Op-Ed

Banks’ overdraft fees shouldn’t put the squeeze on you just because you’re broke

TNS

Which bank fees cost Americans more money each year than they spend on eggs, on baby clothes, or on books, newspapers and magazines combined?

Overdraft fees on family and personal checking accounts, to the tune of $14 billion annually.

Financial institutions charge large fees when a customer’s checking account doesn’t have enough money for a purchase but the bank pays the transaction anyway. Instead of declining the transaction, as many customers expect banks would, the bank often “covers” the amount and adds a fee, typically as high as $35. This practice is particularly egregious on debit card transactions, which the bank could easily decline at the point of sale, which would result in the consumer’s paying no fee at all.

Thanks to a number of lawsuits dating back to at least 2009, it became clear that many banks sought to increase overdraft revenue by manipulating the sequence in which withdrawals were taken from their customers’ accounts. By reordering the purchases from highest to lowest, banks maximized overdraft penalties and generated grossly excessive fees from the accounts of some of their most vulnerable customers.

Many banks settled these cases for a total of more than $1 billion combined. Wells Fargo, on the other hand, refused. Its tactic, so far unsuccessful, has been to try to force its customers into a private forced arbitration proceeding that would result in no accountability, while keeping the truth hidden from public view. In August, the 11th Circuit Court of Appeals is set to hear an appeal from Wells Fargo after a court previously denied the bank’s attempts to compel arbitration.

Ultimately, this case will have serious ramifications for consumers who rightfully demand their day in court after being taken advantage of by a big business like Wells Fargo. If it approves Wells Fargo’s forced arbitration proceeding, other large businesses will be encouraged to attempt this.

Overdraft fees are an enormous drain on checking account customers, particularly poor and working-class families. The Consumer Financial Protection Bureau found that nearly three-fourths of overdraft and related fees are paid by only 8 percent of account holders, who incur 10 or more fees a year. The Center for Responsible Lending found that 2 million Americans incur 20 or more fees per year — exceeding $700 annually. Further, these funds are often not spread evenly throughout the year but come in unpredictable, sporadic episodes. A single negative balance episode can trigger hundreds of dollars in fees in just a few days and drive a bank customer much deeper in the hole.

At the same time, the use of forced arbitration clauses by big banks continues to grow with devastating consequences for consumers. Forced arbitration prevents consumers from banding together (in proceedings such as class actions) to take on big institutions like Wells Fargo. The bank knows a consumer is unlikely to pursue an arbitration proceeding over tens or even hundreds of dollars, especially when the arbitration process itself is so stacked against the customer. So without class actions, the bank has far less fear of being held accountable.

Many banks that settled overdraft posting order cases have since added or bolstered their forced arbitration clauses. Meanwhile, Wells Fargo’s income from overdraft fees rose 7.5 percent last year, prompting a group of U.S. senators to question the surge in overdraft income. Clearly, big banks are all too willing to return to underhanded practices the minute the spotlight is off them.

Fortunately, the Consumer Financial Protection Bureau, after years of study, has issued a rule that will ban banks from using forced arbitration clauses. The rule will not apply to pending cases like the overdraft litigation against Wells Fargo, but if this CFPB rule is not reversed by Congress or the Trump Administration, it will level the playing field for the future and serve as a healthy deterrent for banks thinking about taking advantage of their customers.

The 11th Circuit has the opportunity to prevent Wells Fargo from opting out of legal accountability. And the CFPB rule will ensure that no bank may do so in the future.

Rebecca Borné is senior policy counsel for the Center for Responsible Lending, a nonprofit, nonpartisan organization.

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