Frequently Asked Questions (FAQ) on Excessive Bank Overdraft Protection Fees
1. What is overdraft protection?
Today, when you open a checking account, your bank will provide you with a debit card so you can withdraw money from ATM machines and purchase of goods and services at the point of sale. Banks automatically enroll customers in "overdraft protection," and many consumers are not aware that as part of the process of obtaining the debit card, they have been enrolled in their bank's overdraft protection program.
With this so-called overdraft protection, when you spend more than you have in your account, the bank will cover the purchase (up to a limit of a few hundred dollars) and then assess fee—usually around $35—for the overcharge.
2. Why is overdraft protection an issue customers should concern themselves with?
Each time a bank applies its overdraft protection, it charges a fee, usually $35, no matter how small the purchase amount.
If you use your debit card to buy your kids a $15 lunch at McDonalds, and the bank charges you an overdraft fee, that lunch will actually cost you $50. The bank won't decline the debit transaction, nor will the bank tell you that you have overdrawn your account and is about to turn your $15 lunch into a $50 expense.
A weekend's worth of small transactions can result in hundreds of dollars in bank charges.
3. Is the charging of overdraft fees by banks on customer ATM, debit and check cards a significant issue?
Yes. The collection of excessive overdraft fees impacts millions of Americans and has become a multibillion-dollar business practice for the banks.
In 2007, banks collected more than $17 billion in overdraft fees. That number nearly doubled in 2008, as more and more consumers struggled to maintain positive checking account balances. In 2009, banks are expected to bring in between $27 billion to $38.5 billion in overdraft charges from nearly 50 million customers.
4. Which bank customers are most impacted by overdraft fees?
Many Americans, from all types of backgrounds and economic circumstances, incur overdraft fees everyday. This year it is estimated that 50 million Americans will be subjected to overdraft fees.
Unfortunately, however, overdraft fees disproportionately affect the poor, who are most likely to maintain low balances. Moebs Services, a research company that has conducted studies for the government as well as banks, estimates that 90 percent of overdraft fees are paid by the poorest 10 percent of banks' customer base.
5. Is it necessary that banks offer overdraft protection?
No. Banks could simply decline to honor your ATM or point-of-sale transaction if you lack sufficient funds, or the bank could give you warning that if you went through with the transaction you would be assessed an overdraft fee. In fact, until a few years ago, most banks simply declined debit transactions that would overdraw an account.
6. What practices are banks allegedly using to increase the likelihood customers will overdraw their accounts?
Banks do not record charges and purchases on ATM or debit cards in the order they occurred. Instead, banks reorder the charges and purchases so that the largest charge or purchase is the first one paid by the bank. This practice usually increases the number of times a customer will incur an overdraft fee, and thus increase the amount customers in overdraft fees.
In addition, it has been alleged that certain banks deducts the cost of purchases made on debit cards from the balance of the checking account before they credit deposits made on the same day, again increasing the likelihood the account will become overdrawn.
7. Can you provide an example of how the recording of withdrawals or purchases can lead to multiple overdraft fees?
Yes. For example, a certified public accountant from Baltimore, Maryland, alleges that she was victimized by abusive banking practices. She was charged $148 in overdraft fees in April 2008. Most of the fees resulted from her bank's reordering of her withdrawals that took place on the same day from largest to smallest (instead of chronological order).
The overdraft was caused by a mortgage check that the bank rejected the very next day. This caused a cascade of $37 overdraft fees on three purchases from the same day, including a $37 fee based on $12.08 debit charge for lunch. Given even tried to transfer money from savings, but the transfer was counted too late.
8. I hear the Obama Administration has proposed legislation to protect consumers from abusive practices by the banking industry?
That is correct. The President has sought a sweeping overhaul of the federal financial regulatory system to eliminate outdated rules that unfairly punish consumers.
These needed changes, if enacted by Congress, will only affect the business practices of banks after the legislation is signed into law. The legislation will not provide any relief for bank customers already victimized by abusive practices.
Only by bringing a class action lawsuit against the banks can consumers practically obtain a recovery and force the banks to return their ill-gotten profits from improper and excessive overdraft fees.
9. What is the purpose of a class action lawsuit?
A small number of consumers may file a class action lawsuit, representing all consumers that were victimized by the same abusive practices.
Each class member may have suffered limited losses and the cost of individual lawsuits would be far greater than the value of each claim. The total economic damages, however, can be significant, in the billions of dollars. The wrongdoer would have the incentive to continue its fraudulent conduct but for a class action.
Thus, class action lawsuits provide a powerful and effective means for consumers to compel a corporation to acknowledge its legal responsibilities and provide just compensation to the class members.
10. I have been assessed multiple overdraft fees by my bank. What should I do?
Please click here to contact a consumer protection attorney to submit your complaint. We will review your claim without charge or obligation on your part.