LawInfo content writers Chris Blankinship Esq. and Mark Sweet Esq. argue the legal rights of banks to charge customers bank overdraft fees.
The facts
Bank overdraft fees have long been the source of much frustration among bank customers. Recently, the Federal Reserve enacted “Regulation E” that set restrictions on when and how overdraft fees may be charged, and the amount chargeable. In the past, if you overdrew your account using an ATM card, your bank might automatically charge you a fee of around $30. Under the new rules, whenever you sign up for a new account your bank is required to ask you whether you would like to “opt in” to an overdraft protection plan. If you choose to be covered, your bank will still be able to charge you overdraft fees. However, if you choose to opt out, any attempts you make to overdraw your account using an ATM card will be denied and no fee will be charged. These new rules do not apply to checks or automatic payments.
Mark’s argument in favor of increased regulation to limit overdraft fees
Most of us have been in a business and seen a sign that says “all returned checks subject to $20 return check fee” or something to that effect. What does this really mean? If we write a check for a certain amount of money, but don’t have enough in our account, that check is returned. However, many times the bank will also charge you an overdraft fee, since you are trying to “draft” (take out) more money than you have in your account. Not only is this situation embarrassing, but it could end up costing you quite a bit of money. First, you have the amount you wrote the check for, plus a returned check fee, plus an overdraft fee. For most banks this overdraft fee is $35, but the overdraft is usually $20 or less. So, we have a $20 check, a $20 returned check fee and a $35 overdraft fee….$75 for a $20 bill. Now factor in the embarrassment of the business calling you to say that your check bounced and you owe them money and a potential blemish on your credit report because of the bounced check. Yikes!!
Now consider that most of the people who are suffering from these excessive overdraft charges are those who can least afford it, the Center for Responsible Lending states that, “those with frequently overdrawn accounts are among the most financially vulnerable. They tend to be lower-income, single and nonwhite, and rent their homes.” What does this mean?
This means that Gordon Gekko is still alive and well today (outside of the sequel to be released soon) making money off of everyone and anyone, “Greed is Good” indeed. In 2008, the banking industry made roughly $35.4billion dollars in overage fees; in 2009 it upped that amount to $37.1billion dollars. These fees are being collected from those least able to afford it. Recently, a court in California agreed, finding several banks guilty of “gouging and profiteering” from consumers and forcing the banks to pay a $203 million dollar penalty. This prompted Wells Fargo to declare that the sky is falling and they would lose at least $500 million in the last final half of 2010 (http://www.lawyersandsettlements.com/articles/14743/excessive-bank-overdraft-fees-16.html)
Of course this isn’t the end of overdraft fees. Not only are banks offering “overdraft fee protection” which, for a fee, will pull money from a different account to cover your overage. The fees for this “protection” range in fees, Bank of America will pull from an account for you, but charge you the amount you over drafted by, minus $10 dollars (if you overdraft for $17, you would “only” be charged an extra $7). So not only are banks still making money on these overdraft fees, but they are almost guaranteeing that the money needed will be available (since it is being transferred from another account). No risk, all reward, who wouldn’t want this as their business model?
However, the banks are likely to push these overdraft fees even further. If you simply don’t have enough money in an account to cover a transaction, the bank could simply “loan” you the money. Some are calling these loans “shadow loans” because they only exist for a few minutes, or at the most a few days, but charge incredibly high interest rates. One of the offending banks would process checks, debits and charges from the highest amount to the lowest, which often meant that there would be an overage for a short period of time. Of course the bank could simply overlook this overdraft until everything had been recorded, or the bank could seize this opportunity to boost their bottom line.
Chris’ argument in favor of decreased regulation, to allow banks to freely charged contractually agreed upon fees
Mark’s argument is that bank fees are high and hit the poor the hardest, thus unfair. Well, life isn’t fair. Last time I checked, if a business makes a lot of money by providing a service to customers it means they are a successful business. I know limiting profits and taxing the wealthy is a popular sentiment among the current administration, and it’s sad when this economically devastating idea is adopted by the public.
The simple fact is, bank overdraft fees are included in every contract signed by customers. The freedom of contract is one of our country’s most powerful and important legal protections. The ability to enter into contracts based on our own perceived notions of fairness and good faith allows us to maintain at least some fundamental elements of laissez-faire capitalism. When the Federal Reserve steps in to invalidate mutually agreed to contracts, they chip away at our shared freedoms. The implications are undoubtedly frightening, and the future bleaker with every “protection” enacted. What my colleague fails to articulate is the important freedoms he advocates to destroy. Under the cloak of protecting the less fortunate or disadvantaged, he advocates for limiting our individual freedoms. This isn’t hyperbole, its a shared powerful threat we must confront head-on, fight, and overcome.
Choosing a bank is a voluntary and personal decision that requires a thoughtful examination of each provider’s offerings. Not only does a person have the freedom to select any bank they want, I argue they have a duty to review their banking options and select the one most appropriate for their needs. Everyone should be aware if they frequently overdraft accounts, and should select a bank that forgives these actions without imposing fees. If these people are unable to find a bank that satisfies their requirements, they should avoid banking altogether rather then running to the Federal Reserve with their victim stories.
You know what the worst part about this whole thing is? Many people who have never had banking issues were recently sent notices explaining their interest rates would be skyrocketing. Why? Because the banks now have to find alternative methods for increasing revenue as a result of the new regulation. Wonderful! An act to protect the few who overdraw their accounts has risked a rate increase for countless more responsible ATM users. I’m not surprised. Do-gooders always seem to find a way to hurt more than they attempt to help, and this is just another classic example.
