Last night I watched PBS Frontline's excellent piece The Card Game (which is available for viewing online if you missed it). Today I watched a replay of the recent (17-Oct-2009) hearing hosted by Senator Christopher Dodd (D-CT) on the topic of protecting consumers from abusive overdraft fees (also available for online viewing).
Let me just say that for as much as I have been aware for a long time that there was a problem in this area, the magnitude of the problem continues to stun me. Moreover, what especially caught my eye in these two programs is the brazenly deliberate nature of the acts taken by the many major companies doing this.
I was amazed in the Frontline report to hear it explained that the reason that the banks refer to the practice of overdraft fees as a “non-contractual courtesy” was to dodge the oversight that would come if it were actually agreed to and requested by the customer, since then it might be classified as a loan. That would, in turn, cause a lot of loan-related protection mechanisms to come into play. But through this calculated dodge, banks are able to fly under government oversight radar.
Testimony suggested other related problems, such as someone making a payment “on time” but in a situation where the contract with the bank allows them not to credit the payment right away, having the bank wait 10 days, and then having it observe that the payment is late. In general, banks are increasingly willing to re-order credits and debits in their own favor, trying to maximize the number of overdraft fees. They also exploit loopholes allowing them to add additional interest charges even if notice has not been affirmatively received by the consumer.
And the banks do all of this without a formal agreement. This makes complete nonsense out of the notion of “credit limit” and it blurs the line between credit cards and debit cards. It used to be that the advantage of a debit card is that you could not overdraw your account, but because banks have decided it's better to let you overdraw and then to charge you money for the “courtesy,” there is no longer any such protection.
Overdraft fees can be as small as a couple dollars, and yet can require payment of in the tens or hundreds of dollars within a matter of days or weeks. If required to disclose the terms of these loans (and they are loans), the APR they would have to disclose would be over 3000%, putting payday loans (which offer interest rates down in the “low” 300-800%'s) to shame. This at a time when those able to get loans directly from the US government are paying low single digits, almost 0% in some cases.
Michael Calhoun, President of the Center for Responsible Lending, testified at the recent Senate hearing, saying that “line of credit” products from banks are disappearing from the market because they aren't as lucrative as the automatic loans that come by allowing people to overdraw their account and then applying these fees. He quoted a testimonial from a banker for overdraft programs as saying, “If I had two more products like this, I could quit making loans altogether.”
So while the amounts of individual overdrafts may be small, the impact on the US consumer is not by any means small. Bloomberg.com, in a 12-Nov-2009 article, cites research by the firm Moebs Services Inc. in saying that last year lenders collected almost $37 billion in overdraft fees last year. The numbers on this seem to vary depending on source, or perhaps based on the time interval, since it's a statistic in (upward) flux. In the Senate hearing, Dodd suggested $24 billion were paid in such fees this year but noted that the Financial Times recently reported that American banks stand to collect a record $38.5B this year—almost double what they did last year, and probably not coincidentally at a time when the economy is not performing well.
Let's round that to $35 billion because there are about 350,000,000 people in the US. So if $35 billion sounds impossibly hard to understand, then understand it as an average of $100 for every man, woman, and child in the United States. Senator Dodd cited the FDIC as saying 14% of account holders are paying 93% of that, and that these are people who are already in dire economic situations. So let's assume 4 people to a family, for round numbers. That's $400 per family on average, but if only one person in seven (14%) is paying most of that, then—if I got my math right—that's really more like one person in seven paying about $2600 per year of that. No wonder people can't dig their way out once they fall into this trap. That's all interest payment, and possibly on some very tiny principal, and it underscores the point I made in my article Credit Cards: A Tax on “Being Poor.”
The FAIR Overdraft Coverage Act (S.1799) is not a complete solution, but is a step in the right direction. It's narrowly targeted to overdraft fees and seems to neglect the issue of other fees that might end up getting substituted. But it seems to me it would be a big help. Contact especially your senators, but also your representatives, to let them know you think this is a good idea.
