How to Get Out of Debt With the Get Out of Debt Guy » overdraft charges

Banks Target MVBs, Most Vulnerable Bankers, to Keep Overdraft “Protection” Before Regulation E Comes Into Effect

Amanda Miller — Thu, 12 Aug 2010 22:22:48 +0000

Overdraft “protection” as we know it in America will make a positive change August 15, 2010. Considering to protect something means to cover or shield from exposure, injury, damage, or destruction, overdraft “protection” is anything but that. I view it as one of those “convince” fees. Let’s just call it what it is: a service charge.

Most banks charge a flat fee per overdraft incident via debit cards averaging at $34 while the average amount an account is taken overdrawn each incident is $17. Currently banks are extending the amount overdrawn and in most instances charging a fee twice as much as the transaction.

Just two years ago banks were raking in nearly $24 billion in overdraft fees annually, almost half (40%) came from debit card transactions.

This year the Federal Reserve has implemented Regulation E for debit card users that actually provides a real sort of protection and gives them the option to avoid overdraft charges and fees if they choose to and have their card declined instead of the credit extended on the account. The Center for Responsible Lending (CRL) recently released a Research Brief entitled “Banks Target, Mislead Consumers As Overdraft Deadline Nears“.

The topic of protection for checks or electronic automated clearinghouse (ACH) payments, which also yield high fees for insufficient funds, have yet to be discussed and will not fall under this new rule.

Reactions of financial institutions to the new overdraft rule have been widely divergent. Some banks have ended overdraft coverage on debit cards entirely, which we strongly commend. Others have lowered the amount of their overdraft fees on small transactions, while the remainder have kept their policies largely the same.

One survey found that 14 percent of the 2,000 responding banks and credit unions had decided to no longer allow consumers to overdraw their account using a debit card.

Bank of America— the nation’s largest debit card issuer—is among those who have chosen to simply decline debit card transactions. A representative from Bank of America noted that customers demanded this change, asking the bank to serve as a partner in helping them manage their finances by not allowing them to overdraw through a debit card. With this policy change, Bank of America joins Citibank, USAA, and ING Direct, among others, who have never allowed overdraft fees to be assessed on debit card transactions.

The same survey found that 18 percent of the financial institutions reported lowering their overdraft fees to make these programs more attractive to customers. A survey of community banks found that nearly a quarter planned to reduce their overdraft fees on debit card and ATM transactions by ten percent or more, in an effort to make their debit card overdraft coverage more palatable. U.S. Bank is one example of an institution that has reduced the amount of its overdraft fees on small purchases. – Source

Banks are scurrying at the moment to hook in their MVBs (most vulnerable bankers) to keep their overdraft “protection” the way it is. A study found that in FDIC-regulated banks a quarter of all bank accounts will go overdrawn each year but only about 5% of accountholders will go overdrawn 20 or more times, resulting in over $1,600 in fees each year. “This finding is consistent with CRL research finding that 16 percent of accountholders account for 74 percent of all overdrafts.” That being said banks are trying to keep these customers engaged in the same “protection” they’ve had so they can still make their profits in these fees. For example, there is a credit union in Iowa offering “incentive-based pay to employees who can identify accountholders who have overdrawn their accounts when they walk into a branch and then convince them to opt in to debit card overdraft coverage”.

Given the concentration of overdraft revenue derived from those who overdraw frequently, several industry consultants have urged banks to prioritize the marketing of debit card overdraft coverage to these customers. One consultant even suggests offering a gift or cash offer to customers with four or more overdrafts annually who opt in, noting that this and other strategies will result in “[s]natching bank revenues from the jaws of Regulation E.” The figure below includes the statements of four consulting companies offering opt-in marketing strategies to financial institutions: – Source

What is the most disconcerting is that these accountholders falling into the red and going overdrawn are the most vulnerable of accountholders and it seems that some banks and credit unions are preying on them at the moment for their own financial gain not keeping the best interest of their customers in mind. A survey taken in 2006 highlighted that people that are most likely to go overdrawn are “lower-income, single, nonwhite, and rent their homes”. That being said it is important to be educated and aware of the Equal Credit Opportunity Act (ECOA) to make sure no one is being discriminated against. To learn more please visit the FTC’s publication “Equal Credit Opportunity: Understanding Your Rights Under the Law“.

The original CRL publication reports, “Charging large fees for typically small debit card transactions erodes these consumers’ finances further. In a recent article, FDIC Chair Sheila Bair noted that this form of overdraft coverage is ‘…not appropriate for consumers who are having trouble managing their finances.’” This may drive vulnerable consumers from the banking system all together, leading to more unbanked households.

It is said that the Federal Reserve put out a model opt-in form that describes the debit card overdraft coverage to consumers so they can make a more informed decision. It is required that banks and credit unions “largely mirror” the Federal Reserve’s form.

Information included is as follows:

a description of the bank’s overdraft policies and the types of transactions that can trigger overdraft fees;
the maximum fee that can be incurred per overdraft incident, as well as additional fees if the account remains overdrawn;
whether the institution limits the number of fees that can be assessed per day; and
lany alternative overdraft programs offered.

