Many banks automatically cover your debit or ATM card transactions when you don’t have enough money in your account, even if you never asked them to do it.
It comes at a price, of course. Banks might charge $35 for each overdraft, no matter how small your transgression. Suddenly, a $3 blueberry muffin costs $38.
But the days of enrolling you in an expensive overdraft protection program without your say-so may be numbered.
Senate Banking Committee Chairman Chris Dodd says he is drafting legislation that would require banks to obtain permission before enrolling customers in the service. Similar legislation is pending in the House.
Two major players chase and bank of america — last week announced they were changing their programs so customers could decide if they wanted to participate.
Not that long ago, banks would deny debit or ATM transactions on the spot if you didn’t have enough money in your account. (Citibank still does.) But as the use of debit and ATM cards grew, many banks started automatically extending overdraft protection to these transactions and slapping hefty fees on overdrawn accounts.
Exacerbating the problem is that many banks don’t process transactions in the order you make them, but from largest to smallest.
Banks say they do this because the largest payment is likely to be the rent, mortgage or some other important bill that customers would want covered first.
But critics say this is a manipulation by banks to generate the most fee income. Processing the biggest transactions first brings the account balance closer to zero faster and can trigger more fees.
And fees can add up fast.
Just ask Maxine Given of Baltimore County, Md., who last month sued M&T Bank, claiming the lender’s overdraft program violates Maryland’s consumer protection laws. Her lawsuit seeks class-action status.
Given, a senior director of finance and administration for the Fund for Johns Hopkins Medicine, was overdrawn twice in the past year and a half. All told, M&T charged her $370 in fees.
“It becomes out of control,” says Given, a certified public accountant who says she monitors her account online twice a week.
“You feel like there is this avalanche of fees.” One April day last year, Given had four transactions in her checking account. M&T processed the largest one first, a $2,800 mortgage payment, causing her to be overdrawn, she says. And each other smaller transaction — including $12.08 for lunch — triggered a $37 overdraft fee.
(As it turns out, M&T rejected her mortgage check the next day — for reasons Given says she doesn’t know — which means she would have had enough in her account to cover the other transactions the day before.) About a year later, Given again triggered multiple overdraft fees.
The lawsuit claims she could have avoided all or some of the fees both times if M&T didn’t reorder the transactions.
“They are reordering transactions to maximize their profits,” she said.
Her lawsuit also claims that M&T doesn’t clearly disclose that consumers can opt out of the program and doesn’t notify consumers in advance that their electronic transactions will incur an overdraft fee, which would allow them to use another payment method to avoid the charge.
Given says to dispute the fees she had to take off work to go to her bank branch. The bank waived some fees.
“You feel kind of helpless. What can you do? It’s like David and Goliath,” she said.
In a statement, M&T says it works hard to make sure customers are educated about the bank’s products and services.
“Our overdraft programs are similar to others in the industry locally and nationally,” the bank said. “This appears to be the latest of many similar lawsuits filed by class-action trial lawyers directed at banks across the country. We are currently reviewing the lawsuit and will respond to it through the legal process.” But some other banks are changing overdraft policies as criticism mounts.
Bank of America said recently that as of Oct. 19 it would no longer charge an overdraft fee if a customer is overdrawn by less than $10 during a single day. And it will make opting out of the overdraft program available to all customers and won’t charge overdraft fees on more than four items in a single day, down from 10 currently. In June, it will allow new customers to opt-in if they want the service.
Chase announced that beginning in the first quarter of next year it would allow customers to opt-in for debit card overdraft protection, eliminate fees if the account is overdrawn by $5 or less, post transactions in the order they occur and reduce the maximum number of overdraft charges in a day from six to three.
Despite the banks’ moves, Dodd says he will continue to plug away on legislation to curb overdraft abuses. Legislation pending in the House would ban the reordering of transactions, require banks to obtain customer consent for overdraft programs and to notify consumers when an electronic transaction is about to trigger an overdraft fee.
Banks aren’t likely to give up easily on this revenue source.
Overdrafts are estimated to be worth tens of billions of dollars annually to the banking industry, which is finding its revenue squeezed in other areas.
“Banks have gotten addicted to this pot of money very quickly,” says Jean Ann Fox, director of financial services for the Consumer Federation of America.
Fees are stiff because they are meant to be a deterrent so you don’t overdraw your account, says Carol Kaplan, a spokeswoman for the American Bankers Association.
(Begin optional trim) The trade group’s survey found that 82 percent of the 1,000 consumers polled last month avoided overdraft fees in the past year.
And nearly all who did pay a fee said they were happy the bank covered them.
Of course, it’s your responsibility to make sure you have money in your account to cover your purchases.
It’s not always easy. Banks often put holds on deposits, while money flies out of accounts with electronic transactions, Fox said.
“Even if you are really careful, you can get caught up,” she said.
(End optional trim) Distributed by the Los Angeles Times-Washington Post News Service
