Bank of America recently settled a massive class action lawsuit concerning overdraft fees. Photo Credit: MoneyBlogNewz/Flickr/CC-BY

Bank of America has reached a settlement in a huge lawsuit that involves most large retail banks in the United States. B of A has agreed to pay $410 million to settle a class action lawsuit over aggressive overdraft fee practices. Similar suits are being filed against other banks.

Dozens of banks sued for account fees

Overdraft fees and account fees are not popular among consumers, and outrage over fee practices has led to major class action lawsuits against some of the largest financial institutions in the United States and Canada. Nearly 1 million people are part of  a massive class action suit, according to Bloomberg, against Bank of America, and similar suits have been filed against JPMorgan Chase, Citigroup and Wells Fargo. Bank of America has won approval to settle for about $410 million. More than two dozen banks from the U.S., Canada and Europe are being sued for overdraft fees, according to Reuters, and the cases were all consolidated into one massive class action. The case is titled In Re: Checking Account Overdraft Litigation.

Undue burden placed on vulnerable consumers

Bank of America is alleged to have processed transactions from largest to smallest instead of by when the transactions were made, thus making it more probable that accounts would fall into overdraft and the sum recovered by the banks would be greater. Overdrafts can function like short term credit; the bank will fund the transaction but add a fee to the amount owed by the account holder. Fees vary by institution, though fees between $25 and $35 are common. Many consumer advocates consider overdraft protections and fees to be abusive to less fortunate consumers. Banks can no longer enroll customers into an overdraft protection program automatically; customers have to elect to enroll.

B of A going mobile

Bank of America is unveiling a pilot program involving mobile banking, according to the Los Angeles Times. If a transaction is declined for insufficient funds, the customer will receive a text message giving the customer the option to have the bank cover the overdraft. If the customer elects to do so, the customer can deposit the required funds by 8 p.m. that evening to avoid the overdraft charge of $35. The option would only apply to that transaction. Overdraft fees will become the province of the Consumer Financial Protection Bureau, according to the New York Times, when the agency begins operation. The CFPB is involved in an ongoing Congressional tug-of-war over the director position and what powers the bureau should have.

Sources

Bloomberg

Reuters

Los Angeles Times

New York Times

Just because there are new rules for how banks raise interest rates on credit cards doesn't mean Bank of America and others won't still do so. Photo: MoneyBlogNewz/Flickr.com/CC-BY

Just because there are new rules for how banks can raise credit card interest rates does not mean banks will not raise them. Bank of America, for instance, has been reported as raising interest rates to 30 percent for missing a single payment. The increased regulation is making some differences, but may not be as effective as hoped.

CARD Act causes default interest rates to increase

The Credit Card Accountability Responsibility and Disclosure Act of 2009 had a noble aim, which was to make the way credit card companies dealt with their customers and the interest rates on the cards issued to them clearer. One practice in particular was that of default rates, according to Daily Finance. When a customer defaults on their credit card, the interest rate assessed on past and future balances is raised, even if payment is late by a day. In 2009, default rates averaged around 25 percent, but are currently averaging closer to 30 percent. Bank of America is already raising default rates to 29.99 percent on the future balances of customers who are late on payments.

Card issuers have been compliant

Default rates can no longer be charged on past balances unless the account is 60 days in default or more, and banks are complying with laws. However, that is small consolation to card carriers who rely on credit cards to help them cover unexpected expenses. Credit cards are a method for people who don’t have or want to use cash to avoid having to miss payments or resort to other types of short term loans in a pinch, but a 30 percent interest rate makes for a slim margin of error. One missed payment and a car holder won’t be able to afford to rely on their card as a source of credit anymore, which is a common reason for people turning to other lending options such as car title and payday loans. The Consumer Financial Protection Bureau is supposed to begin regulating consumer credit products in a few months, according to CNN, but legislative bickering over the agency may gut it before it opens its doors.

Overdraft fees continue

People are still paying overdraft fees and buying overdraft protection despite the programs having been a cause of customer dissatisfaction, according to USA Today. It is estimated that banks and credit unions will collect nearly $38.5 billion in overdraft fee revenue for 2011. Overdraft fees average about $35 per occurrence when a customer is enrolled in overdraft protection, which not every bank customer wants to. Simply having one’s debit card declined costs nothing, and a transfer of funds from savings to checking in case of an overdraft costs far less than using a line of credit related to overdraft protection.

Sources

Daily Finance

CNN

USA Today

Bank of America has unveiled a pilot program that grants customers greater choice between checking account types, and associated bank fees. Photo Credit: MoneyBlogNewz/Flickr/CC-BY

Bank of America has unveiled a new pilot program that gives members of the bank more choices regarding their checking accounts. The bank is offering new customers in select areas choices between checking accounts with varying structures of bank fees. Bank of America and other large national banks have been steadily raising fees.

