Many banks rack up fees by counting the biggest transactions first and enrolling customers in overdraft programs without their knowledge or consent.
One mistake could cost Trina Lee her Christmas.
Things have been tight for the Arizona-based nursing assistant since she got laid off two years ago and suffered some medical problems that have kept her from working full-time. As a result, she's become meticulous about watching her bank balance, which is often uncomfortably close to zero.
Earlier this month, she was feeling temporarily flush because she has prepaid most of her bills and figured the rest of her December income from child support and a part-time job could be spent on Christmas gifts. So she splurged on a $65 meal with her mom and brother, knowing that it was possible that this one meal could overdraft her checking account. Debit card transactions like this one require a signature and usually take a couple of days to clear, so Lee monitored every purchase after that, copying her daily bank account activity into a computer file each night to make sure she wasn't stepping over the line.
On Dec. 7, the night before her son's child support payment was due, she breathed a sigh of relief. At 10:45 that night, the dinner charge still hadn't posted and wasn't even listed as pending. After subtracting every pending payment, she had precisely 16 cents in her checking account. She went to bed imagining that she'd dodged an overdraft because she would get a $156 payment in the morning.
She got a rude awakening.
Before crediting her account for the child support payment, Chase bank not only put through the dinner charge, it also "reordered" every one of her pending transactions, turning one potential overdraft into four. The mounting overdraft charges of $35 each then triggered two additional overdraft charges for small debit transactions that Lee did that day, before she'd realized that her account had gone into the red.
In total, Chase levied $210 in overdraft charges -- $175 more than Lee imagined was possible.
"I accept responsibility for one overdraft," said Lee, a 29-year-old mother of two. "But they created the rest of these. It's really frustrating."
Bank spokesman Greg Hassell said Chase would not reverse these charges because "Ms. Lee intentionally overdrafted her account, knowing she had insufficient funds for all her purchases."
The fact that Chase in effect created five of the six overdrafts by changing the order of her transactions -- deducting the biggest items first to drain her account faster -- is simply current policy, the spokesman said.
The policy is common among big banks, industry experts say.
Bankers justify the policy by saying that it ensures that big, important transactions -- such as mortgage payments -- are paid first and thus have a lower chance of bouncing. Critics, however, say that argument doesn't hold water because the banks pay all the transactions regardless. In that case, changing the posting order simply magnifies the effect of a single mistake by turning a single overdraft into several, just as it did with Lee. Indeed, an FDIC study completed late last year found that policies like this had caused overdraft fees to quadruple in just two years, ringing up some $24 billion in revenue for the banking industry in 2008.
Industry consultant Michael Moebs estimates that overdraft charges have continued to soar and are likely to account for some $38.5 billion in revenues this year, with roughly 90% of those fees being paid by just 10% of bank customers. Worse, the FDIC study found that most bank customers had no inkling they could suffer an overdraft charge in advance. Why? They'd been automatically enrolled in an overdraft program without their consent or knowledge.
Consequently, millions of bank customers used debit cards for small purchases, assuming that the swipe would be rejected if they didn't have sufficient funds. They learned later that, say, a $2 coffee cost $37 because it triggered a $35 overdraft fee - a practice so common that many experts now say using a debit card has become dangerous.
The Federal Reserve announced this year that it will require banks to get advance permission before enrolling customers in overdraft programs, but the rule doesn't go into effect until July. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.) have also introduced legislation demanding that banks stop this practice of systematically "modifying posting order" and post transactions chronologically.
The overdraft legislation, which has been temporarily stalled while congressional leaders work on health reform and other financial regulations, would also require that fees bear some relationship to the cost of processing an overdraft; prohibit enrolling customers in an overdraft program without their consent; and limit the number of overdraft fees a bank could charge to a single consumer in any given month or year.
"To actively reorder checks to cause a tidal wave of overdrafts is unconscionable," said Ginna Green, a spokeswoman for the Center for Responsible Lending, which has been pushing for the legislative fix. "This is exactly why we still need legislation."
In the meantime, several banks including Chase have announced they will voluntarily revamp their policies.
Chase's new policy, spokesman Hassell said, will eliminate changing posting order the crux of Lee's complaint.
It will also reduce the maximum number of overdraft fees the bank would charge in a single day, reducing it to three per customer from six under current policy, and it will eliminate fees for overdrafts of $5 or less. Any of those changes would have dramatically helped Lee. Unfortunately, none has been implemented to date. The legislation is expected to be voted on early next year. Chase's policies have an amorphous starting date -- "in the first few months of 2010," according to Hassell.
In the meantime, Lee and consumers like her are out of luck.
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