Earlier this year, Congress took major steps to limit the way banks can raise rates, change terms and profit from consumers who use credit cards. Lawmakers should take similar action regarding bank overdraft fees.
In recent weeks, some banks have scaled back fees and the number of times they say they will charge consumers for overdrawing their checking accounts, but Congress needs to pass laws so that banks cannot reverse their voluntary actions and to prevent future abuses.
Many consumers overdraw their checking accounts. It happens. People forget exactly how much they have in the bank, they overlook a purchase when balancing their checkbooks, they lose track of spending on a busy day of errands or an unexpected charge sends their account balance into the red.
When this happens, banks gladly pay the retailer for you — but they charge you a fee for this "overdraft protection." The average bank overdraft fee nationwide is about $33.
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The worse part is that if you don't realize that your account is overdrawn and keep using your debit card or checks, you incur an overdraft fee for each and every subsequent transaction. This can get expensive very quickly.
The son of a colleague at the Star racked up $360 in overdraft charges over one weekend. KGUN News, Channel 9, recently profiled a Tucson man who incurred eight overdraft charges — at $35 a pop, for a total hit of $280 — when he mistakenly overdrew his checking account.
Overdraft charges quickly turn small items into expensive purchases. A gallon of milk or a loaf of bread, once the overdraft fee is thrown in, can cost $35.
It's no surprise that banks love overdraft fees. The Associated Press reported in September that banks will rake in about $39 billion — yes, with a "B" — in overdraft charges this year. That's up from about $11 billion in 1992.
Kelly Griffith, deputy director of the Southwest Center for Economic Integrity, a Tucson-based consumer advocacy group, says that in some ways overdraft fees are worse than payday loans. If overdraft fees are calculated as short-term loans, the interest rate comes to about 3,500 percent annually.
"They make payday loans look good," Griffith said. "The payday lenders have used bank fees in the past to defend their usurious practices, and it isn't too far from the truth. But from our perspective, two wrongs don't make a right."
Griffith said overdraft fees are essentially unauthorized loans.
"They give you a loan at a huge interest rate that you didn't apply for and didn't approve. The bank just decided to give it to you," Griffith said.
Banks also make sure their customers pay as many overdraft fees as possible through a practice called "transaction sorting."
This is how it works. Say you have $500 in your checking account. In the course of a day, you make debit-card purchases of $15, $30, $5, $55, $10 and $450, in that order. You may think you'll be hit with only one overdraft charge because only your last purchase put you in the red.
However, through transaction sorting, banks can debit the transactions from your account in whatever order they want, and it's usually the order that overdraws the account the fastest. In this case, they would charge the $450 purchase first, then the $55 to overdraw the account and then the rest. The consumer would be charged for five overdrafts.
Banks defend this practice by saying it's a courtesy to the consumer because the large purchase is usually the most important. It likely is, but transaction sorting seems to be nothing more than a ploy to maximize profits on the backs of those who can least afford it.
So what can be done?
Congress is considering two bills — H.R. 3126 and H.R. 1456 — that would protect consumers from rampant overdraft fees, including the possibility that people would have to specifically ask to be enrolled in overdraft protection.
Some people, we believe, would rather simply have their debit cards rejected if they are out of funds. It's embarrassing, for a moment, but much less expensive.
We encourage Arizona's congressional delegation to support these bills to give consumers who overdraw their account fair treatment.
Congressional contacts
Rep. Raúl Grijalva D.C: 1-202-225-2435; Tucson: 622-6788 Web site: grijalva.house.gov
Rep. Gabrielle Giffords D.C.: 1-202-225-2542; Tucson: 881-3588 Web site: giffords.house.gov
Sen. Jon Kyl D.C.: 1-202-224-4521; Tucson: 575-8633 Web site: kyl.senate.gov
Sen. John McCain D.C.: 1-202-224-2235; Tucson: 670-6334 Web site: mccain.senate.gov
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