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A follow-up to this article was posted a day later:
Teetering on the Brink of Moral Bankruptcy
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Comments
The Old Testament says " If a man be found stealing any of his brethren of the children of Israel, and maketh merchandise of him, or selleth him; then that thief shall die; and thou shalt put evil away from among you."
But really, that's what has happened. We have allowed a system to develop in which our fellow citizens have been made into merchandise, in effect sold into a kind of financial slavery, exploited as much as possible, treated most unjustly, and ultimately turned into a commodity rather than persons, by evildoers (another quaint term) who seek to suck the very last dime out of them.
Dude, you write such good posts, and this is no exception. Whether or not I agree with you, you always explore substantive and important issues. I look forward to the next part.
Mishima, I hope you'll check back. I think the post will give you a framework to continue your remarks from here. Although I come at the matter from a non-religious point of view and I don't place any specific stock in the mysticism of the Bible per se (in this case it's a bit dramatically bloodthirsty in its presentation), so I might word it differently if I were writing it, I'm quite comfortable with the fact that we each have different ways of verbalizing ideas, and I basically agree with the thrust of what you're saying about the need for spirituality/ethics/morality. God or not, “sinful” is too good a word to avoid using it for what's going on here. Thanks again for stopping in to contribute. :)
It's kind of a separate question about how moral the bank's actions are, and whether lots of well-meaning people are getting caught up in something they don't understand, and whether the government could make society better by providing protection for these people who aren't protecting themselves.
But for an individual, you should be able to opt out of this whole mess.
The solution is not to squeeze the balloon again at the latest bulge. The solution is to pop the balloon altogether, by doing away with the idea that making money just from manipulating money is a legitimate activity. A democratically planned economy would focus the allocation of resources - including surplus capital - into the production of goods and services to meet human needs, not the facilitation of greed and usury.
A story is told in the testimony of some kid who overcharged a card by a small amount ($15 or some such) and was whacked with a bunch of fees. He paid the overdraft, but the money was taken for fees and his account continued overdrawn, racking up more fees. The parents said it was up to about $500 before he had it under control. If you think this happens by accident due to people not being vigilant, you're just wrong. These are traps laid specifically by the credit card companies.
These companies did away with for-fee checking because they knew that they could make more by sucking people into this structure and then whacking them with fees. That's not an honest or reasonable way to do business. It also may or may not run afoul of a place where antitrust legislation but it ought to because it's an example of a place where the public good—a certain efficiency of reasonable services at lowest cost—is not being achieved. It's not even being tried. There is no incentive to try.
In September 2006 we had a terrible flood of hot water in our downstairs rooms while we were away. It caused tens of thousands of dollars of damages because it was undiscovered for over three days and mold and mildew started. The steam reached every room in the house, rusting things you would never imagine rusting, ruining or framed artworks. We had an overwhelming number of expenses. Because of the way the bank timed deposits behind overdraft fees we got dinged over $350 for less than $35 in purchases. If you buy a small packages of screws at the hardware store they can end up costing $37.82. A Starbucks cost $38.50. Wells Fargo Bank acted like they were doing us a favor when they reversed three $35 overdraft fees out of ten even though it was their prioritization of our deposit behind our expenses from the same day that was the cause of the overdraft in the first place.
On the same day as we made those little charges for a variety of small things we needed to get our house up and running again, we deposited a check from our insurance company for over $12,000 as I recall, but the bank entered the information in the order that was convenient to making them the most money, and even when I pleaded with them and gave the facts of what had happened, they were snotty and acted like I had been irresponsible. They were completely smug asshats about it.
While normally you might be able to keep track of your expenses fairly closely, there are circumstances where the sheer volume of transactions that one must make would hide the actual balance in your account. Not everyone keys a charge into an account immediately, so checking your balance doesn't always help, and the banks have disclaimers in place about not relying on the balance that they show. The smug things that people say about managing money don't come close to protecting those who don't know wiki from a wicket or whatever else they might have checked. These charges attack the least able to afford it and take advantage of the underinformed and the most undercapitalized.
Normally, we pay every debt on time and we don't overdraft our account, but unusual circumstances led us to experience what the consequences are for those who the banks find easy prey. I don't like being victimized by corporate bullies.
Excellent writing as usual Kent.