TWO VIEWS • Are overdraft fees for bounced checks good for customers, or are they better for bankers?
If someone offered you a $20 loan with a 3,889 percent interest rate, would you take it? Most people wouldn't, but that's exactly what average Oregonians are subject to through their bank's checking account.
That's just one of the ways banks are taking advantage of their customers with their 'overdraft protection' programs. Banks are also refusing to allow customers to opt out of these programs and are manipulating the way they clear transactions so that they can charge more fees to the consumer. As Oregonians continue to endure the worst economic crisis since the Great Depression, OSPIRG set out to document the day-to-day experiences that Oregon consumers have with their banks.
Our objective was to determine what consumers are really paying to maintain basic banking services in Oregon and which sorts of fees and financial-institution policies have the biggest effect on consumers' bottom line. So we analyzed 64 checking and savings accounts offered by 10 banks and eight credit unions in Portland, Eugene and Ashland, including the largest institutions in the state.
One of the key findings of our report, 'Tricks and Traps: The Hidden Cost of Banking in Oregon,' is that overdraft protection fees continue to be a potential nightmare for consumers.
Overdraft protection programs are analogous to involuntary payday lending. An overdraft protection loan of $20 with a fee of $29.92 (the average of the banks surveyed) is equivalent to a loan with an annual percentage rate of 3,889 percent if paid off after two weeks. That interest rate is more than seven times higher than the 521 percent APRs that were common in the payday lending industry before Oregon established effective regulations in that market.
Many of the institutions surveyed also manipulate their customers' checking accounts to artificially trigger an overdraft charge. The most common method found in our survey was to clear the largest transaction first, causing more transactions to overdraw the account.
Banks claim they do customers a favor by paying the largest and presumably most important items first to ensure those items get paid. This argument is disingenuous. Banks pay all of the transactions, regardless of the order in which they are posted.
Almost every bank and credit union we surveyed automatically enrolled customers in their overdraft protection program. Of all the institutions we surveyed, 44 percent did not allow consumers to opt out of the programs. This number was worse for banks - 66 percent would not allow their customers to opt out.
Some large banks recently announced changes to their overdraft protection programs. However, most of the announced changes will not end automatic enrollment.
We should not have to stand for these kinds of tricks by the banks. The creation of a Consumer Financial Protection Agency, now pending in Congress, would have the power to regulate the banks from the consumers' perspective. It could stop these abusive practices and require banks to allow consumers to opt out of overdraft protection programs and limit the ability of banks to manipulate accounts to create more overdraft fees.
Until the Consumer Financial Protection Agency is created and begins to implement controls on banks, we have two tips to consumers to reduce or avoid excessive overdraft fees. First, complain to your bank. Often these fees are negotiable and can be reversed or reduced, especially if you can show you didn't know about the fees. Second, switch to a community bank or credit union. While most financial institutions we surveyed engaged in the practices highlighted in this report, credit unions consistently offer lower fees in nearly every fee category and are more likely than banks to have consumer-friendly policies.
Although we did not survey community banks, common experience confirms their practices also are more consumer-friendly.
The full report on hidden bank fees is available at www.ospirg.org/reports and highlights even more ways in which the banks are taking advantage of the average customer.
Jon Bartholomew is a policy advocate for OSPIRG. He lives in Northeast Portland.