If you’ve had problems managing your debit cards in the past, racking up those $30 or $35 overdraft fees every time you overdrew your account, you might be getting a call from your bank or credit union in the next week or so. That is, if they haven’t already called you.
A new study from the Center for Responsible Lending (CRL) raises the alarm that those who can least afford to pay overdraft fees are likely to be targeted by banks to sign up to pay, you guessed it, overdraft fees.
As of Aug. 15, 2010, current debit card users can no longer be charged overdraft fees unless they sign up (called “opting in”) to an overdraft protection program. Overdraft programs allow you to spend more than you have in your account, but charge high fees for the privilege. Depending on how long the account remains overdrawn and how many times you overdraw, the fees can add up to a lot of money pretty quickly. (See this chart for a list of the total costs by bank.)
Previously, banks and credit unions signed account holders up for these programs without their knowledge. New debit card rules issued by the Federal Reserve require banks to get customers to opt in to overdraft programs for ATM and one-time debit card purchases. So, over the past several weeks, some lending institutions have been sending letters and e-mails and posting messages on their websites and on ATM machine screens urging customers to sign up for overdraft protection.
According to CRL, several financial industry marketing firms have advised banks and credit unions to aggressively target chronic overdrafters. Why? To keep a significant banking industry revenue stream flowing. One estimate puts revenues from overdraft fees at $37 billion in 2009. Unfortunately, going after overdrafters puts families who’ve clearly demonstrated that they have problems managing money on even more precarious financial footing.
Some lenders, following the advice of the marketing firms, may even call debit card users, likely emphasizing the point that their purchases will be denied at the cash register if they don’t sign up for overdraft protection. According to CRL, banks may offer gifts or even cash if you respond to the offer.
Low-income and minority groups most vulnerable
As the CRL report notes: “Since research has repeatedly found that overdraft fees have a disparate impact on lower-income consumers and nonwhite consumers, targeting practices such as these raise fair lending concerns under the Equal Credit Opportunity Act (ECOA). In addition, encouraging high levels of unsustainable overdraft debt and an overreliance on unfairly high-cost fees from vulnerable accountholders poses safety and soundness concerns for financial institutions.”
This debit card overdraft problem is eerily reminiscent of the subprime mortgage fiasco, which nearly imploded the U.S. economy in 2008. Mortgage lenders made unsuitable loans to low-income families knowing full well they didn’t have the means to make the payments. Unfortunately, there was a financial incentive for everyone along the mortgage lending pipeline to continue to issue subprime loans.
Now, with debit cards, there is a financial incentive for banks and credit unions to sign a certain segment of debit card users up for overdraft protection services — so that the lenders don’t lose a large source of revenue. The more customers screw up their accounts, the more overdraft revenue a bank collects. All sorts of alarms should be going off here.
Note: Not all banks are charging debit card overdraft fees. This month, Bank of America will begin to decline transactions when there isn’t enough money to cover the purchase (and customers have not opted in to an overdraft protection program). Citi has a long-standing policy against charging overdraft fees. According to the CRL report, USAA and INGDirect have never allowed overdraft fees to be assessed. In March, Chase said it would not charge overdraft fees for purchases under $5.
These banks represent some of the biggest players among debit card issuers, but there are scores of other financial institutions issuing cards. Hopefully, more of their competitors will follow their lead and drop the fees.
Hang up the phone
My advice if you get a call from your lender about overdraft protection? Hang up the phone.
Repeatedly overdrawing your account is a problem — a sign that customers are not good money managers, can’t keep track of what they spend or are deliberately working the system to take advantage of the lag time in processing electronic payments.
Opting in to overdraft protection means you shred the safety net put in place by the Federal Reserve to help protect you from abusive overdraft fees. Opting in means your $10 or $17 debit card purchase could end up costing you an additional $35 or more in overdraft charges.
If you do nothing (meaning don’t opt in), your purchases and ATM withdrawals may be declined if you don’t have enough money in the account to cover the transaction. This will force you to keep track of your money. There are several tools available now to help debit cardholders better manage their money, including e-mail and text alerts and online banking.
See related: Video: Should you enroll in overdraft protection?, Consumers to Fed: Stop overdraft opt-in scare tactics, The high cost of opting in to overdraft fees