsible Lending reports that most point-of-sale overdrafts (like buying that Snickers bar) are for an amount less than half of the $35 dollar fee charged by big banks. That’s right; Main Street is paying an average of at least 50% interest on these small loans. Normally, when an individual takes out a loan from a bank, he or she consults with a loan advisor and is made aware of interest rates ahead of time. In the case of overdrafts, the system is marketed as a protective measure and most consumers are completely unaware of impending charges that cardholders will incur if they spend more than they have. In this regard, overdraft protection acts like a loan forced upon the consumer with no express consent.
The trouble does not end here. The banks have been fighting Congress and public sentiment for years on the issue of allowing customers to opt out of overdraft protection. Until recently, this has not been an option and still only a few large banks have made the switch to allowing customers to opt-out.
The worst is still yet to come: Bank of America has recently been shown to reorganize payments at the end of each business day so that larger payments are paid first. According to the bank, this is done with the intention of paying more important bills first. However, the actual effect is that larger payments deplete a cardholder’s funds so that numerous small charges can rack up the maximum amount in fees. Any reasonable person can realize that thanks to overdraft protection all bills will be paid regardless of their order of entry and that this scheme of reorganization serves only to create more fees and more gains for the big banks.
In addition, this is by no means a minor practice in the banking industry. The Center for Responsible Lending reported that banks made over $24 billion in overdraft fees in 2008 alone. Moebs Services reported that about half of all banks make more money from these fees than from actual profits. The same firm estimates that banks will make another $27 billion from overdraft fees in 2009. Banks appear to not only be content to profit off of Main Street’s money when times were good; it is now their prerogative to profit off of the lack of money in people’s checking accounts during this recession.
News of outrageous gains from loans disguised as “over draft protection” is both disturbing and upsetting, but it is not surprising. As we have discussed previously, big banks have been practicing risky, deceptive and even illegal deceptive practices for years. The irony, even after Main Street has given hundreds of billions of dollars in bail out money to the banks with the goal of “saving the economy,” they continue to swindle those hit hardest by the recession. It is time Congress stands up to the big banks and that the average person demand oversight on all lending practices, even those disguised as aid to consumers.
Proposed solutions forthcoming…
Assisted by Zach Kady
Steven N. Berk has over twenty years of litigation experience spanning both the private and public sectors. His practice ranges from representing Fortune 500 Companies, to consumers. Steven is based in Washington, D.C. and founded Berk Law in May 2009....
