Banks Rearrange Charges To Produce The Highest Fees For Themselves; A Couple Of Dollar Purchases Can Result In Hundreds In Fees - Students and Elderly Most Commonly AffectedBanks Automatically Enroll Their Customers In "Overdraft Loan Programs," Allowing Banks to Charge $30 or More When People Overdraw Their Accounts By As Little As A NickelLegislation Would Require Consumer Permission Before Enrollment In Overdraft Programs, Warn Consumer Before A Transaction Would Over

U.S. Senator Charles E. Schumer today announced that he is pushing legislation to curb abusive practices on the part of banks that are costing Central New York families - particularly students and the elderly - millions of dollars in overdraft fees.  Schumer noted that middle class families are working hard to make ends meet in these tough economic times, but these overdraft fees can derail the family budget.   Schumer said that financial responsibility is important, but that banks have developed strategies to wring every last dollar out of their customers.  Schumer said such practices include rearranging charges so that there are as many overdrafts charges as possible, automatically enrolling customers in "overdraft loan programs," and providing no notice that a consumer is about to overdraft their account.   The legislation would address these practices, cutting overdraft fees almost in half, saving millions of dollars for New York families and billions of dollars nationwide.
Schumer, standing with Syracuse residents who have been victims of these abusive practices, said overdraft fees disproportionately affect people that are low income, such as students and the elderly who are living on a fixed income.  Americans aged 1824 pay nearly $1 billion in overdraft fees annually, as do Americans who depend heavily on Social Security income.
"Bottom line, debit cardholders are getting scammed by their banks," said Schumer. "Families across Central New York are being involuntarily placed in these overdraft loan programs and getting ripped off by excessive fees. It's time to stop them dead in their tracks. This legislation will provide cardholders with a warning when they are about to overdraft from their accounts to protect them from sky high fees, and prevent banks from rearranging charges so that customers are placed in the worst possible position."
As consumers across the country struggle to pay bills, many of them are being hit with fees amounting to tripledigit interest rates on loans they did not ask for-and in many cases cannot afford-when they overdraw from their bank accounts through checks, electronic transfers, debit card purchases, and ATM withdrawals. An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance.
In the last ten years, it has become common practice for banks to enroll many of their account holders into expensive overdraft "loan" programs automatically - an option customers generally don't want and often aren't even aware of. This allows the bank to accept overthelimit debit card charges and assess a fee for each purchase over the limit, rather than rejecting the card at the point of sale. According the Center for Responsible Lending (CRL), 80% of consumers would rather have their debit card transaction denied than have it covered in exchange for an overdraft fee, but are never given the choice because they are automatically enrolled in overdraft loan programs.
Furthermore, banks game the system by rearranging the order of charges to maximize the fees they can squeeze from a costumer.  For example, if a consumer has $10 in their account and makes three $2 purchases and then a $9 purchase, he or she should only be charged for a single overdraft.  However, banks commonly rearrange charges so that the $9 purchase would be charged first, and then the three $2 charges.  Therefore, instead of paying a single overdraft fee, a consumer pays 3 - likely producing $100 in fees for the bank.
These fees result in billions of dollars in profits for banks nationwide, mostly from small transactions.  The average transaction on which an overdraft fee is charges is $20, but the average fee charged is $34.
Many banks claim that the system benefits debit card users by allowing them to spend when they do not have sufficient funds in their accounts. However, the fees exacted on the customer are often double or triple the amount of the actual purchase amounting to enormous costs to the consumer. For example, a customer who overdraws from his account by purchasing a $6 sandwich when he has only $5.95 can be charged a $35 penalty. If the customer doesn't realize his or her mistake, he or she can be charged up to 10 overdrafts in a day, resulting in up to $350 in fees.  According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 %, costing consumers $17.5 billion per year.
In recent years, the problem has been getting worse.  As recently at 2004, 80 % of banks still declined debit card transactions without charging a fee. Today, 81% of banks surveyed by the FDIC allow overdrafts at ATM machines and debit card terminals. Only 11% of these banks surveyed notify consumers that they are about to overdraw their account before the transaction is completed.  From 20032005, the number of financial institutions using vendorbased automated overdraft loan programs grew 80% to a total of approximately 3,500 institutions.
 In an effort to curb these abusive practices and save consumers billions of dollars, Senator Schumer today announced that he is supporting legislation that would prevent banks from unknowingly placing their consumers in overdraft loan programs and require banks to warn customers when a transaction will result in an overdraft fee and give them a chance to cancel the transaction.  Legislation has been introduced in the House of Representatives by Congresswoman Carolyn Maloney.  Schumer will be an original cosponsor of legislation being introduced in the Senate by Senator Chris Dodd (DCT).   
Schumer will fight for legislation that will:
  • Require banks to give consumers the choice to not participate in an overdraft protection program.  Consumers will either have to choose to opt in to a program or have an easy method of opting out.
  • Increase disclosure of the fees and APR charges on overdraft loans so that consumers can factor that in when choosing a debit card provider.
  • Require banks to warn the customer that an electronic transaction may trigger an overdraft loan fee and allow the customer to cancel the transaction after receiving this warning.
  • Prohibit banks from manipulating the order in which checks and other debits are posted if it causes more overdrafts and maximizes fees.
  • Require banks to be proportional in the fees they charge the fee for a nickel overdraft should not be the same as a fee for a $100 overdraft.

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