Posted by: The Last Liberal Gwinnettian | August 20, 2009

Americans Bailed Out the Banks, Then the Banks Screwed Over Americans

Most states have laws against usury. In recent years, they have cracked down on title loans, payday loans, and various other predatory lending practices. Yet there is one industry that has managed to escape usury laws, and that needs to stop: Banks.

 In the past year, some of the nation’s most prominent banks have had to be bailed out in order to keep them from bankruptcy. At the time, I agreed that allowing our banks to collapse would be a bad idea. Then there was the scandal regarding executive bonuses. That ticked me off, but seemed like a comparatively minor issue considering that various economic crises going on at the time. Besides, those bonuses didn’t really take money directly from my pocket. Then, just last week, I saw this headline: “Bank overdraft fees to total $38.5 billion.” Upon reading the article, I learned that 90% of this record breaking amount was paid by just 10% of consumers. As one of those 10%, I got really mad; so, I did what I usually do when a situation like this arises and did some research.

 There are a number of interesting articles out there about how banks make their money off of overdraft fees. The articles themselves tend to side with the consumer in arguing that the methods that banks use to charge overdraft fees are ridiculous and unfair. However, it’s the reader comments at the bottoms of the articles that I want to address first. One of the common comments on these articles goes like this: “If people would be responsible and not overdraw their accounts, they wouldn’t have to pay fees. Be responsible and quit complaining.” It’s a semi-valid point – yes, if I never overdrew my account I wouldn’t have to pay fees. But I’ve yet to meet anyone who purposely sits around planning ways to overdraw their bank accounts. Generally, an overdraft item wasn’t done on purpose. When you live paycheck to paycheck, and every dime that goes into your account has to go back out, accidents happen. Yes, in a perfect world everyone would easily be able to live within their means and no one would ever overdraw their accounts. But we live in a world in which a large percentage of the population is unemployed, under-employed, or broke for any of a variety of other reasons. As a result, people will sometimes overdraw their bank accounts.

 When people overdraw their bank accounts and spend money that they do not have, banks should charge them a fee. That is not the practice that I am disputing. What I am disputing are the amounts and methods of these fees.

  1.  Overdraft Fees are Usurious. Credit card companies were criticized when they drove interest rates to 30 percent or more, which led to Congressional laws mandating more fair lending practices. In many states, pay day loans have been outlawed because they essentially charge roughly 300 percent interest. Yet, according to a 2008 study by the F.D.I.C., overdraft fees for debit card purchases can carry an annualized interest rate of greater than 3,500 percent. The definition of usury is “the lending of money at an exorbitant rate of interest.” Usury is immoral and illegal. If this isn’t usury, then I am at a loss as to what is.
  2. Despite What Banks Claim, Overdraft Protection Programs Are Not a Customer Service. Once upon a time, roughly a decade ago, banks didn’t generally provide overdraft protection. If your account had insufficient funds for a transaction, the debit card was declined and no fees were incurred. Now, the bank approves the transaction and charges a heft penalty fee. There is no alarm that tells the customer that he has just paid $38 for a gallon of milk – not until he receives his bank statement. Some bankers claim that the system benefits debit card users by allowing them to spend money when they don’t have it. Perhaps some bank customers might agree. I’m sure that somewhere out there, there are people who prefer to be able to float on overdraft protection until pay day despite the fees that they incur. But I feel that it is safe to say that most would prefer to be informed, in real time, that they have no money and avoid overdraft fees. At the very least, this “customer service” ought to be optional. But it’s not. Banks automatically enroll customers in overdraft protection programs, and the programs are not remotely transparent. Then, once you’ve incurred those fees, there is no way to opt out of the program. Perhaps I’m wrong in thinking that a customer service should be up to the customer…
  3. Banks Purposely Pay Overdraft Items to Maximize Fees. Here’s a bit of information that is probably located in the fine print of your bank account paperwork (I say probably because, like most account holders, I didn’t read all the fine print when I opened my basic free checking account). When you overdraw your account, the bank pays the big items first, and the small items last. Consider this scenario: You have fifty bucks in your bank account. On the day before pay day, you pay your $35 cell phone bill online. Then you buy a $6 fast food dinner and a $1.50 bottle of Coke at the gas station. Then, thinking that you have a little more in your account than you actually do, you put $10 worth of gas in your car. You have overdrawn your account by a total of $2.50. Oops. One would think that you would pay a $35 overdraft fee on that $10 purchase that pushed your account over the limit, bringing your account to negative $37.50. Nope. Your bank paid the cell phone bill, then the gas purchase bringing your account to $5. THEN they paid the $6 fast food purchase, bringing the account to negative $1 and charging you a $35 fee. So your fast food really cost you $41. THEN they paid the $1.50 Coke purchase and charged you ANOTHER fee, so that Coke cost you $36.50. And now your account is negative $72.50. Nifty, huh? Yeah, I didn’t think so either when I once wound up paying $245 worth of fees when I overdrew my account by $35.

 Representative Carolyn Maloney, a New York Democrat, said, “Consumers are currently enrolled [in overdraft protection programs] at many major banks without their consent or knowledge and not even allowed to opt out once they’ve been badly surprised by excessive fees. It’s an issue ripe for congressional action.” Yes, it is. If the Fed won’t act, then Congress should. In an economy in which jobless claims and unemployment keep rising, and average Americans are having trouble keeping the roofs over their heads, it is unfair, immoral, and bad business to force people to pay such excessive fees. It is usury, plain and simple, and it cannot be allowed to continue.

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