New Overdraft Protections
By Sharon Secor,
LendersMark.org Staff Writer
August 15, 2010, brought the final phase of the new overdraft protection regulations set in motion by the Federal Reserve in November of 2009. Bank customers must now specifically opt into overdraft programs, explicitly agreeing to have a financial institution extend an immediate loan in the case of an overdraft, rather than deny the charge for insufficient funds. Those insta-loans typically come with heavy fees, much to the consternation of customers that, before opt-in became official, would have preferred that the bank or credit union just say no, rather than forcing them into a high fee loan for what is often a simple mistake or a consequence of how the financial institution orders its posting of debits and deposits.
The Old Overdraft “Protection” Racket
Overdraft “protection” is a phrase that has garnered many adjectives from those on the wrong side of such protection, including oxymoronic, Orwellian, and a handful of others that are probably inappropriate for print. The bottom line on this euphemistically phrased service is that instead of denying a debit card request for which there are insufficient funds, a financial institution allows the purchase and tags on a weighty fee, one that crept up steadily from around 20 dollars a decade ago to a whopping $35 per incident. As the Center for Responsible Lending explains, “the leading trigger of these fees is small debit card overdrafts, which average about $17—meaning the fee charged exceeds the amount of credit actually extended on a nearly 2-to-1 basis.” An August, 2010, Newsweek article citing information from the Center for Responsible Lending pointed out that it is the financially vulnerable – those in the lower economic tiers – that are hardest hit by such practices.
As a recent court case involving Wells Fargo demonstrated, some banks deliberately set out to maximize their fee harvesting abilities by altering the order in which account debits and credits are posted. By posting account debits and credits in orders other than chronological, multiple fees could be finagled during a single day from a single account. Multiply that by hundreds upon thousands of accounts and it’s easy to understand why banks refused to allow customers to opt out of such “protection” or never bothered to fully inform consumers of the existence of such “protection.” An August, 2010, CBS Money Watch article, citing data from Moebs Services, noted that banks garnered $37.1 billion in fees last year alone. According to an August 11, 2010, Associated Press report, that sort of manipulation is going to cost Wells Fargo some serious money. A California federal judge has ruled that the bank must return $203 million to its customers for the “unfair and deceptive business practices” that led to multiple overdraft fees.
Hard Selling the New Overdraft Protection
Naturally, with billions of potential profits at stake, banks are in no hurry to surrender this revenue stream without a fight. Banks and credit unions throughout the nation have been engaged in the hard sell of overdraft protection, even offering, according to Newsweek, cash and gifts to “to customers with four or more overdrafts annually if they opt in.” Other bank hard sell consultants advise “snatching bank revenues from the jaws of Regulation E” by actively pursuing those banking customers that make frequent overdrafts, saying “if they are in the top 29 percent of abusers, call them.” While some pundits do accuse the banks of targeting revenue enhancing customers with misleading sales pitches, the fact remains that the new overdraft protection is called opt-in for a reason, and the consumer has a responsibility to check facts out carefully before entering into any agreement with a financial institution.
To Opt-in or Not? Decide With Care
This is a matter to decide with care. After all, in how many circumstances – really – is an insta-loan at overdraft rates a better choice than simply deferring the purchase until the cash is in hand for it? And, in an emergency, many have less costly options, such as an automatic transfer from a savings account or using a credit card for the purchase or to get a cash advance. As with any other financial decision, running the numbers is a must and for the most part, overdraft protection is costly and often unnecessary credit. However, to some people, it may be worth the cost, which is why opt-in is a good idea, offering one more credit choice to the consumer.