The Corporate Observer : Washington D.C. Class Action Lawyer & Attorney : Steven Berk Law Firm : Consumer Protection, Corporate Abuse : The Corporate Observer Blog

The banks are at it again!

Consumers’ deadline -- this summer -- for opting-in to overdraft programs on their debit accounts is rapidly approaching. Not surprisingly, banks are doing all they can to maintain this important revenue stream – and by whatever means necessary.

In an article published Monday February 22^nd, The New York Times reported that banks are focusing on “FEAR” as the key motivating factor for convincing consumers to retain overdraft protection. The advertisements and notices using fear are slick at best, but more often they are just downright deceitful.

According to the Federal Reserve rule changes passed last November, Banks are required to inform customers exactly what “overdraft protection” means and obtain written consent in order to legitimize these charges. The new rules take effect July 1, 2010. Needless to say, these rules do not continence scaring consumers into overdraft protection.

The banking industry made $24 billion from overdraft fees in 2008 and about $27 billion in 2009. What’s more? The banks aren’t the only ones on the hunt. The same Times article reported that a cottage industry of consulting firms like Raddon Financial Group and Strunk and Associates are moving fast to sell banks multiple solutions for retaining overdraft protection customers and its important revenue stream. Cynical examples of those solutions target users who frequently fall below their checking account threshold and pay overdraft fees 5 times or more per year. (See the Raddon Report). 

To be fair, we should not be surprised that the banks are fighting to keep every dollar possible, but is it too much to ask for honesty instead of trickery, and information instead of fear tactics? It is simply unacceptable that, in response to federal action to protect consumers, banks are running campaigns to push consumers into blindly agreeing to overdraft protection rather than publishing honest, non-biased, information and allowing them to make their own decisions.

Transparency is a critical starting point. Consumers need information to make the right decision for their own financial needs. There is not enough time before July 1 to change bank practices and it would be unwise to expect these scare tactics to cease. Instead, consumers are on their own. Wall Street has made its intentions clear. It is now up to the informed public to ignore fear tactics and use all available resources to make the best possible decision about overdraft fees.

Assisted by Zach Kady

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The New York Times reported yesterday that the Federal Reserve will move to restrict banks’ abilities to charge overdraft fees.

The Fed’s new rules will have multiple impacts on consumers’ relationships with banks:

1.      Most importantly, all consumers will be notified of debit card policies and fees in clear, easily comprehendible language.

2.      Starting July 1, 2010, banks will no longer have the ability to charge exorbitant overdraft fees on most common purchases.

3.      Customers will have to opt-in to overdraft protection policies in order to be subject to them.

4.      If a consumer does not opt-in to overdraft protection, he or she will simply be denied at the register for purchases over their available balance.

Overdraft fees will still be charged for purchases made by check and on recurring debit card payments (i.e. auto-pay monthly bills). However, purchases at retail stores will not be subject to overdraft and withdrawals at ATMs will trigger a warning that a customer is about to overdraft. Only if the customer chooses to continue with their withdrawal will they be charged an overdraft fee at an ATM. According to the NY Times, the distinction between types of payments was made in response to consumer satisfaction surveys. These surveys concluded that consumers are less aggravated by fees on checks and recurring payments than by fees on retail purchases and ATM withdrawals.

Currently, consumers can be charged overdraft fees upwards of $30 for purchases far less than the fee. Under these current conditions, a $3 cup of coffee that pushes an account below zero could cost a customer 10 times that amount in fees. As we described in earlier blogs, overdraft fees are essentially high interest loans made without the consent of the consumer. The Fed’s realization of this injustice and action to remedy it, however dilatory, is highly praised.

This recent move is a step in the right direction, and one The Corporate Observer has advocated for in the past (see: “Big Banks Strike Again: High Interest Loans Disguised as Protection”). Consumers’ rights to full disclosure in the banking world are of paramount importance and the Fed deserves congratulations for its responsible action.

Assisted by Zach Kady

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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

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