Tell the Fed to Protect Seniors and Stop Unauthorized Overdrafts

Seniors who are heavily dependent on Social Security pay nearly $1 billion a year in fees on unauthorized bank overdrafts. Overall, Americans who are 55 and older pay $4.5 billion in overdraft fees – $1.65 in fees for every $1 a lender advances them.

These are some of the key findings in “Shredded Security: Overdraft Practices Drain Fees from Older Americans,” the latest report from the Center for Responsible Lending (CRL) on the sorry state of the nation’s current overdraft system. It costs people of all ages some $17.5 billion a year, at an average fee of $34 for every overdraft, often with additional daily fees – even though they never agreed to this “protection.”

Isn’t 18% Enough for a Bank to Make?
There’s a case study in the new report about "Mary," who paid $448 in overdraft fees for $210 in credit from her bank. The bank repaid itself from her Social Security check, leaving her $20 to live on and putting her further in debt every month. Instead, if Mary had an 18% line of credit for overdrafts, she would have paid only about $1 in fees.

I don’t know about you, but 18% seems like plenty of interest to me – especially since the bank can re-pay itself from future deposits, which are guaranteed to come from Mary’s Social Security. What a rip-off!

Let’s Put an End to It
While the news here is not good, the timing is excellent: The Federal Reserve is considering changes to the overdraft rules. Unfortunately, the Fed doesn't go far enough, only calling for banks to let customers opt-out of pricey overdraft programs. Along with the CRL and over 80% of Americans, I believe banks should ask customers if they’d like to opt-in.

The vast majority of us want to be warned when an ATM withdrawal or a debit card purchase would put us in the red. That way, we can decide for ourselves what to do. The Fed should require it.

I also want to see the Fed put an end to the way banks maximize their overdraft fee income -- by subtracting the checks with the highest dollar amounts first, regardless of the order in which they were received, and by holding deposits longer than necessary. All of these practices put customers deeper into the red when they may not even know they have a problem.

If the bank has hit you, your parents, or your grandparents with unfair overdraft fees, the Center for Responsible Lending wants you to tell the Fed about it. I want you to speak up even if you haven’t been victimized by this unfair system.

Sealed with a Kiss
This is what I sent to the Fed:

Please protect our seniors and their Social Security checks from the excesses that leave too many of our elderly with hardly any money, thanks to their overdraft “protection.” I call on you to require lenders to:

1. Ask customers if they’d like to opt-in to the bank’s overdraft program.
2. Show how much the overdraft fees would be in terms of an annual percentage rate.
3. Warn people before they go into the red.
4. Stop “gaming the system” to increase overdraft fees by picking and choosing when checks and deposits clear. 

Feel free to copy and paste my message to the Fed here!

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com. 

Comments

[Jim]

Why should the elderly get a pass for overdraft fees, that's what isn't fair. Seniors relying on social security alone to live on also rolled the dice that it would be enough. I don't even plan on receiving this money when it comes to retirement. The Fed should allow people to opt-out of social insecurity. Banks will always figure out new ways to rip off the customer through fees since the interest rates no longer maintain their profit margins.

[Jane]

It's not just the elderly that are affected by overdraft fees - banks also prey on college students (who are often sadly unfamiliar with things like deposit holds and overdraft "protection.") I once overheard a bank officer refusing to refund an 18-year-old's $32.50 overdraft charge. The student had assumed (and why not?) that the charge would be denied if she didn't have enough money in her account. She essentially paid $34 for a cup of coffee.