Feds Crack Down on Bank’s Overdraft Cash Cow
Today the Federal Reserve announced a set of rules it was enacting in order to make it harder for banks to hit their customers with those dreaded overdraft fees. Overdraft fees have long been a major source of cash flow for banks. These new rules from the Fed are just the latest in what has been all out government crackdown on financial institutions and their long standing money making practices. Not to say that these companies shouldn’t and won’t continue to make money, but there is definitely a concerted effort from this administration to make sure they do it in the most up and up fashion possible.
The way overdraft fees have worked for quite awhile is that the banks automatically enroll people in an overdraft protection program. This program is supposedly for the benefit of the customer. The banks figure that you would want them to go ahead and process any charges that are over your balance, so that important must live necessities don’t go unpaid.
However, the only one that really seems to benefit are the bank’s pocketbooks. Most of the time people aren’t overdrafting to pay the rent. Instead their overdrafting for something like a cup of coffee at Dunkin Donuts. For something that overdrew their accounts by only a few dollars they are then hit with an overdraft fee. These fees vary but are generally somewhere around $35.00.
These fees were a huge source of income for banks. Its estimated that last year the banks made $38 billion on overdraft fees. Those fees have to be seen as nothing but 100 percent profit for them. Naturally they would then seek to maximize those fees as much as they could. They did this by enacting policies that made sure that the customer paid a fee whenever possible. For example if you had $100.00 in your account and made a purchase for $15 followed by purchases of $25, $35, and then $90; the banks would process the last transaction first and then hit you with 3 overdraft fees. They do this supposedly for your protection as they figure the largest purchase is the most important. It couldn’t possibly be to hit you with 3 fees even though only the last one actually put you over, yeah right.
All of this though is going to change with the new rules being enacted. The Los Angeles Times has a nice summary of the changes being enacted entitled “A Glance at the Fed’s Decree on Overdraft Charges”. The banks of course need time to implement these changes so they won’t actually take effect until July 1st of next year.
The biggest part of the changes is that now customers will have to opt in for the overdraft protection program rather than just being automatically entered into it. In order to protect the customers rights even more and remove a possible loophole, if you choose not to opt in to the alleged protection then they also can not charge you any different terms than people who enroll in the program. This is a nice move by the Fed as they already saw what the banks next move was going to be.
“The final overdraft rules represent an important step forward in consumer protection,” said Fed Chairman Ben Bernanke. “Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.”
These new overdraft rules just cover ATM and debit card transactions. They are allowing the banks to still automatically charge overdraft fees created by checks or recurring debit charges such as a monthly gym membership.
The banks though I don’t think are going to just sit by and see all this money go out the window without any response. They are all about their bottom line and are now going to have to make up this lost revenue somehow. What we can expect from them is now they will start charging for other services such as simply having a checking account.
All in all I say the new rules are probably a good thing and something that was needed. However, there is a price to be paid. The people that manage their accounts well and never come close to having an overdraft charge are the ones that are going to suffer. These people are the ones that are going to pay the price for the seemingly less responsible people. Isn’t that how it works with everything in this world though? Why should this be any different? The people that do things the right way often seem to have to pay the price for those that can’t manage themselves. Its not entirely those people’s fault either. Its also the banks fault for getting too greedy with the overdraft system. They saw a great source of profit, and exploited it to the extent that something had to be done about it.
I love all the posts around from bankers here ripping on people for overdrawing their accounts as if they really believe they aren’t the bad guys. It’s not that the banks ding people once in awhile for overdrawing their account. It’s the sleazy strategies that they use to get you to overdraw more. At Bank of America they will take all the debit swipes you do on Sat. Sun. and Mon. and pile them all together on Mon. and then order them from the largest debit first to the smallest. If you have fifteen total debits over the three days this strategic manipulation can change what would have been one overdraft charge into ten. They say they order them that way to “protect” you from having large debits not going through and they compile all the debits from Sat. Sun. and Mon. because they “don’t post” on the weekends. So even though they know the date of the debits they still pile them together on Mon. and order from largest to smallest in order to maximize overdraft fees. It’s laughable how they try to describe this as their effort to “protect” you. I am grateful that our government is finally cracking down on these scamming con artists.
