In the midst of the worst recession since the Great Depression, with millions of Americans losing their homes and jobs, banks are scoring record-setting amounts of overdraft fees through the misfortune of their customers, The Financial Times reports.
American banks are on pace to collect $38.5 billion in overdraft fees this year, more than doubling the 2000 total, according to research by Moebs Services. The study also found that those charges are disproportionately effecting the least economically well-off, with 90 percent of the fees levied on just 10 percent of the nation's 130 million checking accounts.
The study also found that the median fee charged for overdrafts has actually risen for the first time in the past 40 years during a recession.
"Banks are returning to a fee-driven model and overdraft fees are the mother lode," said Mike Moebs, the company's founder, according to The Financial Times.
The fact that banks are profiting handsomely off fees that many view as excessive during a time of such financial hardship could the impetus needed to pass The Consumer Overdraft Protection Fair Practices Act through Congress.
Introduced by Rep. Carolyn Maloney (D-NY), the bill would provide consumers with protection against unfair banking practices that are designed to maximize the number of overdraft charges and gouge consumers.
Overdrafting has turned into a multi-billion dollar enterprise for the banking sector, oftentimes by means that are unethical at best. According to The Center for Responsible Lending, overdraft charges generated $17.5 billion for banks in 2007, up 70 percent in 2004 when banks generated $10.3 billion.
Banks have achieved this amazing growth in overdraft charges by automatically enrolling consumers without their knowledge, juggling transactions to increase the frequency of overdrafts and not providing any warning to customers that an account is near being overdrafted. According to the Federal Deposit Insurance Corporation, 75 percent of banking customers are automatically enrolled in overdraft protection programs.
"When overdraft fees are $30 or more, a $5 treat at Starbucks becomes a $35 shock after the overdraft fee is applied. And when multiple purchases in a day are posted in a sequence that only benefits the bank""incurring multiple fees""then something is broken in the system and must be fixed," Maloney said in a press release.
When that occurs, what the banks do amounts to a loan - with an astronomical interest rate. Typically, a $100 overdraft that takes two weeks to pay back would result in a 900 percent APR.
The Maloney bill would seek to curtail the banks' ability to unknowingly charge consumers such high fees.
First, the bill would require customer consent before banks can provide overdraft protection and would put overdraft loans under the oversight of the Truth in Lending Act. Second, the bill would prevent banks from juggling the order of transactions to increase the frequency of overdrafts and therefore maximize the amount of fees gained. Finally, the bill would require banks to inform customers that a transaction could trigger an overdraft and would provide customers with an opportunity to cancel the transaction.
"Consumers simply shouldn't be enrolled in overdraft programs without their consent," Maloney said. "Since Congress just required an affirmative opt-in to over-the-limit fees in my credit card reform law, regulations should similarly require an opt-in to overdraft fees. Whenever banks step over the line of reasonable business practices into abuse of consumers' trust and understanding, government needs to act."