We’ve written about overdraft banking fees before, and they way the abuse the system to milk maximum fees. So numerous and loud were consumer complaints that Congress has responded with proposed bills in the House and Senate. The Federal Reserve is also being pressured to issued new rules. This has the banking industry quaking in their boots.
In a remarkable coincidence, starting Oct. 19, you will be seeing some changes from several banks in the way they charge overdraft fees.
- Bank of America and JP Morgan Chase customers will be able to choose to void a sale or an ATM withdrawal that would exceed the amount in their checking accounts right at the point of sale.
- Bank of America has also agreed that it will no longer charge overdraft fees on accounts less than $10 in the red. It also will limit the number of overdraft fees to four a day per account, down from 10.
- Wells Fargo will charge no more than four overdraft fees per day.
- J.P. Morgan Chase went even further. It will limit the amount of overdraft fees to three a day.
- Chase and Wells Fargo announced that it will no longer charge any fee for accounts that are overdrawn by $5 or less.
- Starting next year, Chase won’t pay debit card overdrafts and charge a fee without consumers’ consent.
The banks efforts to modify their overdraft policies have failed to impress lawmakers, including powerful Senate Banking Committee Chair Chris Dodd, D-Conn., who is preparing legislation to crack down on what he calls a pattern of abusive practices.
“Excessive, automatic overdraft fees are forcing many American families deeper into debt at a time when they are already struggling to make ends meet,” he said. “I am working on a bill to protect consumers from these fees,” says Dodd.
Rep. Carolyn Maloney, D-N.Y., sponsored a bill requiring banks to get consumers’ permission to pay an overdraft, and charge a fee, and clear transactions in chronological order. The Federal Reserve is also under pressure to crack down on industry overdraft practices. The Fed has said it plans to issue a rule by the end of the year.
Have you been hit with overdraft fees? Do you think the banking laws should be modified? Leave us a comment!
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The proposed and drafted legislation sounds good, but it put a huge and cumbersome bit of responsibility on the customer. No doubt customers that overspend should have to pay some penalty, this is obvious and just. The problem is that banks are not scared one bit over these proposed rules because they do not affect them financially. The real problem is the practice of “largest to smallest” check cashing, and rules imposed by congress throughout the 1990’s.
The first of these rules was something left over from the Clinton era called “Know your customer”. These regulations basically put the burden of proof over the legitimacy of funds and accounts onto the banks themselves, but had an insidious tone of watching the customer’s accounts and their spending/depositing habits. This lead to a boon for the banks insomuch that now through Federal mandate, they kept track of what you were doing and thus could now see when funds cleared regularly and when deposits were made. This set a template for them to be able to “rig” your account for over drafting. The problem was legitimizing it so that YOU took the burden of responsibility. This came again in 2003 and 2005 with the electronic dept regulations and bankruptcy reform laws respectively that now established the concept of electronic check clearing.
Now the banks could clear a check and charge it to your account in as little as 1 day from a written check verses the multiple days of “floating a check” or charge. This in addition to the ability by banks to hold deposits for 5 business days allowed them a huge “come and get it” of overdraft collection on the customer and make it 100% legitimate.
Because banking rules are essentially state run, laws governing banks vary from one state to another. This is problematic for the customer, but a cash cow for the banks. Almost all states allow a practice of “Largest to smallest” given that no rules are written prohibiting the practice. What is “largest to smallest?”
In times past, a bank cleared deposits and debts as they came into the bank. Thus, if you wrote out checks from number 250 to 255 and they came in to your bank in that order, regardless of the amount of the check, they were charged to your account in the order the bank got them. The concept of Largest to smallest however allows banks to hold checks for a given amount of time and they can re-arrange the order they are cashed from the largest check to the smallest. If you look at your account online, they typically show an amount followed by the words “in process”. Meaning the bank has the information but has not yet cleared the account. Here is where it gets tricky. If for the sake of argument your careful for the entire pay period and don’t overdraft, you should be fine. But lets say that you come out of your house or apartment one Wednesday morning and find your windshield broken. You have to have a new windshield and you know it will cost $300, but you only have $189 left in your bank account until that Friday. So you decide you can take the chance and write a check for the $300 hoping it will float until Friday. The problem is that the company you write the check to deposits the check into their account (different bank from yours) and because of the electronic nature of the check cashing, it hits your bank that afternoon because the check does not have to arrive physically at the bank. Like a debit card or credit card purchase, it is now at your bank that afternoon. However, you borrow money to cover the check and you deposit the money 10 minutes before the check hits your account. Unless you deposit it at the counter inside the bank, the money can now be held for 5 business days. That translates to the following Wednesday; or literally a full week later. Now because you have three purchases of $11 of coffee and beagle for you and some friends, a paper, magazine and a package of tomatoes you purchased all separately, those do not add up to $300. But they are all separate purchases. You bought them all in the last few days, and should be at the bank by now right? Well yes, but the bank can now hold those and charge them to your account AFTER moving up the check you wrote out for the $300.
Thus, instead of one over draft charge of $30 for the $300 check, you are now charged 5 $30 charges for the smaller stuff. Putting you in the hole for not only the amount of purchase, but for $150 in overdraft charges.
This is the insidious nature of the banks today. And they readily admit to as much because there are no consequences for what they are doing.
The first step is to end this practice of largest to smallest; the second step is to allow for same day deposits for checks and cash.
There are many other things that need to be done including mandatory K-12 financial literacy in schools.
But such issues can be addressed later.