If anyone needs another example of how the Federal Reserve favors the banking industry at the expense of consumers year after year – regardless of who is in the White House – consider the new “bank overdraft” regulations issued by the Fed last Thursday. There was much fanfare in the press, but a close look reveals that the new rules don’t address some of the worst abuses by the banking industry.
Banks love it when people overdraw their accounts. A November 2008 report by the FDIC (pdf) estimated that the banks it studied earned $1.97 billion in “insufficient funds” fees that averaged $27. But the Financial Times of London recently reported that the industry total has exploded to $38 billion this year, as the banks, many of which received a public bailout, try to rebuild their profits on the backs of consumers.
This was an opportunity for the Fed to take concrete action to protect consumers against a panoply of bad practices revolving around overdrawn accounts. Instead, the Fed focused only on the banks typical practice of covering the shortfall when a person tries to withdraw more than is available in their account – so-called “overdraft protection” and then charging a huge fee for it.
Here are five perennial problems that the new rules don’t address.
1. Checking Accounts Not Covered
The new rules require consumers to agree in advance before a bank can impose a fee for covering an ATM or debit card withdrawal that exceeds the customer’s balance. Banks will require new and existing customers to fill out a form deciding whether they want overdraft protection. The new opt-in rules don’t apply to checking accounts, because the Fed says most people want overdraft protection. (They also don’t apply when you sign up to have your bills paid through automatic debits on a recurring basis).
The way it works is as follows: if you don’t “opt-in” to the bank’s overdraft protection plan, and you try to withdraw money that’s not in your account, your ATM or debit card will be rejected. The theory is that this way, consumers can avoid the “insufficient funds” fees if they want to. Great. But what if you need the money? Then you’ll have to agree in advance to pay the fees…. and guess what?
2. There Is No Limit On the Amount of the Fees that Your Bank Can Charge You
Whether its an ATM, debit card or checking account, the Fed rules don’t place any limits on how much your bank can charge you if you withdraw more than what’s available in your account, and the bank covers the overdraft. So let’s say you decide to sign up for the bank’s “overdraft protection plan.” Then you go to the ATM and withdraw $30 more than you have in your account. The ATM will dispense the $30. But it’s free to charge you whatever it wants – $17 is a typical “NSF” charge.
Sound familiar? In the big brouhaha over passage of Congress’s credit card “reform” earlier this year, no one seemed to notice that the bill contained no cap on interest rates. The credit card companies noticed, and the industry has gone on an interest rate rampage in the meantime, as I explained a month ago.
The Fed got inundated with tens of thousands of letters, many from the public requesting relief from the excessive fees. It’s answer, for ATM users, is to decline the protection plan. Everyone else has to pay.
3. No Limit on How Many Overdraft Fees You Can Get Hit With
Let’s say you write five checks for a total of $90, and they all bounce on the same day. Banks routinely charge the NSF fee for each bounced check, most without regard to the amount. So you can end up paying $150 in fees. The new rules don’t prevent this.
4. No Limit on Bank Posting Traps
The banks have become pretty crafty in figuring out ways to maximize NSF charges.
Many banks will arbitrarily choose to cash the single largest check of the day first, so that it wipes out a customer’s balance and lets the bank levy an NSF fee on all the additional smaller checks that bounce. Example: There is $100 in the bank account. Five checks arrive at the bank for payment: three for $30, one for $100. If the bank pays the smaller ones first, the account won’t be overdrawn until the $100 check is paid – and the customer gets one NSF fee. But if the bank pays the $100 check first, then each of the three smaller checks bounce, resulting in three NSF fees.
Here’s another one: many banks post withdrawals first before they post the day’s deposits. So even if you went to the bank to make a deposit to cover checks that were going to show up that day, you will still get tagged with NSF charges.
The new rules don’t prevent these kinds of shenanigans.
5. The New Rules Don’t Apply Till Next Year
The Fed’s program doesn’t start until next July 1 for new accounts, and August 15 for existing accounts. That leaves the banking industry a full seven months to increase fees and figure out even more creative ways to take your money before the new rules apply. Congress left a similar gap in the effective date of its “credit card reform” bill.
The Fed’s action comes just as some in Congress want to close some of these loopholes. In fact, the Fed is playing a game it has played many times in the past at the behest of the Money Industry. Whenever Congress starts seriously considering consumer protection legislation, the Fed announces it will investigate and take action. The banking industry’s lobbyists then assure members of Congress that there’s no need to act – the Fed will take care of the problem. Usually, this little kabuki dance works like a charm.