Overdraft fees are boosting banks’ profits at the expense of consumers, especially young and low-income people, according to findings in a new Federal Deposit Insurance Corp. study. This shouldn’t come as a big surprise. The 18-month survey found that most banks automatically enroll consumers in overdraft programs ‘ some don’t allow them to opt out ‘ and then cover overdrawn transactions for a per-item fee of up to $38. The survey excludes many of the largest banks in the nation, because it covers only FDIC-regulated banks. Nevertheless, it’s still the largest study of overdraft programs by a bank regulator. According to an article in USA Today, it will “fill an important universe of information that has not been available to policymakers.”
In recent years, consumer groups have received an increasing amount of complaints about overdraft fees. The Federal Reserve has proposed a rule, which it expects to finalize by year’s end, that requires banks to give customers the ability to “opt out” of overdraft programs. But advocates say the rule doesn’t go far enough because banks don’t have to obtain explicit permission from customers to pay their checks and debit card transactions. A bill introduced in Congress by Rep. Carolyn Maloney (D-NY), would require banks to sign up consumers for this service. The FDIC’s survey found:
• Most banks that automatically enroll consumers allow them to overdraw by check, ATM or debit card purchases. About half of all overdrafts occur at ATMs or via debit card transactions, which tend to be for smaller dollar amounts.
• Banks surveyed earned $1.97 billion in overdraft-related fees in 2006, representing 74% of their overall $2.66 billion in service charges on deposit accounts. The advocacy group Center for Responsible Lending estimates that overdraft-related fees bring in a total of $17.5 billion each year to banks and credit unions.
• Large banks are more likely to process transactions from largest to smallest dollar amount, often triggering more fees.
• Young and low-income consumers are disproportionately affected by overdraft fees. “The most vulnerable consumers are getting hit with these fees,” says Chi Chi Wu of the National Consumer Law Center.
Hopefully, the Maloney bill will pass and become law. It is needed to give consumers the protection they deserve.
Source: USA Today
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