– Source

However key information such as taking no action (choosing not to opt in) will result in the debit card being declined at no charge and “a way for a consumer to readily compare the cost of all overdraft options before making a decision. Instead, the Federal Reserve’s opt-in form only states the following related to declined debit card transactions and alternative forms of overdraft coverage:”

CRL suggests that a simple way to present the information would be to incorporate a table that displays the cost of every overdraft option into the notice.

“The 2010 Debit Issuer Survey found that banks expect a 30 percent opt-in rate on average, although the expected opt-in rate varies dramatically by bank. Larger institutions are projecting opt-in rates of 20-40 percent and smaller institutions are anticipating much higher rates.”

The CRL’s conclusion:

“Debit card overdraft coverage is a very expensive option for consumers, with fees nearly twice the amount of credit actually extended. Consumers using their debit cards for several transactions throughout the day can incur hundreds of dollars in overdraft fees over a short period of time. Surveys conducted for CRL and others have consistently shown that the vast majority of checking accountholders would rather these transactions simply be declined for no fee.

The Federal Reserve has required that banks obtain consent to overdraft coverage of debit card transactions, but it has not addressed the cost or frequency of these fees or other abusive overdraft practices, such as reordering transactions to maximize fees. As a result, institutions have great incentive to employ deceptive tactics to pressure consumers to opt-in.

The following are our recommendations for consumers, financial institutions, and policymakers:

Consumers:

To protect your account from costly overdraft fees, do not consent or “opt-in” to overdraft coverage on your debit card. Consider lower-cost alternatives to costly overdraft fees, such as a line of credit or linking an account with back-up funds.
Consider signing up for programs your bank offers to help you monitor your account balance, such as low balance alerts through emails or text messages.

Financial Institutions:

Follow the lead of Citibank, Bank of America, and others, by simply declining debit card transactions that would otherwise result in an overdraft fee.

Only cover debit card overdrafts with fair overdraft options, such as an overdraft line of credit and transfers from savings or other accounts.

Clearly disclose comparative cost information for overdraft options, including that declined debit card transactions result in no fees.

Policymakers and Regulators:

Address continuing abusive overdraft practices, including the high-cost and frequency of these fees, the automatic repayment of the overdraft loan upon the customer’s next deposit, the re-ordering of transactions to generate more fees, and the lack of consumer consent about whether checks and electronic ACH payments are covered in exchange for a high fee.
Actively supervise opt-in efforts. Prohibit financial institutions that have engaged in deceptive opt-in campaigns from charging debit card overdraft fees; any “opt-ins” obtained by banks employing deceptive tactics should be deemed invalid.
Require an easy-to-read disclosure of the comparative costs of opting in to fee-based overdraft coverage, other overdraft alternatives, and declining to opt-in.” – Source

Personally, from the perspective as someone who used to wrestle with banks over overdraft “protection” I cannot wait for the option to opt out of overdraft coverage. There were times in my past where I made poor financial decisions and shared a joint bank account with a financially unstable person. This joint holder would sometimes run the account dry without letting me know. One time, with two small purchases totaling $7 I was hit with $77 – the original $7 and a $35 overdraft “protection” fee for each transaction. Let me tell you, my coffee, pack of gum and Snickers bar was far from valuing $77 but that was the price I paid.

I strongly encourage you to read the entire Research Brief put out by the CRL to keep yourself informed before Regulation E comes into effect August 15. Stay educated. Stay strong. Seek help.

Is There Any Way to Get My Overdraft Fees Reversed? – Sheri

Steve Rhode — Thu, 10 Dec 2009 18:56:19 +0000

From How to Get Out of Debt

“Dear Steve,

I have been charged so many overdraft fees by my bank, now I cannot pay my bills there are 1300.00 worth of fees.

Is there a way to get these reversed

Sheri”

The Answer:

Dear Sheri,

If the fees built up because your account was actually overdrawn, then your options are limited. But saying that you need to understand banks have setup a system which is likely to result in big overdraft fees. For example, they will clear the largest checks against your account first in hopes of bouncing multiple smaller items.

Some banks, not all, have said they will change their was. Don’t hold your breath for that. It will take some legislative interaction most likely.

Your options at this point are to find a way to live within your income so you can meet your current obligations and have enough extra money leftover each money to pay down the balance due.

You can always attempt to negotiate a lower amount with the bank but don’t expect them to budge much.

Do you have other debts you owe?

Once this crisis is resolved the best way to avoid this in the future is to make sure you are building a balance in your savings account or emergency fund each month. Cash in savings would have prevented the overdrafts and thus the fees. Not having money is savings essentially cost you $1,300.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Big Hug!

@GetOutOfDebtGuy

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

The Good Side of Check Cashing and Payday Loans

Steve Rhode — Wed, 12 Nov 2008 20:21:11 +0000

From How to Get Out of Debt

I’ve got to be honest with you. While the righteous scream out about check cashing and payday loan stores, I’m not sure I understand all the fuss. Sure I get the fact about fees and I will admit that I’ve seem some sleazy payday loan stores and outfits. But you know what, I’ve seen my fair share of sleazy banks and credit card companies as well.

