Young Adults Are Getting Hit with Enormous Overdraft Fees

By Leslie Parrish and Ginna Green, AlterNet. Posted November 6, 2007.

Few Americans are immune to the offers of quick, cheap and easy credit that surround us these days. Indeed, when brand-new adults first arrive on their college campuses, they are often greeted by a bank or credit card company before their resident advisor.

The consumer finance industry-including banks, credit unions and credit card companies-is never short of ways to lure in the American consumer, and a recent analysis performed by my organization, the Center for Responsible Lending, illustrates precisely how banks and credit unions are socking it to young adults -- to the tune of nearly $1 billion a year.

More and more consumers -- particularly young adults -- are finding the deck stacked against them when it comes to battling abusive overdraft fees. Banks and credit unions now routinely allow most debit card transactions to go through when their account holders have a negative balance. Instead of declining the transaction, institutions will advance the funds to cover the shortfall (often less than $20) and charge the account holder an average fee of $34 for each overdraft. Consumers are not given an adequate chance to prevent these fees, which are largely out of proportion to the loans themselves. In fact, adults in general pay about $2 for every dollar the bank advances to cover debit card overdrafts, while young adults pay $3.25 for every dollar loaned to them, due in large part to their frequent use of debit cards for low dollar transactions.

In July, we found that banks and credit unions' abusive overdraft lending practices cost American consumers $17.5 billion in fees for abusive overdraft loans. Our latest analysis, released last month, found that nearly $1 billion of that amount came at the expense of our nation's college students and young adults aged 18-24.

And our nation's young people-dubbed "Generation Plastic" because of their reliance on debit and credit cards-are particularly vulnerable to new banking practices that make it easier for even the most scrupulous account holder to avoid abusive overdraft fees [you mean make it harder for scrupulous account holders to avoidd overdraft fees?]. The rapid growth in overdraft fees levied by banks and credit unions-$17.5 billion in 2006 compared to $10.3 billion in 2004 -has been fueled largely by debit card transactions (popular among Generation Plastic) and bank practices that increase the number of overdrafts (popular at many banks and credit unions).

Some of those unsavory bank practices are related to daily account reconciliation. When banks reconcile a customer's transactions for the day, they often deduct funds in order of the largest payment to the smallest, regardless of the order the transactions were made. The industry acknowledges this is their standard practice. By manipulating the order, the bank still covers the same number of payments, even when the account balance goes into the negative. But they can count more of them as overdrafts-and collect more fees in the process-if they deduct the largest debit first.

Other practices, such as enrolling customers in overdraft "protection" programs automatically without their consent or holding deposits for extended periods but processing checks and debits immediately, can lead to unexpected overdrafts for consumers as well.

There is a solution, however, and it's pending before the U.S. House Financial Services Committee. HR 946, the Consumer Overdraft Protection Fair Practices Act, sponsored by Carolyn Maloney (D-NY) would require banks and credit unions to disclose the interest rates of these abusive overdraft loans so that consumers can compare the cost of this credit option to others. It would also empower account holders by allowing them to the choice to opt-in to an overdraft program, rather than automatically enrolling them without their express consent. It would also prohibit banks from manipulating the order they process checks and debits in order to increase fees.

The legislation is sorely needed for the sake of consumer protection. Even our most vulnerable and inexperienced consumer group-new, young bank customers-is not being shielded from abusive practices. Instead of protecting their financial wellbeing, these overdraft loans are robbing young people of a secure and solid start in their lives.

In the meantime, all consumers, but especially younger ones, should be wary of overdraft protection programs - especially those in which they were automatically enrolled or those that are not linked to a line of credit or to a savings account. Unfortunately, overdraft "protection" programs rarely consider the consumer's best interests and typically protect nothing more than the bank's bottom line.

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Ginna Green and Leslie Parrish work with the Center for Responsible Lending. Parrish is the co-author, with Peter Smith, of Billion Dollar Deal, the Center's recent report on overdraft fees and how they impact young adults.