Modbert
Daydream Believer
- Sep 2, 2008
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t r u t h o u t | How the Sneaky Hands of the Big Banks Are Working Overtime to Rip You Off
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One of the most pernicious of these predatory practices is the overdraft fee. It's one of the biggest revenue streams for banking behemoths today. In 2009, banks reaped over $38 billion in overdraft fees from their own customers, while posting a total combined profit of just $12.5 billion. Without overdrafts, many banks would have scored massive losses last year, and possibly gone under. Instead, they booked epic bonuses.
It can come as a huge shock to get hit with a rash of overdraft fees. You open a bank statement to find that you are not only broke, but deep in the hole thanks to several $30 or $40 charges. Your first reaction is shame. How could I have let this happen? But looking into the ways that banks conduct their overdrafts, you come to realize that you've simply been scammed.
Banks are actively deceiving their own customers. According to an FDIC study, 75 percent of all banks don't even tell people they've been automatically enrolled in "overdraft protection" programs. Many consumers don't even realize that their accounts are subject to these charges—they assume that anything that puts them past zero will simply be denied.
It gets much worse. Once banks realized that overdraft fees could be a real cash cow, they developed "fee-harvesting" software, which reorganizes the order of your checking transactions to maximize the number of overdraft fees for the bank. In other lines of financial business, this is called "backdating," and it's considered "fraud."
How the Scam Works
Say you've got $100 in your checking account, and you decide to pay some bills and run some errands. You spend $30 on gas and another $20 on your water bill. Later, you head to the grocery store and spend $81—oops!—on groceries. Banks, of course, could notify you that your $81 purchase was going to send you over the edge and result in an overdraft fee. They don't, because they don't want to risk that you'll deny the purchase and reject the fee.
But in addition to neglecting this safeguard, the bank automatically processes your $81 purchase ahead of your previous charges. As a result, you do not get hit with one unwanted overdraft fee for your groceries—you get hit with three, because your costliest purchase was processed before the others—even though you made the cheaper purchases first.
Agencies have been voicing concerns about overdraft fees for years. The FDIC published a damning study on the practice in 2008, and the Federal Reserve began issuing warnings to the banking industry about unfair overdraft programs in 2004. But up until 2004, overdrafts were generally viewed as a form of short-term credit—the bank is basically lending the consumer money that is paid back with interest. But the interest rates are so egregiously predatory—the average overdraft fee amounts to 1,067 to 3,520 percent (PDF), according to the FDIC -- that they simply would not be tolerated if regulators had to think of them as loans.
Even this reclassification scheme wasn't enough for Wall Street, which managed to violate even the much weaker consumer protection rules on fees 335 times a year, according to a report by the Government Accountability Office. The GAO also found that consumers who went to an actual bank branch were unlikely to be able to obtain information about basic overdraft terms and conditions, much less comprehensive information about how their checking accounts could be gamed.
The Fed is offering another weak response to the overdraft insanity today. By mid-August, the Fed will require consumers to "opt-in" to overdraft programs, instead of being automatically enrolled without their consent. It's a step forward that will likely limit some of the overdraft profits banks currently enjoy. But it will not require that the programs be fundamentally changed. It will not cap the amount of the fees charged, or the number of fees charged, nor will it require consumers to be notified when a purchase or withdrawal will result in a fee. Banks will take a modest hit from the new rules as consumers choose to back out of the program—but the fundamentally obscene business model will remain.
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