What’s It With Federal Regulators – Overdraft Fees Rising

Monday, June 11, 2012, AM | Leave Comment

Under the nose of Federal regulators and in bright daylight in front of the American people, many banks are shamelessly increasing the already high overdraft fees.

Will there ever be an end to it? Whatever happened to the Consumer Financial Protection Bureau (CFPB) – the so-called watch dog? CFPB is supposed to be looking out and protecting the American consumers.

While CFPB keeps researching and try to come up with some answers, banks are raising fees left to right.

What is overdraft fees?

When you withdraw more money than is available presently in your account, the bank charges you extra money which is known as overdraft fees.

What is extended overdraft fees?

If your account remains overdrawn for around seven days, the bank charges you extended overdraft fees on top of the initial overdraft penalty.

Nearly two thirds of bank accounts charge “extended overdraft” penalties, according to a new study released Thursday, June 7, 2012 by Pew Charitable Trusts.

That’s up from 45% in 2010.

Overdraft transfer

Overdraft transfer occurs when funds from another account are transferred to cover the overdraft.

The 12 major banks that Pew studied also charge a median of $12 per “overdraft transfer,” up 20% from 2010.

Banks can charge overdraft fees multiple times a day…

When the consumers play it dumb, don’t check their account prior to using debit card and keep using it for the whole day, fees can be charged anywhere from three to 10 times (or more) a day, according to the CFA.

Customers who pay a $100 overdraft after two weeks would incur the equivalent of a 900% to 3,000% annual percentage rate, according to the CFA.

“This is the most expensive credit that banks extend to consumers.”

Organized Crime

I can easily compare it with the interest organized crime charged their customers up until the 1990s. Maybe they still do.

Banks do it everyday so why not The Organization or loan sharks.

 

So far, media has reported that the following banks have increased or are in the process of increasing overdraft fees:

  • Fifth Third Bank is raising fees for overdraft transactions to as high as $37, up from $33. It calls itself “The Curious Bank.”

  • U.S. Bank is planning to increase overdraft fees to $15 and $35, depending on the size of the transaction, up from $10 and $33.

  • If it’s any consolation to consumers, both banks say not all customers who overdraw will incur a fee.

    Fifth Third Bank does not charge customers if their account is overdrawn by up to $5.

    U.S. Bank does not charge customers if their account is overdrawn by up to $9.

Banking experts and consumer advocates say that in spite of new regulation they expect more banks to follow suit.

Median Overdraft fees was already high…

The median overdraft fee rose to $29 in 2011, up 5.4% from 2010 and up 11.5% from 2009, according to research firm Moebs Services.

Banks generated $31.6 billion in 2011. That’s no small chunk of money.

Those earnings dropped from $37.1 billion in 2009 before new banking regulations went into effect.

It could be because the American consumers became more careful in their spending and checking their account before their purchase.

In order to make up for the “loss”, banks are taking advantage of consumers’ smartness about their finances and are raising overdraft fees.

Consumers play dumb or smart, banks make money…

When consumers play dumb and don’t check their bank account before purchase, banks make money by charging overdraft fees more frequently.

When consumers play smart and check their bank account before purchase, banks make money by charging more overdraft fees.

That means consumers get financially screwed both ways.

Regulation E…

Regulation E is part of the law that went into effect in 2010. It prohibits banks from charging overdraft fees unless customers opted for coverage at the time of purchase.

There are two type of consumers:

  1. With overdraft protection

    When these consumers swipe their debit card for an amount larger than their checking account balance, the purchase will be accepted.

  2. Without overdraft protection

    When these consumers swipe their debit card for an amount larger than their checking account balance, the purchase will be declined.

Durbin amendment supposedly lowered the fees…

The Durbin amendment made to the Dodd-Frank Wall Street Reform and Consumer Protection Act specifically lowered the fees banks receive from merchants when consumers swipe their debit cards.

How to protect yourself from overdraft fees?

As we all know the banking industry lobby is extremely strong. Therefore, relying entirely on CFPA or some other agency appointed by Congress will make you lose on issues of overdraft fees protection.

  • The only entity that can protect you from overdraft fees is you and you alone.

  • Before you use debit card for your next purchase, check your account. If it can cover the purchase price, you may go ahead with buying the merchandise if you really need it.

  • If your bank account does not cover the price, then make a deliberate but smart decision whatever that may be.

In a Nutshell
Banks should include a clear disclosure on consumers’ checking account statements that highlights the amount overdrawn and the total fees charged.

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