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Bankers Association Claims Customers Are ‘Glad’ To Pay Exorbitant Overdraft Fees

By Pat Garofalo on October 6, 2009 at 1:30 pm

"Bankers Association Claims Customers Are ‘Glad’ To Pay Exorbitant Overdraft Fees"

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2768194208_9512c9c078_oOne of the nastier bank practices that has arisen in recent years is banks automatically enrolling consumers in accounts with expensive overdraft protection, and then charging exorbitant overdraft fees without ever letting people know that their account is overdrawn.

In theory, overdraft protection is meant to prevent a small check from bouncing — as the bank would cover the amount of the check and collect from the consumer later — but with the rise of debit cards, overdraft fees have become an easy way for banks to raise lots of cash from unwitting consumers. The standard overdraft fee now stands at $34, and banks re-order purchases — “debiting large transactions before small ones” — in order to charge multiple fees.

This is an awful mess, and according to a report released today by the Center for Responsible Lending, at least 50 million Americans overdraw their accounts over the course of a twelve month period, 27 million of which incur five or more fees. Banks and credit unions collected $24 billion in overdraft fees in 2008, a whopping 69 percent of total bank fees. Shockingly, the Center noted that Americans spend more on overdraft fees annually than they do on fresh vegetables.

You’d think these numbers might give the banks at least a moment’s pause. But the American Bankers Association (ABA) — the banking industry’s largest trade group — shrugged them off, saying that consumers are actually “glad” about being hit with overdraft fees, because they are then saved the embarrassment of having their debit card rejected:

“Clearly, consumers who pay overdraft fees are the minority, and that number is shrinking,” Nessa Feddis, ABA senior federal counsel, said in a statement in response to the study. “More importantly, most consumers want banks to pay their overdrafts so they can avoid the inconvenience, embarrassment and potential costs of having a payment or transaction rejected.”

So in the ABA’s world, consumers are actually thrilled about paying a bunch of $34 fees, because it saves them some face at the checkout counter. Not only is that a sorry justification, but it isn’t even true. 80 percent of consumers actually say that they would rather have their debit card rejected for a $5 purchase than be charged an overdraft fee, which only falls to 77 percent when the price of the purchase is increased to $40.

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Data from the research company Moebs Service shows that banks are expected to collect $38.5 billion in overdraft fees in 2009, but as Mike Lillis noted at the Washington Independent, the banks’ behavior has “caught the eye of some powerful lawmakers.” Rep. Carolyn Maloney (D-NY) has crafted a bill that would “prohibit banks from charging the fees unless consumers sign up for the overdraft protection service,” and would also “prevent banks from reordering purchases” in order to maximize fees.

Sen. Chris Dodd (D-CT) is reportedly working on similar legislation, while Rep. Barney Frank (D-MA) has said that the Consumer Financial Protection Agency (CFPA) that has been proposed will be responsible for policing overdraft fees.

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