In August of 2010, banking overdraft fees finally went away! Sort of. The Federal Reserve passed a new set of regulations which prohibited banks from charging any customers a fee if they’d tried to overdraw their account with an ATM card or debit card. But that was only the beginning, according to an article in the Los Angeles Times. The Federal Deposit Insurance Corporation has also proposed an even stricter set of regulations on banks, which would ultimately offer customers even more protection.
Though banks are banned from charging the fees, there’s still a glaring loophole. Banks can still charge an overdraft fee if the overdraft is caused by a check – or if it’s caused by an automatic withdrawal. Now there’s concern that the banks are using this loophole to hit customers with more overdraft fees. Some banks have admitted they have a standard policy of cashing the largest checks first. But obviously, if a customer ends up overdrawing their account, this policy means a greater likelihood that there’ll be more individual overdraft charges for all the smaller transactions that occur on the same day!
This policy is already the subject of a class action lawsuit, and the FDIC is urging banks to perform a review. The FDIC has also proposed reducing all overdraft fees for checking accounts and automatic withdrawals. But check-cashing policies have an even bigger glitch, and it’s one that could affect the solvency of banks. The FDIC is also worried about the “automatic approval” that’s encouraged by their ability to collect overdraft fees, and the way it could ultimately reduce the confidence people have in banks!
Here’s the problem. More than 90% of all the overdrafts each year come from habitual offenders – people who overdraw their accounts again and again, at least five times in the same year. In effect, these are people who are receiving an unapproved loan from the bank, though they’re getting it at a very high interest rate. This is obviously bad for the consumer, but it’s also bad for the bank. Banks are required to know how much money they have on their books – but how can they do that if these customers are continually overspending?
But whatever new changes are coming in the future, banks are already eliminating many of their traditional overdraft fees. Now if you open a new account, the bank’s representative will clearly explain to you that they have two choices available for your account. Yes, you can continue having the bank cover your cashed checks – and then charging you a premium for the service. But you can also insist that the bank simply decline the overdrawn transaction – and avoid charging you any overdraft fees at all!