Financial institutions, like the Bank of Hawaii, are under closer scrutiny for their overdraft protection policies after years of reaping billions in revenue from overdraft fees.

In 2010, new regulations required banks to disclose their overdraft protection policies, particularly noting the customers’ right to opt in or out of certain types of protection.

Yet despite those disclosure requirements, some consumers remain confused about their rights and end up being taken surprise by overdraft fees.

The Consumer Finance Protection Bureau is working on a new set of regulations to help get the problem of overdraft fees under control. One practice called into question is the use of an overdraft line of credit, essentially a loan automatically granted by the bank to pay transactions that would overdraw the account.

It’s possible for the interest, principal and fees associated with these lines of credit to ensnare consumers in a cycle of debt. Some banks automatically loan a larger amount than the transaction amount, both increasing the consumer’s debt and allowing them to charge more interest.

Another practice called into question is known as reordering. With this practice, the bank processes drafts in the order of largest to smallest, not necessarily in chronological order. This tactic causes the account to be overdrawn sooner, making more of the drafts trigger an overdraft fee.

Bank of Hawaii Class Action Lawsuit

Reordering was one issue raised in a 2011 consumer class action lawsuit against Bank of Hawaii. In February of 2012, the bank agreed to a $9 million settlement that would address claims brought by a 160,000-strong class of customers who said they were overcharged for overdraft fees.

The plaintiffs had alleged that Bank of Hawaii had charged them a $26 overdraft fee, plus $10 for every continuous seven-day period the account remained overdrawn. The bank was also accused of reordering transactions in such a way that would cause more of them to trigger an overdraft charge.

Plaintiffs also said the bank had failed to give proper disclosure to its customers that they had the right to opt out of overdraft protection.

Today, Bank of Hawaii limits its overdraft fees to three fees per account per day. The bank does not charge an overdraft fee for items under $2.50 that cause an overdraft, or for overdrafts that leave the account overdrawn by less than $5.

But Bank of Hawaii’s overdraft fee is still $26, the same as its fee for items returned unpaid. And the bank still charges $10 for “each continuous seven-day period the end of day balance is overdrawn by $5 or more.”

Bank of Hawaii also offers at least one novel solution to the problem of overdraft fees and bounced checks. The bank’s EASE account does not allow any check writing, requiring customers to use a debit card for drafts instead. Bank of Hawaii does not offer overdraft protection for this type of account. Debit card transactions that would overdraw the account will generally not be authorized, but some other types of transactions may be paid even if they cause an overdraft.

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