Banks Push Overdraft Fees as Deadline Looms

BOSTON ( TheStreet) -- If you haven't opted for overdraft protection with your bank, prepare to have the service discontinued by Monday morning.

Aug. 15 is the deadline under the Federal Reserve's "Regulation E" to inform Bank of America ( BAC), JPMorgan ( JPM) or whichever bank you use to allow ATM and debit transactions that exceed the account balance to be covered for a fee. Because the deadline falls on a Sunday, anyone needing assistance from a human needs to act by the close of business today.

Most overdrafts from paper checks and automatic payments will continue to be covered for a fee, but ATM and debit transactions will be automatically denied.

This is the second phase of the clampdown on overdraft fees. On July 1, banks were prohibited from adding overdraft protection as an automatic feature on new accounts.

In the days leading up to Sunday, nearly anyone with a bank account has likely received mailings, emails, phone calls, ATM screen prompts and an in-branch hard-sell to keep them in these programs, a lucrative source of revenue for banks of all sizes. Don't expect the cajoling to stop any time soon, as banks keep up a full-court press post deadline to reclaim those who opted out, either by choice or inaction.

AGGRESSIVE MARKETING

A concern expressed by the nonprofit Center for Responsible Lending (CRL) is that banks and credit unions are "scrambling to pressure consumers to opt-in to overdraft coverage."

A report the group issued last week finds fault with how some numerous consultants and marketing firms have been promoting their services. Its references a consultant whose pitch suggests offering a gift or cash offer to customers with four or more overdrafts annually if they opt in. Others have advocated ways for "snatching bank revenues from the jaws of Regulation E," suggesting that "if they are in the top 29% of abusers, call them."

CRL says that those with frequently overdrawn accounts are among the most financially vulnerable. They tend to be lower-income, single, non-white and rent their homes. "Charging large fees for typically small debit-card transactions erodes these consumers' finances further," it reads, adding that the average overdraft purchase is only $17.

"They just don't lay all the facts out straight," says Rebecca Borne, senior policy counsel for CRL. "Some of the solicitations we have seen suggest that a customer will be charged a fee if their debit-card transaction is denied. In reality, we know of no institution that does this, and the Federal Reserve has been clear that to do so would raise fairness concerns. Another example is when overdraft protection is advertised as a 'fee service.' It is free, of course, if you never use it. But if you do use it, it is the highest cost credit they offer."

CRL is pushing for more detailed marketing materials that fully outline range of overdraft protection options available, many of which may be more cost-effective than an opt-in to fee-based coverage. These include an overdraft line of credit, transfers from a credit card and transfers from a linked savings account.

WHO WINS, WHO LOSES?

Statistics on how many people have opted for overdraft protection are not yet available. Banks, working their way through second-quarter earnings, and government agencies alike have said their tallies probably won't be ready until September. But already there are indications that, despite the public's anger about overdraft fees being excessive, many are still going forward with their plans.

A July survey conducted by the National Foundation for Credit Counseling found that that 26% of 2,089 respondents intend to opt for overdraft protection.

"It is disturbing that this many people live so close to the financial edge," says Gail Cunningham, spokesperson for the NFCC. "Anticipating that they will overdraw their account, they are willing to exacerbate the problem by paying a fee to have their purchases approved."

Mike Moebs, CEO of Moebs Services, an Illinois firm that collects and analyzes bank data, sees a much higher response rate in the offing.

A survey of 2,200 banks and credit unions his firm crunched out found that "frequent users of overdrafts appear to be close to 100%," he says. These frequent users represent roughly 10% of most portfolios and nearly 90% of the total overdraft fees collected each year. Overall, he thinks that general consent statistics could reach up to 80%.

With a median overdraft price of $26, banks and credit unions pulled in $37.1 billion in 2009. Roughly half that amount was from ATM and debit transactions.

Fees have steadily increased since 2000, when they averaged $20 and brought in $19.9 billion, Moebs says. Through the first three quarters of 2009, overdraft revenue was accelerating on an annualized basis to $39.1 billion over $35.4 billion in 2008, a rate of 13%. However, uncertainty over financial-reform efforts in Washington, new overdraft regulations, policy changes by large banks and even media scrutiny combined to result in a loss of roughly $2 billion in new revenue.

As for 2010, Moebs says first-quarter overdraft fees rose to $27 billion even as revenue fell to $32 billion and further drops are expected for the next two quarters. He expects increases throughout 2011.

Moebs thinks the Federal Reserve did a good job in crafting the new overdraft regulations, and that they have led to increased competition that is favorable for consumers.

"This caused many huge banks with high prices to introduce floors on checking balances subject to overdraft fees and to put ceilings on fees charged," he says. "Some institutions, like Bank of America, have chosen not to offer overdrafts on debit cards and ATMs. Interestingly, almost an equal number of banks and credit unions have decided to enter the overdraft business for the first time. The huge banks over $50 billion in assets, like Bank of America, JPMorgan, Chase and Wells Fargo ( WFC) will definitely lose revenue. However, many community banks and credit unions should show an increase. This is an incredible opportunity for community banks and credit unions to grab market share and help those 33 million Americans whose banks have stopped offering overdrafts."

OTHER FORCES

Changes to the competitive landscape may extend beyond Regulation E.

Last week, a federal judge in California ordered Wells Fargo Bank to pay $203 million to consumers in that state who overdrafted after the bank engaged in "high-to-low re-sequencing," recording debit transactions from highest amount to lowest, triggering multiple charges.

Moebs says the likely appeal, a claim that overdraft fees can be considered "shadow loans," probably won't hold up given past case law and Federal Reserve opinions.

"The Wells Fargo case is going to be extremely difficult for the banking industry," he adds. "I put it in same ballpark as the BP oil spill. That could be how bad this is going to turn out."

On Aug. 11, the Federal Deposit Insurance Corp. opened public comment on new guidance for how the banking institutions should implement and maintain oversight of automated overdraft-payment programs.

Under one of the proposals, banks would be required to contact customers who incur six overdraft fees within 12 months and offer less costly options. Banks the FDIC oversees also would be instructed not to re-order transactions to maximize overdraft fees.

-- Reported by Joe Mont in Boston.

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