The latest study on US bank fees has gained a great deal of media and legislative attention in the US. The study, conducted by the Center for Responsible Lending (CRL), found that financial institutions generated $17.5 billion of overdraft fee income last year – an average of $1.94 for every dollar borrowed, mostly from debit and ATM transactions made by consumers unaware they were over their limit.

 The CRL – an outspoken critic of bank fees – said banks’ overdraft practices are tantamount to predatory lending.

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The North Carolina-based CRL said its data was based on an analysis of a large, commercially available database of personal banking-account transactions documenting more than 8,500 overdrafts as well as publicly reported data on fee income for banks and credit unions.

The group’s report identified banking practices that included posting charges against a checking account quickly while intentionally delaying the posting of deposits, and lowering account balances by reordering debits to clear higher-dollar items first. The study also noted institutions that fail to warn a customer during debit-card point-of-sale or ATM transactions if they are about to overdraw their account, so they can choose to cancel the transaction.

Overall, the study showed that the 70 percent jump in overdraft fee income since 2004 is largely a result of banks’ shifting their practices away from denying debit and ATM transactions that cause customers to overdraw their accounts. Instead, banks usually automatically enrol customers in protection programmes that cover the transaction, and charge a fee of about $34 every time they cover an overdrawn transaction, the study said.

Nearly half of fees from ATM withdrawals

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Roughly 44 percent of all overdraft fees in 2006 in the US stemmed from ATM withdrawals and debit card purchases, compared with 27 percent of overdrafts generated from consumers bouncing cheques.

“Some financial institutions are hiding behind a smoke screen of misleading terms and murky practices that encourage costly overdrafts,” said Eric Halperin, director of the CRL’s Washington office.

For banks, the problem is confounded by the fact that Congress is paying close attention to the issue – and the CRL study added fuel to a political fire. The issue of bank overdraft fees has spurred ongoing congressional hearings on potential banking reforms.

Consumer advocates are using studies such as the CRL’s to push Congress to pass H.R.946, sponsored by congresspeople Carolyn Maloney of New York and Barney Frank of Massachusetts, that would make overdraft loans subject to federal truth-in-lending interest-rate disclosure laws; require written consent from account holders before banks could enrol them in overdraft programmes; and require banks and credit unions to warn customers before authorising overdrafts.

Congress hearing

Maloney, the chairwoman of the House Financial Services financial institutions subcommittee, joined Halperin’s group in the conference call before convening a hearing on the legislation, and said the study shows banks are treating their customers unfairly.

The US banking industry opposes reforms, contending the fees are necessary to cover rising costs of doing business. Testifying at recent congressional subcommittee hearings, representatives of the American Bankers Association (ABA) argued it is ultimately up to consumers to watch their account balances to avoid overdrafts. The ABA said only 18 percent of consumers had overdrafts in their accounts in the last 12 months, according to a poll released in July. Of the remainder, 80 percent did not and 2 percent said they didn’t know, according to an Ipsos telephone survey of 1,000 consumers.

Many banks argue that consumers have many options to overdrafts, such as linking their savings accounts to automatically transfer money into their checking accounts to cover any discrepancies. The service usually involves a fee, but it’s much less than what the consumer would pay for an overdraft.

Consumer advocates counter that such ‘buyer beware’ policies are relics of a bygone era. “The overdraft idea – that is based on a cheque world, which we are no longer in,” said Halperin. “The results are customers’ debit cards were turned into incredibly high-cost credit cards.” The average amount borrowed when a customer went into overdraft using a debit card was $16.46, the CRL said.

The CRL study also noted that the federal Check 21 law, which changed how banks process cheques, means that banks are clearing – or bouncing – cheques in a fraction of the time. That catches even greater numbers of customers who once could safely rely on floats, hoping to make a deposit before the cheque they wrote comes in. 

Charles Davis