Wednesday, May 7, 2008

Debit Cards and Overdraft Protection: The US Allows Banks To Steal 10 Billion Dollars Per Year From The Poor

In August, 2007, I reported on a lawsuit brought by the U.K. Office of Fair Trading (the equivalent of our Federal Trade Commission) to curb unfair overdraft fees. (You can read that entry here). I think, and I believe any reasonable person would agree, that the banking practice surrounding overdraft fees should be illegal. Of course, banks should not be required to give free loans, but the current practice is purposefully designed to take advantage of consumers who maintain low balances. Banks: (1) encourage debit card use; (2) set flat-rate overdraft fees which are often multiple times the amount of the actual overdraft transaction; (3) purposely do not offer a real-time account balance; (4) as a default, allow transactions to go through even after an account has overdrafted; and (5) account for the debits from your account by resequencing them each day from highest to lowest, thus maximizing any potential overdrafts.

There has been some academic and judicial commentary against these practices, but in general they have been sanctioned by the U.S. Government. Overdraft fees and "overdraft protection programs" became common in the 1980's, and early U.S. litigation treated them as what they were: loans. During the 1990's, however, the Federal Courts began interpreting the fees as something other than short-term loans, and refused to apply usury laws to them. In 2002, the Comptroller of Currency formally approved the practice of high-low sequencing, then, in 2003, in Beneficial National Bank v. Anderson, 539 U.S. 1 (2003), the Supreme Court held that the National Banking Act pre-empts state regulation of national banks (i.e. banks with an "N.A." after the name) and makes them subject only to the usury laws of their state of incorporation. The banks that were not already incorporated in Delaware or North Carolina (which have laws saying, basically, that banks can charge customers any fee they want), quickly did so.

The disturbing thing about abusive overdraft fees is that the fees, by definition, target the people who can least afford them. According to a recent study by the Center For Responsible Lending, U.S. Banks earn over 10 Billion Dollars each year from overdraft fees, 7.3 Billion of which is taken from individuals who are on the border of financial solvency. According to this same study, the average return on investment for the banks for debit card overdrafts is $2.17 for every dollar overdrawn. Even if it takes the consumer a full week to deposit overdrawn funds in the account (which is a generous estimate), the bank still earns an interest rate of over 6000% on a loan that the consumer probably never consented to and was wholly unaware of at the time. People may be willing to pay $3 for a coffee at Starbucks, but I doubt anyone would willingly do so knowing that they would also incur a $35 fee from their bank.

U.S. judicial and legislative cow-towing to banks has been so pervasive that banks are even trying, with success, to usurp social security benefits -- which have the strongest available protection against being siezed to pay debts -- on the pretense of overdraft fees. See Miller v. Bank of America, NT & SA, 144 Cal. App. 4th 1301, 51 Cal. Rptr. 3d 223(Cal. App. 1st Dist. 2006)(Note: this case is presently pending before the California Supreme Court). Banks also routinely partner with colleges, so as to have easier access to their most succeptable prey. (See USA Today Story regarding N.Y. Attorney General's Investigation, here).

But the government has woken up, and is stepping in to correct the injustice: just not in the US government. In April, an intermediate appellate Court in the U.K. ruled that the U.K. Office of Fair Trading can review overdraft fees for fairness. See the BBC Story here, and the judgment here. Some momentum has been building in the U.S. to incite similar action by our government. As reported by the Consumer Law and Policy Blog, Professor Andrew Rosberg recently drafted an article comparing US and UK regulation in this matter; as I mentioned in my earlier piece, there is an excellent article by a group led by Professor Aruna Apte entitled "The Impact of Check Sequencing on NSF (Not-Sufficient Funds) Fees," 34 Interfaces 97 (March, 2004); and the Center for Responsible Lending offers a variety of terrific research on the issue. This momentum, however, is mere grumbling compared to the political clout of national banks, which are now quickly being purchased by credit card companies, such as Capital One and MBNA, with a proven track record for taking advantage of consumers whenever possible.

If you would like more information, please see my other related posts:

* February 8, 2009, "Potential Tide-Turning Victory In The Battle Against Illegal Overdraft And Non-Sufficient Fund Fees: Bank Of America Settles Closson Class Action."

* June 27, 2008, "Week In Review," (the Federal Reserve is now considering a rule to curb abusive overdraft fees by banks).

* May 7, 2008, "Debit Cards and Overdraft Protection: The US Allows Banks To Steal 10 Billion Dollars Per Year From The Poor."

* August 31, 2007, "The UK Takes Steps to Curb Illegal Overdraft Fees, But US Efforts Have Not Been So Well Received."

Also, consider the following outside sources:

* The Washington Post, Bailout recipients also major lobbyistsashington Post Article, (1/23/2009)

* USA Today, FDIC: Bank overdraft fees hit young, low-income customers, (12/3/2008)(Overdraft fees are boosting banks' profits at the expense of consumers, especially young and low-income people, finds a new Federal Deposit Insurance Corp. study.")

* USA Today, Banks raise penalty fees for customers' overdrafts (6/18/08)

* USA Today, Good news in the works on overdraft charges, 6/3/08.

* USA Today, Banks' check-clearing policies could leave you with overdrafts, (11/19/2006)

* USA Today, Banks' check-clearing policies could leave you with overdrafts (11/20/06)

* Wikipedia, Overdraft

1 comment:

  1. I hear you loud and clear. I am on the edge of financial solvency myself and two charges of just over $2 and one at $9 puts me at -115! The first overdraft came when WAMU automatically debited 5 dollars from my checking to go into my savings account. I have a feeling that is a deliberate tactic. We need to band together and defeat this practice.