This should be considered a deadly weapon, in light of banks' runaway abuse of overdraft fee policies. (Photo: flickr.com)

Overdraft fees across the board have attracted the interest of Congress lately. Many have said that the way in which overdraft fees are assessed by banks and credit unions is predatory and dishonest. Charging the same high fee for each infraction – even if is for 1 cent – and then charging an additional fee for each day a customer’s account is overdrawn makes it nearly impossible for  already cash-strapped consumers to raise their heads above water.

In a recent case before California’s Supreme Court (Paul Miller et al. v Bank of American, NT & SA No. S149178), the ruling from Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 356 [113 Cal.Rptr. 449, 521 P.2d 441] (Kruger) was put to the test for Paul Miller, a retiree who depends upon Supplemental Social Security for his income (since 1992). Funds are directly deposited into his Bank of America checking account (since 1994). At the time that the direct deposits began, Miller was promised by Bank of America employees that those deposits would “be safe from debits or charges” unless he authorized otherwise.

But Overdraft Fees Came Calling

First, Bank of America accidentally deposited $1,799.83 in Miller’s account. They realized the error and reversed the credit, but not until Miller had made some charges. B of A also failed to give Miller notice of the deduction. The result was that his balance dipped below zero. Overdraft fees followed, which depleted a social security payment. For reference, Bank of America’s NSF fees at that time ranged from $14 to $32 per transaction. Up to five NSF fees could be processed against a checking account per day, with a maximum of $160 in overdraft fees allowed.

Miller pointed out that depleting his social security payment made it impossible for him to pay his rent or living expenses. Yet Bank of America told their long-time customer that he’d have to repay the part of the erroneous credit that he’d spent, but that he “could open a separate checking account for his SSI deposits that would not be used for repayment.” Miller did this, but a few months later the bank twice dipped into this new account to cover the overdraft fees. Both times Miller complained and the money was credited back to him.

And the Same Thing Happened Again

Although he did so infrequently, Miller occasionally overdrew his checking account. Each time, Bank of America hit him with overdraft fees that automatically deducted from his social security income. Bank employees who’d previously assured Miller that no deductions could be made from social security deposits without authorization now claimed that such funds received no “special treatment.”

Interestingly, during trial, a Bank of America executive responsible for checking products at Miller’s branch testified that Bank of America “could develop the capability to identify accounts into which public benefit funds are directly deposited, and could bypass charging NSF fees to those accounts.”

Why Didn’t Bank of America Take the Customer-Friendly Route with Overdraft Fees?

The same executive testified that “in order to prohibit certain account holders from overdrawing their accounts (which would eliminate the Bank’s need to recoup overdrafts or charge NSF fees), the Bank would have to ‘bounce’ more checks, withhold check deposits for the maximum allowable period of four days instead of one or two days before the Bank would make the funds available for withdrawal, eliminate point-of-sale purchases (but not personal identification number (PIN) transactions), and restrict automated teller machine (ATM) withdrawals from non-Bank ATMs.” The executive also stated that larger transactions would be processed before small – regardless of when the transactions occurred – because Bank of America felt larger transactions were “more important.”

More Important for Whom?

Any consumer who has felt the barbed sting of overdraft fees knows that the reordering of transactions is a way that banks stack the deck against consumers. Bank of America claimed in the Miller case that “the Bank’s practice of processing larger transactions before smaller ones results in the same total amount being overdrawn from a particular account.” Yes, but as Mr. Miller’s team clarified, doing so “increases the number and amount of NSF fees imposed.”

Miller would have none of that. His complaints alleged such things as “fraud, negligent misrepresentation, and intentional infliction of emotional distress, as well as violations of Code of Civil Procedure section 704.080; the Consumers Legal Remedies Act (CLRA), Civil Code section 1750 et seq.; the unfair competition law (UCL), Business and Professions Code section 17200 et seq., and the false advertising act, Business and Professions Code section 17500 et seq.” That’s a lengthy list of charges. How would Bank of America fare?