New pilot program lets customers choose banking fees

A new pilot program by Bank of America allows customers to choose from several different checking account plans; this allows greater choice regarding which account fees they prefer to potentially face, according to ABC. The largest national banks have come under criticism for charging excessive banking fees, and now Bank of America, JP Morgan Chase, Wells Fargo and others have rolled out new programs for checking accounts to make fees more transparent. The new B of A checking account programs are being offered in Georgia, Arizona and Massachusetts.

Monthly fees vary by account type

Bank of America is offering five checking account options, and fees range from $6 to $25 per month. The account types include:

• Essentials: Simple checking account with a debit card. The monthly account fee is $8.95, but the fee is waived if a customer receives monthly direct deposits or maintains a minimum account balance of $1,500.
• eBanking: Also simple checking. However, customers can waive most fees altogether by banking entirely online or through an ATM and electing to receive electronic statements instead of paper. However, overdraft, non-sufficient funds and ATM fees will still likely apply.

Account options with greater amenities are geared toward wealthier account holders.

• Enhanced: Account fees are waived if customer has a minimum balance of $2,000 in one account or $5,000 across linked accounts. The Enhanced account offers two linked checking and two savings or money market accounts. Enhanced account holders can also have fees waived with monthly use of linked credit cards.
• Premium: Fees are waived with a minimum balance of $20,000 across linked accounts, certain Merill Lynch investment accounts or a mortgage through Bank of America. This account offers services such as cashier’s checks and money orders for free.
• Platinum Privileges: Customers must have a minimum account balance of $50,000 in order to be eligible for these perks: Personalized customer service, a Privileges credit card, special rates on mortgages and money market accounts.

Bank fees on the rise

As the federal government has increased regulatory pressure on banks to curtail deceptive fee practices, account fees have been steadily rising at the nation’s largest banks. B of A, Chase and Wells Fargo are trying to make up for revenues lost when the Dodd-Frank Act curtailed fee practices that weren’t made clear to customers, e.g. enrolling checking account holders in costly overdraft protection programs without notifying them.

Source

ABC

Overdraft using debit? Expect to owe some instant cash in bank fees. Image from Wikimedia Commons.

Bank fees are never fun to deal with, but it is ingrained in banking as it is a huge source of instant cash for banks and credit unions. In fact, the pay day that banks get from fees is one of the largest sources of revenue the banking industry has. As the rules for fees on credit cards and other things get more complicated, the fees are going up. There are a few things a person should always watch out for.

Bank fees going up

As new federal regulations come out which limit the amount and the way in which customers can be charged for account services. The major banks are all raising fees, according to CNN. The new laws governing banking and credit cards in the CARD Act place limits on things like overdraft fees. So banks are creating new fees or raising rates on others to get a little more of a pay day where they can. For instance, Bank of America is raising the minimum account balance. If a customer dips below the minimum balance, the bank assesses a monthly fee for doing so.

How overdraft works

Banks previously did not have to inform a customer of being enrolled in overdraft protection. Protection programs can be very costly. For instance, some banks allow account linking and transfers as overdraft protection. A person can transfer emergency money to savings to cover checking. Each transfer will cost you $10 if you bank with Wells Fargo. Then again, that is pretty cheap for a cash advance. Citibank will charge some customers up to $30 a month just for having a checking account with them. A person could wind up needing a payday loan for not spending any money.

Nature of the beast

Banks assess fees for certain things, like going into overdraft. Sticking to the straight and narrow will pay off. The further a person stays from these fees, the less will be paid to the bank.

Sources

CNN

Many people think overdraft fee policies at most banks make them snakes in the grass. Image from Wikimedia Commons.

A lawsuit in California concerning Wells Fargo and its practices regarding overdraft fees concluded recently. The presiding judge, William Alsup, handed a ruling which ordered Wells Fargo to pay back a substantial sum to Californians that it had unfairly dinged for overdrafts. The judge found the bank had deliberately manipulated overdraft practices to profit heavily, and did not mince words in his decision to penalize the bank for its actions. Overdraft fees are controversial, and some contend that people are better off getting a cash advance than using overdraft protection.

Judge orders $230 million in restitution

According to Forbes, Federal judge William Alsup ordered Wells Fargo to pay $230 million to customers it has charged overdraft fees. Depending on the amount of the overdraft, a single overdraft fee can carry an APR far higher than a payday loan. The judge also highlighted that Wells Fargo had a practice of clearing the largest charges first, which guaranteed that customers would lapse into overdraft and be charged $35, even if customers overdrew their accounts by a few dollars.

