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Excessive Bank Overdraft Fees
As of July 1, 2010, banks will have to ask new customers if they wish to opt in to overdraft protection. That legislation extends to existing customers on August 15, 2010. There is no legislation regarding how much money can be charged for overdraft fees, meaning customers who opt into the program could still pay up to $35 for transactions that take them even $1 into overdraft.
New Bank Overdraft Fees Regulations
Bank accounts go into overdraft when more money has been taken out of the account than was actually in it. It can happen quite easily—a bank account has $100 in it, but the customer makes a debit card purchase for $110, pushing the account $10 into overdraft.
The problem is that some customers say they never asked their banks to provide overdraft protection—they assumed that if they tried to make a purchase they could not afford the purchase would be declined. Instead, customers say more and more frequently, such purchases are being approved and the customers are left with hefty overdraft fees.
Those fees can be as much as $35. That means that $10 into overdraft—overdraft the customer might not have asked for—is costing that customer an extra $35. What's more, customers say they are charged overdraft fees for every overdraft transaction. So, they may be in overdraft without knowing it, continuing to spend on their accounts and being charged $35 every time they do so—pushing them even further into overdraft. That can add up to hundreds of dollars in fees.
Excessive bank overdraft fees lawsuits have been filed and/or settled against a variety of banks, including Wells Fargo, Bank of America, M&T Bank and Wachovia. The lawsuits allege that banks charge excessive overdraft fees when customers' accounts go into overdraft. They further allege that the banks use a number of unethical practices to push their accounts into overdraft, such as misrepresenting customers' account balances and reordering debits and credits to accounts.
Excessive Bank Overdraft Fees
One tactic that banks are accused of using to increase their profits from overdraft fees is reordering transactions on accounts. That means that regardless of what order transactions occurred in on a single day, some banks process the largest transactions first. That can lead to a lot in extra fees for a person to pay.
For example, say a man spends $10, $20, $50 and $100 (in that order) in four transactions on one day, having $140 in his account. Either way, the account will likely still go into overdraft. But, if the account is debited in the order the purchases occurred, then only the final transaction will result in an overdraft fee of $35. However, if the transactions are processed from largest to smallest, then only the $100 purchase will be covered, leaving the customer to pay $35 for each of the final three transactions—for a total of $105 in charges.
Those charges can add up. According to a USA Today (Oct. 2, 2009) article, banks made $36.7 billion off overdraft fees in 2008. The article notes that some banks have allowed debit transactions as low as $1 and charged a $35 transaction fee and have charged an overdraft fee when the purchase is made rather than when it clears the account.
Not all banks charge a flat $35 overdraft fee—fees run from $19 up to $35. Some banks have tiered overdraft fees, so that the first overdraft transaction in a certain period costs one amount but any more overdraft transactions cost more.
Another practice that banks are alleged to have used to push customers into overdraft is authorization holds. Authorization holds occur between the time a bank card purchase is made and the time the merchant settles the transaction. Prior to the merchant settling the transaction, the amount of the purchase is held, but it has not actually been withdrawn from the buyer's account yet. Once the merchant settles the account, which can occur a few days after the purchase is made, the funds are transferred to the merchant and the customer no longer has the money in his account.
For example, a customer with a $100 in his account makes a purchase of $40. That $40 is held immediately for the merchant, but is not actually taken out of the account because the money has not yet been transferred to the merchant. The customer cannot access this money, but it is still, technically, in his account. When the merchant submits her batch of transactions, the money is then taken from the account and transferred to the merchant.
This is all completely legitimate. However, some customers have complained that their banks back-date transactions to the date they occurred, not the date they were settled. They say this pushes their account into overdraft because they may not have had the funds necessary on the date the transaction occurred but did have the funds necessary by the day the transaction was settled.
Another complaint is that banks have been irregularly posting debits and deposits on customers' accounts. For example, banks are required by law to make a check deposit available to a customer within a certain number of days. However, they can choose to make the deposits available sooner. Customers have complained that check posting is occurring inconsistently—meaning that customers cannot predict when a deposit will be posted to their account. Sometimes, they say, the check is posted immediately while other times the check is not posted until after the account holder goes into overdraft.
Lawsuits have been filed against banks for their overdraft fee policies. Already, some overdraft fee lawsuits have been settled. In Closson v. Bank of America, Bank of America agreed to pay $35 million to settle allegations of fraudulent business practices and false advertising. According to the plaintiffs, Bank of America reordered transactions, did not warn customers that their account was about to be overdrawn, and gave inaccurate account balance information.
Overdraft Fees Lawsuits
Meanwhile, more customers are filing lawsuits against their banks, alleging their overdraft policies are illegal. Banks that could potentially face lawsuits regarding their overdraft procedures include:
Also in 2010, Umpqua Bank announced it was changing how it processes and posts debit transactions. According to a September 16 letter from Umpqua Executive Vice President for Community Banking Ric Carey, transactions to checking accounts will now be ordered from lowest to highest, rather than highest to lowest.
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Last updated on Aug-30-12
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