Being a big name bank does not make it less egregious to charge someone $35 for overdrawing their account by $1. Don’t even get me started about the unit driven treatment of individual people by large Main Street banks. $3 to use a teller, please!

Banks do a good job of doing what banks do but they don’t offer all a user friendly or customer friendly service that people want and need. Check cashing stores like Mix check-cashing in Los Angles, do serve a particular market segment.

Nix Check Cashing Lobby

Nix and other similar check cashing businesses offer their customers something that most banks don’t personal attention, clear fees and choice.

Rather than be sneaky about changing interest rates, terms and magical fees; customers that use places like Nix Check Cashing know exactly how much services are going to cost. They are good and loyal customers that come back time and time again because they are treated well and the check cashing store does not force their financial products on the customer like a bank does.

Sure, a payday loan can be expensive, but so can overdrawing your bank account and going into overdraft, paying to get your utilities reconnected for a late payment or paying a steep fee and ruining your credit by making a credit card payment one hour late.

He told Lagomarsino why. A bounced check, a fee to reconnect a utility, a late-payment fee on your credit card, or an underground loan, any of those things can cost more than a payday loan. And then there are overdraft charges. “Banks, credit unions, we’ve been doing payday loans, we just call it something different,” Lagomarsino says. “When it starts to get used like a payday loan, it’s worse.”

I think we need to get off our moral horse and look at check cashing stores in a different way. These much maligned outfits are offering a service that meets the customers needs and charges a premium for risk and convenience.

If I go to a cheap neighborhood restaurant and order a steak, does that mean that I’m getting ripped off when I pay ten times the amount for a steak at an upscale restaurant? Or is that my choice?

It seems to me that the issue isn’t that payday loan stores and check cashing outfits exist. The real issue is that these companies fill a need that is not being met or unable to be met by any other business.

It might be that Nix Check Cashing might be making changes in that old paradigm. Kinecta Federal Credit Union is purchasing the Nix Check Cashing business and will continue the services it offers and introduce it’s credit union services to the check cashing customers.

Then Kinecta Federal Credit Union called with its offer. “We were trying to understand why check cashers have been successful in underserved areas where banks haven’t,” Kinecta’s president and C.E.O., Simone Lagomarsino, told me. What they concluded was that most banks simply didn’t know low-income neighborhoods or understand them. “We go in with this cookie-cutter approach: This is our branch, this is our way we do business,” she says.

And that is an excellent point, why is it that banks chastise payday loan outfits on one hand but then don’t serve or offer services to the market segment that the payday loan stores serve? You also have to ask yourself how much difference is there between a payday loan outfit that charges $22.50 for someone to borrow $150 for two weeks and a gaggle of banks that flood a nearly anonymous person with five empty credit cards with 30% penalty rates.

If you would like to read more about Nix Check Cashing and the check cashing business in Los Angles, I strongly suggest that you read the recent New York Times Magazine article that I quoted from, “Check Cashers, Redeemed.”

Debit Card Concerns. Profits Hide Truth About Your Risks.

Steve Rhode — Tue, 04 Mar 2008 15:38:21 +0000

From How to Get Out of Debt

For years banks have lied and hidden the reality of debit cards from you. What I’m about to tell you is going to sound counter-intuitive from everything you’ve been taught and believe. Here it is. Don’t use a debit card. It’s not smart financial management.

By now you’re probably thinking that I’ve lost my mind but before you judge me, do some homework. What you will find is that when using a debit card a thief has easier access to steal your money, there is a greater chance of you having your bank account drained, you have a much higher chance of incurring bank fees and overdraft charges due to point of sale mistakes, and extra money in your account can be placed off limits for days while a merchant releases or processes an authorization for a transaction.

Now, if getting smart about debit cards by reading this site doesn’t make you think, then explain away why the federal consumer protection laws are significantly different between credit and debit cards? A credit card gives you much more consumer protection and safety but the banks never tell you that. Nor does your bank tell you that they make far more on debit card transaction fees than on a credit card transaction.

People say they don’t want to use a credit card because they want to avoid debt. Well just pay the bill off in full each month or come home from shopping and send a payment off to the card. It’s the same result, you are using a financial transaction tool to make the purchase without any residual debt.

When a crook gets your credit card information you don’t have just a few days to spot the problem, the money does not come out of your checking account, you won’t incur overdraft fees from P.O.S. mistake, you’ll have many more legal protections and the credit card company staff will help you fight your battle.

Don’t laugh this off or call me crazy. Research this for yourself and see what you think.

How to Get Out of Debt With the Get Out of Debt Guy » overdraft charges

Banks Target MVBs, Most Vulnerable Bankers, to Keep Overdraft “Protection” Before Regulation E Comes Into Effect

Consumers:

Financial Institutions:

Policymakers and Regulators:

Other Related Articles to Read

Is There Any Way to Get My Overdraft Fees Reversed? – Sheri

The Answer:

Other Related Articles to Read

The Good Side of Check Cashing and Payday Loans

Other Related Articles to Read

Debit Card Concerns. Profits Hide Truth About Your Risks.

Other Related Articles to Read