economic crisis

LAT‘s Kristof Keeps an Eye on the Overdraft Racket

December 21, 2009

The press too often loses interest in a story once some change is done to appease the restive, however incomplete it might be. So it’s good to see the Kathy M. Kristof going the other way and hammering the overdraft racket this morning in the Los Angeles Times.

Recall, the Federal Reserve announced a new rule on overdraft “protection,” requiring banks to make it an opt-in service. In other words, if you don’t sign up, the banks have to decline any transaction that goes over your balance and they’ll lose out on their chance to whack you $35 a pop. That’s a big deal since most people presumably won’t sign up for it and it’s currently costing consumers some $38.5 billion a year.

Kristof digs out some stats I haven’t see before, that overdraft charges went from about $6 billion in 2006 to $24 billion in 2008 to an estimated $38.5 billion this year. I’d like to see an exploration of why that happened. Was it that people had less money and so were bumping against the limits of their accounts more or was it because of the predatory moves like what Chase does in rearranging transactions to maximize overdrafts—or some combination of the two?

Then there’s this:

Industry consultant Michael Moebs estimates that overdraft charges have continued to soar and are likely to account for some $38.5 billion in revenues this year, with roughly 90% of those fees being paid by just 10% of bank customers.

The number I’ve seen is that 40 percent of overdraft charges come from the poorest 10 percent of customers. That 10 percent presumably overlaps with the 10 percent Kristof is talking about here, but it raises an interesting question: Are the poorest 10 percent the ones with the lowest incomes or the ones with the lowest balances?

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Kristof has an anecdote here and it’s an imperfect one, but, hey, life is messy.

(Trina Lee) splurged on a $65 meal with her mom and brother, knowing that it was possible that this one meal could overdraft her checking account…

… (but) Chase bank not only put through the dinner charge, it also “reordered” every one of her pending transactions, turning one potential overdraft into four.

The mounting overdraft charges of $35 each then triggered two additional overdraft charges for small debit transactions that Lee did that day, before she’d realized that her account had gone into the red.

In total, Chase levied $210 in overdraft charges — $175 more than Lee imagined was possible.

I have a better one. Last week, my brother-in-law, who’s in school, got slammed by Chase on the same thing, only he didn’t intentionally go below zero. The bank re-ordered his transactions biggest to smallest and cleared a check that would have covered them all last.

And that’s how you get to that incredible $38.5 billion number (I’m going to advise my bro-in-law to head to the nearest credit union, as I’m doing with Bank of America).

It’s good to continue to focus on this issue because, as Kristof points out, the Fed’s new rule doesn’t even go into effect until July, which is ridiculous and will presumably cost consumers another $19 billion or so in the first half of the year.

But also because the issue isn’t over, and if the press doesn’t keep it on the front burner it might fall behind the stove:

The overdraft legislation, which has been temporarily stalled while congressional leaders work on health reform and other financial regulations, would also require that fees bear some relationship to the cost of processing an overdraft; prohibit enrolling customers in an overdraft program without their consent; and limit the number of overdraft fees a bank could charge to a single consumer in any given month or year.

Yes, it’s still an ongoing story. Keep an eye on it.

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 Follow him on Twitter at @ryanchittum.