New Federal Reserve rules that went into effect earlier this month prevent banks from charging their customers overdraft fees without first getting their consent.
In 2009, banks made more than $38 billion from these fees, according to industry estimates.
The changes are much-needed, especially since spending more than what you have once, which should lead to only a single overdraft fee, can often be manipulated by the banks to create a domino effect leading to multiple fees.
This can be especially devastating to a financially constrained college student whose income is often limited to pay from part-time jobs and financial aid, or drained by the cost of school.
Earlier this month, a federal judge ordered Wells Fargo & Co. to pay $203 million in restitution to its California customers after accusing the bank of manipulative practices with overdraft fees.
The judge cited the company’s practice of reorganizing debit charges so the most expensive would clear first, followed by other charges in order of price. Therefore, three small charges could lead to three expensive overdraft fees, instead of just one fee for the product that actually put the account in the negative.
However, the new rules do not apply to checks or reoccurring charges like monthly payments; it only applies to ATM and debit transactions.
But the ruling is important in that it now prevents banks from automatically enrolling customers with overdraft protection and its expensive overdraft fees.
It seems that overdraft fees are accidental, as the National Foundation for Credit Counseling estimates that 74 percent of Americans will not choose to enroll in overdraft protection, instead opting to have the transaction rejected.
It’s either sheer ignorance or unethical greed that leads banks to assume that their customers would rather pay an expensive fee on top of their purchase rather than face the temporary embarrassment of insufficient funds.
For too long, Americans have suffered the consequences of unchecked loan-sharking on behalf of banks via overdraft fees.
Hypothetically, if a person overcharges their account by $1 and are charged an overdraft fee of $30, they are essentially charged an interest rate of 3,000 percent on a bank’s $1 loan.
If someone were offering traditional loans at a 3,000 percent or higher interest rate, even with their customers’ consent, they could be charged with violating usury – or loan-sharking – laws.
The Federal Reserve acted correctly in protecting consumers from the abuses associated with unnecessary and over-burdensome overdraft fees.