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Study shows overdraft fees exploding; up 35% in just two years

 

A generation ago consumers were told that the proliferation of automated teller machines would reduce costs and increase service and convenience despite the loss of jobs and the personal touch. Instead the machines became literal money machines generating new fees and penalties. Recently financial institutions have taken corporate welfare to a new level while continuing to lavish bonuses and perks on executives in the name of retaining the ‘talent’ that failed in the first place.

 

A new study by the Center for Responsible Lending shows that banks and credit unions collected nearly $24 billion in overdraft fees last year, an increase of 35 percent from just two years earlier

 

The explosion in overdraft charges has drained the wallet of as many as 51 million Americans whose accounts become overdrawn annually. It is particularly harmful to financially vulnerable families already hit hard by the recession.

 

"Banks and credit unions have become so sophisticated in driving up overdrafts that Americans now pay more in overdraft fees every year than they do for books, cereal, or fresh vegetables," said CRL senior researcher Leslie Parrish. "These billions of dollars drained from consumers each year represent lost opportunities for families to save for a rainy day or buy necessary goods and services that could help spark the economy."

 

The most common trigger of overdraft fees are small debit card transactions that could easily be denied for no fee. This is how things used to work, and according to a 2008 nationally representative survey, it's what the large majority of people prefer.

 

Thousands of bank and credit union customers have complained to federal regulators that overdraft policies are unfair. Customers typically haven't explicitly agreed to these high-cost overdraft loan programs but are automatically enrolled by their bank. When consumers try to avoid these abusive fees, they often find themselves tripped up when, for example, institutions needlessly delay posting deposits or process purchases from largest to smallest to purposely generate multiple overdrafts. And because overdrawing an account by just a few dollars triggers a fee averaging $34, cash-strapped households--particularly younger adults and seniors on fixed-incomes--often are thrust even further into debt by this overdraft "protection."

 

The changes to their overdraft programs several banks announced last month do not address some of the most abusive features of the programs and can easily be reversed once the spotlight shifts. Reform of overdraft practices should be set into law--and soon. Policymakers should:

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.