Nearly $300 Million at Stake in Overdraft Fees Alone

The California trial court found that fraud, negligent misrepresentation, CLRA, UCL, and false advertising claims were all viable issues that could be tried. A class was even certified that included “[a]ll California residents who have, have had or will have, at any time after August 13, 1994, a checking or savings deposit account with Bank of America into which payments of Social Security benefits or other public benefits are or have been directly deposited by the government or its agent.”

By the numbers, Bank of America had 1,079,414 such accounts in 2003. They received more than $800 million in government benefits via direct deposit. From January 1994 to May 2003, Bank of America took “at least $284,211,273 in NSF and other overdraft fees from accounts containing Social Security direct deposits.”

What Did the Jury Find in the Miller Case?

The jury found that Bank of America violated the CLRA by “falsely represent[ing] that it ha[d] the right to use Social Security funds from direct deposit accounts that receive government benefits including Social Security funds to pay overdrafts, insufficient fund[s] fees, . . . and money claims it has against class members.” Thus, the jury awarded $75,077,836 in compensatory damages for the class action. Each member also received $1,000 in statutory damages. Finally, Miller received $275,000 for emotional distress.

However, the Court of Appeal later reversed the trial court’s judgment, holding that Kruger did not apply. This is apparently still under review at this time.

What is the Kruger Argument?

Essentially, Kruger stated that a bank “may not exercise its right of setoff against deposits which, derived from unemployment and disability benefits, are protected from the claims of creditors.” But the Appeals Court found that the 1974 Kruger ruling “only applied to cases in which government payments were redirected to pay debts outside the bank.” Overdraft fees, by that logic, are internal debts.

The Office of the Comptroller of the Currency (OCC) sided with Bank of America’s ability to honor overdraft fees in the event of insufficient funds. They claimed that banks can do this without infringing upon 12 United States Code section 24, par. Seventh, or 12 Code of Federal Regulations part 7.4002 or 7.4007 (2009). (Letter, at p. 1). Overdraft fees are considered account maintenance, rather than creating a debt that the bank later collects.

The Consumer Loses Again

Runaway overdraft fees continue to plague consumers who can ill afford them. This is not to say that consumers should not be responsible for their expenditures, but in the case of Miller, I would argue extenuating circumstances. Until this is settled in California court – and until Congress forces banks to curtail abusive overdraft fee practices – the old phrase “buyer beware” still applies. At least there’s no deception with payday loans…

Have you had it up to here with your bank's overdraft protection schemes? You aren't alone, according to the Center for Responsible Lending. (Photo: flickr.com)

If you’re able to see past the shady origins and history of the Center for Responsible Lending, you’ll see that occasionally they do good work that benefits society. While they’re certainly no friend of the payday loans industry, I find that their recent report on the overdraft fees and overdraft protection rackets is worth noting for any financially conscious consumer. Personal Money Market wants you to be informed when it comes to your money, so take the CRL’s findings as a word of caution when it comes to the twisted world of overdraft fees and protection.

Major Overdraft Findings That Should Give You Pause

Overdraft fees and overdraft protection costs have skyrocketed in recent years. According to the CRL’s findings, there are three shocking points of which we should all be aware:

1. Overdraft occurs frequently. Over a 12-month period, the CRL found (based upon Federal Reserve data) that more than 50 million Americans overdrew their checking at least one time. Of those, more than half (27 million) had five or more.
2. How much operating income did overdraft feeds produce for banks and credit unions in 2008? Try $24 billion. Broken down, it’s been noted that a credit union could derive as much as 60 percent of their operating income from overdraft fees and overdraft protection.
3. Think overdraft is under control? Think again. From 2006 to 2008, the CRL found that banks and credit unions upped the penalty by 35 percent.

Were You Even Asked to Opt Into This?

