USA Today has a superb story this morning that latches onto the overdraft-charges story and takes it into new territory.

The paper’s Kathy Chu gets a hold of some industry internal memos that confirm how it thinks about this profit center.

There’s a bunch of great stuff in this piece, including that the poorest 10 percent of accountholders pay 40 percent of all overdraft fees.

The banks would prefer that you call these things “fees,” but as I wrote a couple of days ago, they’re really short-term loans with exorbitant (thousands of percent) interest rates. Chu calls a spade a spade in her lede, noting that the fees are a type of loan:

Even as regulators crack down on abusive mortgage and credit card practices, another type of lending threatens to mire consumers in a credit trap.

It’s called “courtesy overdraft” and has long been used by banks to automatically pay transactions that account holders don’t have the money to cover — and then charge them a steep fee. For years, banks have made it easier for customers to overdraw their checking accounts, aided by a cottage industry of consultants who make big money by helping to wring fees out of consumers, a USA TODAY analysis finds.

Great stuff. Let’s hope the rest of the press catches on to this.

Chu also puts the banks’ scandalous—that’s not hyperbole—behavior up high:

Large banks also reserve the right to process large transactions first, triggering more overdraft fees by emptying the account more quickly. Some even charge consumers before they overdraw by deducting a purchase when it’s made, rather than when it clears, pushing the account into the red sooner.

And it’s massively profitable. This is an eye-catching stat:

“Overdraft fees are the mother lode of (deposit) fees,” says Michael Moebs of Moebs Services, an economic research firm. “If it weren’t for overdraft fees, 45% of banks and credit unions wouldn’t have made money in 2008.”

But a lot of banks didn’t make money in 2008, so it’s unclear if this is 45 percent of the ones that did.

Here’s the first memo:

Wachovia, for instance, is discouraging employees from refunding overdraft fees. A 2007 bank memo obtained by USA TODAY tells employees that the fees “make up a big percentage of our revenue and is (sic) a HOT button among leadership.”

And the paper is good to include the history of “overdraft protection” here:

Overdrafts weren’t always such a profit center. Some banks used to sort through bounced checks daily, figuring out which to cover based on their relationship with customers. Others refused all overdrawn transactions.

In the 1960s, Gerald F. Fitzgerald, founder of Suburban Bancorp of Palatine, Ill., was one of the first to begin paying more overdrawn transactions rather than bouncing the checks. He says he did so as a service to “good” customers.

The trend gained momentum in the 1990s when banker Sam Davis joined Strunk & Associates consulting firm. He looked into how banks could profitably extend small-amount loans to consumers. In 1996, the firm rolled out software nationwide that made it easier to automatically pay overdrafts.

Also in 1996, a Supreme Court decision and a bank regulatory rule effectively gave the industry authority to raise certain fees as much as they wanted. A new law forced some government benefit recipients to set up electronic deposit. Direct deposits made overdrafts less risky because banks could recover debts on consumers’ next pay day. The Truth in Lending Act, signed into law in 1968, sanctioned overdrafts, Moebs says, by defining them as credit, but not as loans subject to disclosures about interest rates.

I haven’t read much of that stuff before.

And USA Today drops another memo showing how banks have manipulated their consumers to squeeze more and more overdraft charges out of them:

Some consultants offered banks ways to boost overdraft and credit card revenue. A 2001 “checklist” from Profit Technologies — a firm that has worked with 19 of the USA’s 20 largest banks — has more than 600 strategies. Some are cost-cutting ideas such as printing a dispute form on the back of credit card bills to curb phone calls.

But most relate to income from fees. One strategy listed to boost overdrafts: “Allow consumers to overdraw their … accounts at the ATM up to the bank’s internally set limit.” To increase credit card fees, banks can “delay crediting of payments not received in bank provided envelop (sic) or for which payment coupon is not received for up to 5 days,” and “remove bar coding from remittance envelopes,” slowing the payment.

This is predatory and abusive lending—no two buts about it.

USA Today covers the field here, with a nice consumer anecdote and a former executive blowing the whistle on his industry:

Banks also have their own employees working to find new fees. Jake Drew, a former vice president in MBNA and Bank of America’s “revenue-optimization” group, worked for nearly 10 years with a dozen others implementing credit card policies. Based on this experience, Drew believes regulators need to limit what banks can do — rather than saying what they can’t do.

“Banks have thousands more resources to come up with other revenue-generating ideas,” says Drew, who was fired this year for refusing to sign an employee agreement governing ownership of his work. Bank of America declined to comment.

And the former consultant who helped popularize the tactic who’s now sorry for his sins:

“This practice has gone awry and needs to be fixed,” says Alex Sheshunoff, a key consultant who once advised banks to pay, not return, overdrawn transactions. “This is something everyone should be trying to find a solution to, not fighting”…

Sheshunoff says overdrafts have become abusive and merit tight regulation: “Overdrafts started happening too easily. I’m very apologetic that it morphed into what it (did).”

Good for him.

The piece even has humor, though of the unintentional sort, in the form of industry defenses of their overdraft practices:

Davis of Strunk & Associates says courtesy overdraft is a “value (consumers) are very willing to pay for”…

Fox says the industry shouldn’t apologize for strategies that benefit shareholders: “Let’s not be naïve. Banks are doing things to make money.”

Spokeswoman Anne Pace says the bank wants to help customers but must adjust policies if costs rise.

Scott Talbott, chief lobbyist for the Financial Services Roundtable, representing large banks, says it’s “unfortunate that low- and moderate-income Americans find themselves (using) overdraft services more often.”

Moebs fears that if banks are restricted from charging overdrafts, some may go out of business while others could bounce overdrafts, marring consumers’ credit records.

Yeah, that would be a real shame if companies built on abusive lending go out of business. The only real defense here is that by covering overdrawn accounts, banks protect their customers from point-of-sale fees. But, correct me if I’m wrong, that seems to me at best a wash.

One of the very few things USA Today doesn’t address is how many overdrafts are checks and how many are debit charges. My guess is that the vast majority come from debit cards and that the vast majority of people would rather have their cards declined than pay $30 because they overdraw their account by fifteen cents. Credit cards have also gotten into the overdraft action, too.

But that’s not to take away from this great story. This is really fantastic journalism by Chu and USA Today. More like this, please.


Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.