July 11, 2007 at 9:52 PM ET
If you feel that bank fees are getting worse, you're right. A new study by the Center for Responsible Lending claims that banks rake in $17.5 billion in overdraft fees each year.
That figure is far more than the agency’s 2004 estimate of $10.3 billion. And it's even more than the amount banks lend to cover overdrafts, the study suggests.
Let me explain: When consumers bounce a check or withdraw more money at an ATM than they have in their accounts, banks lend them a few bucks to make up the difference. Then they charge a fee. Each year, consumers borrow $15.8 billion in overdraft coverage, and they pay $17.5 billion for the privilege, the Center for Responsible Lending says. The consumer advocacy group says it estimated the figures by examining a database of consumer bank account overdrafts and publicly reported bank fee income.
The results are consistent with many real-world experiences offered by Red Tape readers, who have responded to prior columns on the subject by saying they are often hit with $35 overdraft fees for even small overdrafts.
"Some of our largest financial institutions are hiding behind a smokescreen of misleading terms and murky practices that encourage costly overdrafts," said Eric Halperin, who helped write the study. "Banks should protect customers' funds, not plunder them with high fees and harmful practices."
The study was released in time for Wednesday’s congressional hearing on what some call abusive overdraft fees charged by banks. A House Financial Services subcommittee is debating legislation that would change the way overdraft fees are assessed by banks.
The Consumer Overdraft Protection Fair Practices Act would force banks to alert consumers before they overdraw accounts with ATM withdrawals or debit card purchases, and give consumers a chance to abandon the transaction at that point.
"Customers should be told when they are about to take out more money than they actually have,” said Rep. Carolyn Maloney, D-N.Y., one of the bill’s sponsors. “And customers should be able to choose if they want overdraft protections or if they would rather not pay the fees and not have the transaction. These are common sense -- almost due process -- principles."
In the past, banks have said issuing such warnings to consumers wasn't technically feasible. Maloney isn't buying that.
"You would think the sky was about to fall from the industry's perspective: They didn't want customers to be told about the fee,” she said. “When you cut through the jargon, what the industry seems to be saying is that they just can't tell you how much you have in your account, so they can't tell you if you are going to overdraw or not, This strikes me as straining credulity. … At most ATMs you can ask for your balance. Is that number they give you wrong?"
Nessa Feddis, senior federal counsel at the American Bankers Association, said at the hearing that consumers are in the best position to know what their balance is, and should be responsible for avoiding overdrafts.
"Only (account holders) know what checks they have written, automatic payments they have authorized, and debit card transactions they have approved. Simply put, consumers are in control of their finances and can avoid overdraft fees," she said, according to prepared remarks posted on the committee's Web site.
Feddis did not address the Consumer for Responsible Lending study or its conclusion that the industry earns $17.5 billion per year from overdraft fees.
'Bounced checks' are passe
Last year, The Center for Responsible Lending issued a separate study showing that the majority of "bounced check" charges were actually the result of electronic transactions like ATM withdrawals and debit card purchases. That's due in part to the fact that check use is declining. But the center also claims banks subtly encourage overdrafts by posting charges almost immediately while delaying the posting of deposits, and by processing large withdrawals and checks before smaller ones, leading to multiple withdrawal fees.
Maloney's bill would not regulate the amount of fees banks could charge. But it would outlaw this so-called "high-low" check processing.
Maloney said banking regulators, like the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, have not done what’s needed to protect consumers.
"I have been disappointed that the OCC and the Fed have not issued better guidance on this point as well. Several of the OCC's recent letters bother me in that they seem to encourage check manipulation," she said.
Testimony from the hearing, including the response from the banking industry, is available at the committee's Web site.
RED TAPE WRESTLING TIPS
A more extensive discussion of this topic can be found in prior columns on the topic
But the best thing to do is call your bank and opt out of "courtesy" overdraft protection. Sign up instead for a service that links your checking account to a savings account or credit card. That way, if you do slip up, you'll be borrowing your own money instead of the bank's money.