For most people, the answer is no. When you sign up for a checking account at your bank or credit union of choice, you’re automatically enrolled in an overdraft program. And buried in the fine print of your contract is the overdraft fee schedule. Generally, transactions consumers don’t have the money to cover are automatically paid by the bank or credit union. What the consumer gets for the trouble is a penalty per transaction in the neighborhood of $34. Furthermore, banks and credit unions tend to charge an additional daily fee for as long as a consumer’s account balance remains overdrawn. Regardless of whether an account is overdrawn by $100 or $.01, fees can mount – and no bank or credit union I’m aware of works on a sliding scale. It’s all about flat fees that the consumer must pay. And CRL research indicates that for every $1 in overdraft protection credit extended to consumers using their debit cards, $2 in fees are assessed.

The Banks’ Defense

It’s all about protecting a consumer’s good name, they might say. By providing this “service” to customers, banks and credit unions claim they’re keeping people from bouncing checks. NSF fees from banks, bad check fees from merchants and (potentially) other late fees could amount to a person’s picture being hung on the wall in mug shot-like splendor.

Bouncing Checks Aren’t the Story, However

Debit card and ATM transactions are the big issue. The CRL finds that if banks and credit unions wanted to, they could simply decline transactions that would put consumers in the red. However, most do not do this. They pay for the transaction but “help” the consumer by severely penalizing them. While consumers should certainly be responsible with their money, digging unnecessarily deep holes for them to try to climb out of after they’ve already made mistakes is a questionable tactic on the public relations front. In the end, it comes across as a money grab.

The Reordering Transactions Shell Game

Did you know that banks and credit unions reserve the right to reorder your banking transactions from highest to lowest, even if the lesser transactions occurred first? This catches millions of consumers who gamble that a large expense won’t clear until after their paycheck is deposited. If you’ve ever done this (I know I have), know that you’re playing a losing game.

Automatically Dragged Over the Coals

This is what John and Jane Consumer typically get when they sign up for a standard checking account. Many aren’t even aware that cheaper options are available. Some banks may offer a cheaper, more formal line of overdraft credit, or even a link to a savings account in the case of overdraft. However, even these can be expensive. Payday loans, when used properly, can cost even less. Did you expect me to say otherwise?

A Terrible Trio for Consumers

Using FDIC data from 39 member banks, the CRL digs into just what the overdraft fee jungle means for consumers. They do this by addressing the three points raised above.

1. Overdraft Occurs Frequently

Of the 6.5 million accounts held in the FDIC sample, around one in four experienced at least one overdraft over the course of a year. One in seven experienced five or more. As mentioned earlier, this translates to about 51 million Americans stuck in the overdraft fee quagmire. Those with five or more instances are sinking beneath the muck. The CRL found that repeat offenders tended to be of lower income, single, non-Caucasian renters. Considering that the FDIC points to the 18 to 25 age group as being most likely to fall into the overdraft trap, it seems that more effective financial education is in order. Learning to control excessive impulse spending, balance the checkbook and consider options like payday loans in emergencies could help anyone.

2. Excessive Overdraft Fee Profits

Banks and credit unions are conveniently not obligated to report what they make on customers’ overdraft fees, but the FDIC did manage to compile from a sample of its member banks. They found that that around 69 percent of their service charge income came from NSF fees. Extrapolating the data, the CRL finds that this amounts to $34.3 billion in fees for 2008 alone for all service fees. Sixty-nine percent of that is $23.7 billion, a staggering sum that should be much lower. As banks, credit unions and even credit card companies are jacking up fees, that figure could be even larger in 2009.

3. Fees are Out of Control

As I was saying, overdraft fees are a source of concern for any consumer who depends upon the traditional banking industry to care for their money. As the collection has increased 35 percent from 2006 to 2008, the CRL wonders if there’s a ceiling. Organizations like the proposed Consumer Financial Protection Agency and the Credit Card Bill of Rights are designed to help make right what has gone so far wrong, but will they have the healthy canine teeth to tear away the sweet meat?

