PORTLAND, Ore., September 23 - In the face of consumer outcry and possible legislation, the two biggest banks in the U.S. announced changes to their overdraft policies. These modest changes are long overdue, but frankly they don't go far enough, soon enough to really protect consumers in tough economic times.
It's industry standard in the big banking world to automatically include overdraft “protection” as a basic feature of their checking accounts. The abuses that these changes aim to correct are simply shocking:
*These fees amount to short term loans for consumers, with outrageously high fees. An overdraft fee of $35 on a $5 purchase that is paid back after two weeks comes out to an Annual Percentage Rate of 2,600% -- and that's assuming there are no daily negative balance charges, which there often are.
*Often, consumers are unaware that a purchase will overdraw their account, and there is no notice given to the consumer at the point of sale. Essentially, consumers get high cost, short term loans that they didn't ask for.
*Despite being marketed as a courtesy, it's impossible to opt out of these programs at many banks, making it a mandatory courtesy.
*Many banks will reorder their customers purchases to maximize overdraft fees. Here's how it works: A bank customer has $25 in their account on Friday. Over the weekend, they make three small purchases of $5 each, and then a $30 purchase on Sunday night. If the purchases were processed chronologically- like any customer would have every right to expect- these weekend purchases would result in a single overdraft fee. But at many banks, when the charges are processed Monday morning, the largest charge is processed first, taking the customers account into the negative. The consumer then faces an additional $35 for each small purchase.
Chase and Bank of America have now taken small steps towards addressing some of these abuses. Bank of America will allow customers to opt-out of overdraft programs, lower the maximum number of overdraft fees to 4 each day, and stop charging overdraft fees if an account is overdrawn for less than $10. Starting next June, Bank of America will require customers to request overdraft protection when opening an account. Starting next year, Chase will end the practice of reordering purchases from largest to smallest to maximize overdraft fees, stop charging overdraft fees when accounts are overdrawn less than $5, and limit the maximum number of overdraft fees per day to $3.
These new consumer protections are long overdue, but these actions are really too little, too late. For example, Bank of America still insists on reordering purchases to maximize fee income. Both Chase and Bank of America should establish all of these protections immediately, not starting sometime next year. Neither bank has addressed the issue that the overdraft fees they charge are just too high. Neither bank has offered to provide point of sale disclosure for consumer who choose to keep overdraft protectiom-- customers should be warned when purchases or ATM withdrawals could overdraw their account.
Finally, while these are small steps forward at two of the nation's largest banks, good consumer protections should apply to all Oregonians. USBank has a larger market share than either Chase or Bank of America here in the state, and they have yet to reform their abusive, unfair overdraft policies. The same goes for Wells Fargo and many other big banks here in Oregon.
The most important thing Congress can do right now to protect consumers from these and other financial industry abuses is to establish President Obama's proposed Consumer Financial Protection Agency. The agency would have the authority and flexibility necessary to enforce real consumer protection, and so help prevent another economic crisis like the one we face today.
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