It Is Time We Curb Bank Overdraft Fee Abuse

It has reached the point of embarrassment, that is for everybody but the banks.  I am talking, of course, about the sky high and rapidly increasing overdraft fees charged.

Now, three Democratic lawmakers have asked the Federal Reserve to curb charges that banks levy on customers when they make a purchase with a debit card and overdraw an account. The fees can mount up quickly and cost consumers more than their actual purchases.  Known as "overdraft protection," and consumers often don't even know that they have the unasked-for convenience until the charges appear on their accounts.

House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.), along with Rep. Carolyn Maloney (D-N.Y.) and Rep. Luis Gutierrez (D-Ill.), sent a letter to Federal Reserve Chairman Ben Bernanke asking the Fed to strengthen planned regulation of overdrafts.

"Overdraft abuses related to debit card purchases and ATM withdrawals are particularly egregious for at least two reasons," the lawmakers wrote. "First, overdraft fees triggered by these transactions, which could easily be denied at the terminal, often take consumers completely by surprise. Second, an overdraft fee charged on a typical debit card purchase is vastly disproportionate to the amount of the overdraft itself."  The lawmakers want the Federal Reserve to require institutions to obtain the written consent of their customers before enrolling them in overdraft protection.

Overdraft charges represent one of the biggest slices of the short-term unsecured credit market.  It is bigger than credit card over-the-limit penalties, and much bigger than payday loans, bringing in $34.7 billion in revenue for banks and credit unions in 2008, compared with $7.3 billion for payday lenders.

Payday loans are often vilified for their high costs, and they're illegal in 15 states. The annualized percentage rate (APR) of interest on a typical payday loan is 400 percent or more, according to the Consumer Federation of America. But that's nothing compared with the overdrafts the lawmakers are targeting.  The Federal Deposit Insurance Corporation released a survey in January 2008 that broke down the average cost of overdraft fees to consumers and found that a typical $27 overdraft repaid in two weeks incurred an APR of 3,520 percent.

Just how bad is it when the banks and credit unions are charging more in terms of interest than are payday lenders?

Comments

[P Hurley]

The reason Banks were emboldened to charge these fees in this manner is an interpretation of the law by the Comptroller of the Currency interpretative letter #916 . In it Counsel for the OCC claimed that statute provide banks with the authority to act in the banks interest and against that of their customer.

The Flawed legal reasoning began with the premise and ended with the statement that this was in the interest of the Currency, and would contribute to the "Safety and Security of the Bank, and the Currency" nothing is farther from the truth, thise fees are now the banks complete profit, and they are now a structural framework of the financial system. So we now have banks with a failed business model, that cannot be remedied without huge failure and loss.