As mentioned, fees for individual overdraft transactions and days a balance is in the red are commonplace. A cup of coffee, a tank of gas and a few miscellaneous convenience store purchases can quickly and silently become hundreds of dollars in overdraft fee debt. The CRL finds that the monthly average for individual debt card usage is 17. More than a quarter of those are for less than $10.17 on average. Imagine the possibilities across the banking industry. Since this use has exceeded credit card use since 2005, it’s also no wonder that the credit card industry has sought myriad ways to charge their customers with fine print clauses.

Fruits, Vegetables and Overdraft Fees

That sounds like part of a balanced diet these days. The CRL frightens us all with the details of how Americans spend “about the same amount” on overdraft as they do on fruits and vegetables. As for grains and other essentials like postal stamps and books, overdraft fees are clearly in the lead, say the CRL. Considering how difficult financial matters are during the recession, is it any wonder that the CRL found that most consumers would prefer that a transaction be denied than to have to paid exorbitant $34-per-transaction overdraft fees?

How Can This Problem Be Fixed?

This is your checking account on overdraft protection. (Photo: http://tolweb.org/)

Beyond preparing consumers to make sound financial choices, the financial abuses inherent in the traditional banking system must be exorcized. The Federal Reserve is considering that very matter, as is Congress. Large-scale change is needed.

Prohibit Overdraft Fees on Debit Card and ATM Transactions

This exception would be a welcome aid. If a fee is absolutely necessary, then a bank should have to provide a more highly visible, real-time warning so that debit and ATM infractions don’t fly under the radar and destroy overtaxed consumers’ budgets. If warning sign appears, consumers would have the choice to back out of the transaction (if the merchant didn’t simply rule out that method of payment). Some banks and credit unions block such transactions completely. The CRL suggests that all should follow the practice.

Overdraft Fees Should Be Proportional

The CRL’s finding that the amount that banks pay out to merchants for consumer overdraft is about half of what they actually charge consumers for the “convenience” is another signal beacon that change is needed. Flat fee overdraft charges are unnecessary when compared with the actual cost of covering the overdraft to banks and credit unions. It is understandable that banks and credit unions have to think of profit margins, but the current overdraft fee system is tantamount to gross customer abuse. The CRL suggests that an overdraft line with a reasonable rate of interest would be easier for consumers to swallow. Then again, rather than dealing with revolving interest, why not use payday loans?

There Should Be a Limit

If a consumer dashes their checking upon the overdraft fee rocks, banks and credit unions should be required to offer an alternative product at lower cost. A consumer shouldn’t be allowed to rack up more than six overdraft fees per year, says the CRL. This is what’s called weaning traditional financial institutions from their habits of excessive profit. Getting by with a reasonable profit margin may mean fewer executive retreats to Cabo San Lucas, but it’s the right thing to do.

No Overdraft Protection Without an Opt-In

This is self-explanatory. No service or accompanying gross fees should be thrown at a consumer without their approval. The CRL found that around 90 percent wanted to be able to choose whether they would have overdraft protection or not, so banks and credit unions should listen. If not, they run the risk of losing even more customers to payday loans when financial calamity strikes. Banks and credit unions certainly have a larger war chest to draw from, but that doesn’t mean they shouldn’t try to be competitive.

Make Banks Toe the TILA. Payday Lenders Do!

The Truth in Lending Act requires that lenders disclose certain information to the public. It seems that information regarding the amount of money banks collect in overdraft fees should be included in the purge, much the same way payday loan companies make their APR known. Since overdraft protection is an act of extending credit to a consumer, banks and credit unions should be forced to clarify just what they’re charging customers. No bank or credit union should be exempt from the law.

There’s Nothing Up My Sleeve

The Consumer Financial Protection Agency is on its way. President Obama made a great deal of show about the related Credit Card Bill of Rights. It’s time for banks and credit unions to be made to tow the line. If you’ve even gone through the hassle of dealing with overdraft, you know that there has to be something better behind the curtain. In the case of payday lenders, there’s nothing “up the sleeve.” In a short term financial emergency, payday loans are up front about fees, which typically are much less expensive than falling back on overdraft protection. The consumer should have the power to choose what fits their financial circumstances best.

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