The best way to solve this would be to start charging a percentage of the overdraft instead of a flat fee. So if you are overdrawn a total of $200 and I charge $.10 on the dollar I will charge you $20 and the banks could still compete by setting their rate at whatever they choose to make their money and still be competitive. But remember people banks are a retail business just like any other, they are not ripping you off they are selling you a service and you agree to those fees when you open the account so if they change their fees and you don’t like it….shop somewhere else!
That’s a pretty good idea Amanda, I like it!
I agree with most of what you say Amanda, however the banks DO NOT explain to a person when they open an account that transactions will be paid on debit cards even if there are insufficient funds. Intuitively, a person would think that if the funds do not exist, the transaction should be rejected.
I have tried to “opt out” of this scam and Bank of America will NOT let me.
Why is the Federal Reserve Deregulating Banks by Removing the Consumer Protections in the Truth in Lending Act from Application to Bank Overdraft Plans at the Same Time that Congress is Proposing Strengthening Consumer Protections in Bank Overdraft Plans?
On Thursday November 12, 2009 the Board of Governors of the Federal Reserve adopted a new regulation and issued a new Official Staff Commentary relating to bank overdraft fees. See regulation 12 CFR Part 205. The regulation is about 93 pages in length and has the appearance of a consumer friendly regulation that has a provision that as of July 1, 2010 consumers must affirmatively opt-in to overdraft protection plans. However, I believe that even this attempted consumer friendly provision does not go far enough in that it does not apply until July 1, 2010.
Disappointingly, the new regulation is undermined by the Federal Reserve’s failure to enact safeguards against unfair practices. Given the recent history of the banks in raising credit card interest rates before the effective date of the new federal law providing enhanced consumer protections for credit card consumers, one can only be suspect that banks will use this time before the July 1, 2010 effective date to continue to harm the interests of consumers. The regulation does not provide substantive protections to consumers, but rather to the contrary contains a provision buried in the fine print that deregulates bank overdraft protection plans by removing the Truth in Lending Act (TILA) from application to overdraft plans.
This untimely deregulation of banks with respect to overdraft plans is arguably the most damaging provision of the regulation and eviscerates any vestiges of consumer protections for those who have already been affected and for those who will be affected in the future by bank overdraft plans. Not only are there no safeguards for consumers, the interpretation by the Federal Reserve that makes TILA inapplicable enables banks to continue to perpetuate unfair practices with impunity.
Thank you,
Attorney Peter N. Wasylyk
1307 Chalkstone Avenue
Providence, RI 02908
Tel: 401-831-7730
Fax: 401-861-6064
E-Mail: pnwlaw@aol.com
Mark, that would be a prime example of it being time to shop around for another financial institution! I have had more than my share of issues with Bank of America and have decided that their good interest rates aren’t worth their poor customer service and hidden fees so they are on my blacklist. It’s pretty much the same issue with any other big bank so I tend to favor smaller more customer friendly banks and credit unions. They might not be able to compete with some of the perks of the big banks but they more than make up for it when you have a problem and need to talk to A PERSON (not an automated voice) to resolve it.
Mr. Wasylyk, I wasn’t even aware they were removing TILA on overdraft plans! I agree that is not a solution to the problem. And while I do realize they will need time to reprogram software to deal with the changes I also agree that it gives the banks’ CEOs and attorneys (no offense) time to find loopholes in the new regs that will allow them to come out ahead.
Small Banks, Big Banks…It doesn’t matter they are all crooks. I have a question and a suggestion for anyone that has been ripped off by the banks!
We should start a class action lawsuit for all the overdraft fees that the banks have charged us!!
I don’t mean the fees for bad checks, just the fees where they charge us for using our debit cards on one day and not debit the account for several days later, eventually leading to an overdraft fee or multiple fees!
It is stealing!!Plain and simple!!
If I pay with my debit card, that charge should be deducted immediately, not a week later.
I can see charging someone a fee if they write a check and it bounces! That is the consumers responsibility to keep a ledger of CHECKS! But, it is also the BANKS RESPONSIBILITY to keep accurate records every time a debit card is used, not the consumers!!!