Overdraft Misery Continues, Despite Fed Rules

By Laura Rowley, DailyFinance

NEW YORK (DailyFinance) -- A year after the Federal Reserve enacted new rules to rein in abusive bank overdraft practices, fees remain high and some institutions actually have slapped on additional penalties, according to a new survey of the nation's 14 largest banks by the Consumer Federation of America.

Last year, the Fed prohibited banks from enrolling consumers in overdraft protection programs unless they choose to "opt-in." Previously, most banks automatically covered payments that exceeded the account balance, charging a fee for each offense, along with additional fees if customers didn't quickly repay the loan. While the rules have helped, major issues remain, consumer advocates say.

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"The Fed's rule cut the number of people who participated in these programs, but for the people who do opt in, there's no limit on the size of fees or the number of overdraft fees (banks) can charge," says Ed Mierzwinski, consumer program director with U.S. PIRG, the federation of state public interest research groups.

The median overdraft fee is $35, unchanged from last year, and customers can incur anywhere from three -- at JPMorgan Chase (JPM) -- to 10 -- at Fifth Third Bank (FITB) -- of these fees in a single day, according to the study. In the last year, BB&T (BBT) doubled the number of overdraft fees it charges per day to eight, while Regions Financial (RF) raised its daily limit from four to six per day, the survey found. Only TD Bank (TD) reduced the number of fees per day from six to five.

How Some Banks Milk Overdrafts

In addition, the Fed rules don't prevent "reordering," in which banks pay the largest checks and debits first in order to trigger additional fees. The practice remains widespread, the survey found. Here's how it works: A consumer thinks she has $1,200 in her checking, but only has $1,100. She conducts five debit transactions totaling $180 and then pays her rent with a check for $1,000. She has overdrawn the account by $80. Two weeks later, when the consumer deposits her paycheck, the bank gets its money back.

When all six transactions arrive at the bank, the bank processes the rent payment first, followed by the biggest debit transaction of $100. Four smaller debits bounce, resulting in four separate fees for $35 each, or $140. Had the rent been paid last, the customer would only have been on the hook for $35.

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