Checking account overdraft fees take an unfair toll on those who can least afford it

Overdraft fees are a cash cow for the nation’s banks, particularly the big ones, but this is one cow that should be taken to the slaughterhouse by Congress. Many of those least able to afford inflated fees for overdrafting their small checking accounts find themselves in a downward spiral of debt, and though banks deny it, they’re the ones who lure their customers into that spiral.

The penalty for consumers is severe – $35 for each overdraft, interest and other fees – and the reward for banks is great: Last year, consumer banks collected $11 billion in overdraft fees. And that amounted to 8 percent of their profits. The information is at least public, through the Consumer Financial Protection Bureau.

The practice has long been a disgrace, and it has also been deceptive. Banks claim they offer people a chance to “enroll” in “overdraft lines of credit,” that all pertinent information appears on monthly statements. But often people don’t understand what they’re getting into in exchange for not having their transactions refused. They believe naively that the banks are somehow protecting them. In fact, one transaction that kicks in “overdraft protection” can, as The New York Times reports, trigger several fees and penalties.

The Times cited one woman who was dunned $96 a month by Citibank. She was being charged for a loan, a line of credit, to cover her overdrafts. She said she never signed up for a line of credit. But with interest, principal and fees, she went $3,400 in the hole. Her credit was harmed.

Banks – some of them the same big banks that contributed to the nation’s nearly catastrophic financial crisis of 2008 – take the attitude that customers who overdraw their accounts are irresponsible and that the fees are somehow teaching them to maintain better accounts.

Class-action lawsuits accusing banks of “reordering,” in which they processed large transactions like mortgage payments ahead of minor transactions, even when those minor transactions came first in a given month, resulted in banks paying more than $1.1 billion in settlements. By processing the big transactions first, the banks increased the likelihood of more overdrafts, and more fees.

That overdraft fees remain virtually without control, and certainly without adequate regulation, is an outrage, one that’s costing millions of Americans money they can ill afford to lose. Congress should step in.

Yes, people should watch their accounts and not overdraw them. But requiring banks to simply refuse to process transactions when there is not money to cover them is an easy regulation and should be done. It will cause some consumers pain, true enough, but not as much as the surprises in fees that drive them deeper in debt.

This story was originally published March 3, 2016 at 7:43 PM with the headline "Checking account overdraft fees take an unfair toll on those who can least afford it."