More on Overdraft Fees: They're Worse Than You Thought
Pardon me for going on and on about bank overdraft fees, but they really are obscene. And a lawsuit against
Union Bank of California that recently attained class action status shows exactly how financial institutions stack the deck against checking accountholders to relieve them of their cash.
It's bad enough that the fee for overdrawing your account even by a few bucks triggers a charge that ranges from $32 to $37. And, it's even worse that after paying that outrageous fee, you are assessed more money if you don't make up funds to the bank within a specified number of days. Fees on these short-term loans amount to an Annual Percentage Rate that registers in the four digits -- I mean, like 2900 percent -- while at the same time banks pay savings customers almost nothing on their deposits, some .01 to .04 percent. Subtract the second from the first and you realize why banks aren't lending money to small businesses or homeowners. Why bother with loans that bring in 4 to 8 percent when you can charge 2899.06 percent?
Now I know that many of you out there believe that accountholders are at fault. They shouldn't go around using their debit cards to buy $4 lattes, $20 haircuts and $30 dinners when they don't have the money. And, I agree; responsible people should know how much they have in the bank.
But, as it turns out, Union Bank rigs things to keep consumers in the dark. Here's how the scheme works. Say, Mrs. Busybody has $200 in her checking account. On Monday morning, she does errands. Using her debit card, she spends $15 on groceries, $30 on gas, has a $20 lunch with her friends, buys a shirt for $45 and then goes home and from her account, pays a cell phone bill of $210. Clearly, her mathematical abilities are wanting, and she should have known that she would overdraw her account and incur Union's $34 charge.
What she winds up paying the bank, however, is not $34 but $170. Union reserves the right to process debits any way it wishes. And, like many banks eager to maximize fee income, Union, upon the advice of a consultant hired in 2003, processes a string of debits all at once deducting the highest first and proceeding to the lowest. Not only that, but, according to the complaint,
Union Bank refrains from immediately posting charges to a customer's account as it receives them -- sometimes for multiple business days. By holding charges rather than posting them immediately to an account, Union bank is able to amass a number of charges on the account. Subsequently, Union Bank posts all of the amassed charges on a single date. When the group of charges is eventually posted to the customer's account, Union Bank posts them in order of largest to smallest...This delayed posting results in the imposition of multiple overdraft fees that would not otherwise be imposed. The delayed posting also prevents customers from ascertaining accurate balances in their accounts.The Federal Reserve requires banks to get customers' explicit permission to enroll in overdraft programs, but most accountholders have not pored over the pages of legalese that might (or might not) alert them to the gotchas. Ideally, banks would do more to help consumers. Why not inform a customer at point of purchase or at an ATM machine that a particular charge will overdraw the account? Doing that would give the accountholder the option of paying the tab with cash or a credit card. I don't expect banks will do that unless forced by litigation. Fortunately, that may already be happening. Bank of America agreed to pay $410 million to settle a similar case, according to The New York Times. And, last August, Wells Fargo was forced to pay $203 million to its customers after a judge ruled that its practice of "high-to-low resequencing" had led to a "bone-crushing multiplication of additional overdraft penalties," again, according to the Times. But while the lawsuits work their way through the courts, consumers should steer clear of overdraft protection.
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