You can bank on high fees

Wells Fargo also didn’t extend the option for customers to decline a transaction that would put them into overdraft. The decision highlighted documents from the bank that demonstrate the bank establishing covert lines of credit for checking accounts, guaranteeing transactions wouldn’t be declined and the account holder would be charged. The judge also cited that internal communications from Wells Fargo proved the motive was explicitly to profit from overdraft fees. The bank generated $1.4 billion from 2005 to 2007 in California alone. The interest rate on overdraft fees can be higher than if a person were to get a personal loan to float them.

Overdraft practices overhauled

There are new rules in place concerning overdraft practices, and other credit from banks such as credit cards. The Federal Reserve instituted a rule that mandates banks give customers the option of enrolling in overdraft protection, according to CNN Money. Overdraft fees generate more than $38 billion in income for banks annually.

Further Reading

Forbes

CNN Money

Don't be shocked if a small miscue becomes a big money drain called overdraft fees.

(Editor’s Note: Personal Money Market does not offer legal advice. Consult a legal professional if you have questions. The opinions and experiences expressed in this article are those of the author and do not reflect the stance or judgment of Personal Money Market, its affiliates or subsidiaries.)

An overdraft takes place when withdrawals from a bank account exceed the available balance. Some accounts may have a prearranged limit that allows the account to become overdrawn, but the majority of people don’t have this and are charged extortionate overdraft fees.

Why the Overdraft Fees?

It has happened to all of us at one point or another, and there are a multitude of possible reasons why… such as:

• A delay in ATM communication resulting in unavailable funds being used
• The bank charges an unexpected fee
• A personal check has bounced
• Perhaps you may have just misjudged your available balance

When this happens, your credit score takes a dive and you usually get charged another unnecessary fee. All the banks differ with the allowances available and the measures they take when someone accidentally becomes overdrawn. Overdraft fees are there to serve as a reminder that you have exceeded your limit and act as administration charges for the extra work involved in the process. Banks have made a mistake here in their terms and conditions as far as I’m concerned (and I believe most would agree). The fees far outweigh any possible administration costs.

Two Years and £1,500/$2,500

Previously, I had an account with a High Street bank in the UK that offered the usual services and worked well for me. Over the years, however, there were small fees charged for overdraft and other unknown reasons. After researching this problem on the Web, I discovered an excellent forum that explained how to take your bank to small claims court for the fines charged and paid by the account holder. They offered all the templates.

Out of curiosity and the possibility of revenge, I took action. I asked the bank to send all the previous statements and made a tally of the fines and charges applied to my account since the start. The charges added up over time; I was surprised to see the amount accumulate to around £1,500 ($2,500 U.S.) I filed the forms and sent them off, threatening to take the bank to court on the grounds that they had fined me too heavily over the years. We traded letters for a couple of months before the bank made an offer of £800/$1,350, which I happily accepted since I didn’t feel like attending court. After the check was issued, they closed my account, which is not surprising.

A Nasty Travelling Surprise

While I was travelling around Australia, I made every effort to keep on top of my balance at home. It can be tricky. If you end up coming close to the mark due to the delay of international withdrawal charges as I did, the result is that I was around £2/$3.50 overdrawn. The bank failed to contact me directly, even though they were aware I was abroad. They began to charge daily fees of £5/$8.50.

This is a new practice for most banks, as they think it is fairer than charging a fee once a month. That is a load of nonsense! A few weeks later when I finally had access to the internet and could check my account I found that I was not a little but instead £95/$158 overdrawn! Quite frankly that is a joke; under normal circumstances I wouldn’t put up with it however at the moment they are not accepting claims as they are currently in court over a similar issue and I can´t afford to risk the account being closed. After issuing the check, they ceremoniously closed the account. This didn’t surprise me in the least. Be prepared for such treatment if you plan to rectify any daylight robbery that you may be experiencing.

Get Overdraft Protection

Overdraft fees are an ongoing problem, but can be avoided if you take care. Ask your bank if they offer overdraft protection, a service offered to protect you in the event that for whatever reason your account drops from the green into the black. In the event that you know you won’t have money to cover and the bank won’t help, payday loans can also help.

Another option is common sense: Keep on top of it! Make sure you understand exactly how much money you have in your account before making purchases or if you are going to be charged for any reason. In the event that you know you will become overdrawn before it happens, call the bank and ask them if there is an economically friendly solution – if only a temporary one. It seems wrong to say, but remember that the easiest way to stop yourself being charged overdraft fees is by not going over in the first place.

Apply for Payday Loans HERE!

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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