July 12, 2007 - Just two years ago if you attempted to make a purchase using your bank issued debit card but you didn't have the money to cover your purchase in your checking account, the chances are that your bank would have denied your purchase. But today, just the opposite is true. Banks have found that it is quite profitable to quietly enroll their customers in overdraft protection programs and then charge exorbitant fees when they use their overdraft protection. The practice cost consumers nearly $18 billion last year but Congress may be poised to put a stop to it.

A new study conducted by the Centers for Responsible Lending says that the fees being charged for overdraft protection are taking advantage of American consumers. The study was released just as Congress began hearings on a bill that would force banks to clearly disclose their overdraft fee structure. The American Bankers Association and most major banks oppose the bill.

John Hall, a spokesman for the American Bankers Association testified that, "knowing how much is in their accounts is certainly something that consumers are in control of. They know what checks they have written, the automatic payments they have authorized. Overdraft fees can clearly be avoided."

While what Hall said is technically true, the fact is that banks have begun enrolling consumers in overdraft protection programs without telling them. This means that if you fail to balance your account prior to going shopping, and you make a purchase using your debit card that is too large, the chances are good that it will be approved. You may have assumed that you had enough money in your account to make the purchase, but the next time you get a bank statement you will see an overdraft fee charged to your account.

A few years ago, customers who wanted overdraft protection had to apply for it and then go through an approval process. You had to have good credit to get the protection. But now that is not the case. Banks have found that by changing the way they offer overdraft protection, they profit at the expense of consumers.

The average fee for each purchase made using overdraft protection is $34. And the overdraft fees charged by banks (estimated to be $17.5 Billion last year) now exceed the $15.8 billion that the banks actually lent to consumers to cover their overdrafts. This means that the fees may be equivalent to interest charges of several thousand percent for very short term loans.

The fees are exacerbated by the fact that banks increase the amount they receive in fees by controlling the order that they process charges in. For example, if you have $100 in your checking account and you write four checks (one for $100 and three more for $25 each) for a total of $175, you obviously don't have the money in your account to cover all the checks. The bank could process the three $25 checks first. In this case, you would be hit with one overdraft charge of $34 to cover the $100 check. But most banks will process the largest check first. In this case, the $100 check would wipe out all of the funds in your account. You would then be charged $34 for each of the $25 checks; a total of $132 in fees.

The new bill, sponsored by Rep. Carolyn B. Maloney (D-N.Y.) would reign in certain bank practices and give consumers more control over any fees they are charged. It would require that banks notify consumers at the point of purchase that they were about to be charged an overdraft fee as a result of the purchase. Consumers could then decide to proceed with or back out of the purchase.

But according to Nessa Feddis, an attorney for the American Bankers Assn., warning customers when a debit transaction would trigger an overdraft would be "cost-prohibitive" for banks.

ACCESS supports the Maloney bill. Several years ago banks tried to defeat similar legislation that forces them to warn consumers of ATM charges when withdrawing money. That bill passed, yet ATM usage continues to increase. The argument that banks are using, that it would be cost prohibitive for them to tell consumers about charges prior incurring them simply doesn't survive scrutiny. Since point of purchase sales are computerized, informing consumers of charges should be a simple matter of adding a line item to their computer code. More importantly, the ABA is making an argument that lacks any ethics. To say that they have no obligation to inform consumers of charges ahead of time is simply an unethical business practice that needs to be stopped.

by Jim Malmberg

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