According to the findings of an FDIC study, consumers paid significantly more for bank overdraft fees if they set up a line of credit to cover non-sufficient funds versus linking their checking account to another account at the bank, such as a savings account.

The 2008 FDIC study shows that this practice cost consumers billions of dollars in processing fees and annual percentage rates for what amounted to short-term loans from the bank to cover non-sufficient funds.

Just how much this cost consumers is staggering. According to a 2007 study by the Center for Responsible Lending, consumers paid $17.5 billion annually on automatic overdraft loans of $15.8 billion per year.

Consumers Blindly Charged

The FDIC study showed that most banks, 75.1 percent, automatically enrolled customers in automated overdraft programs.

Automated overdraft fees ranged from $10 to $38, with the median fee being $27.

Although customers were usually allowed to opt out of the program, many consumers would incur multiple overdraft charges before being aware that they could opt out. In fact, the FDIC study shows that most customers are not aware that the overdraft protection is even in place until the funds on their debit cards suddenly run out.

By contrast, 94.7 percent of banks made customers affirmatively request to opt in to a linked-account program.

The average fee for a linked-account program overdraft charge was $5.

A quarter of the banks surveyed in the study had charged additional fees to accounts in arrears. Other surveys found that sometimes banks charged smaller fees on a daily basis, without the customers knowing.

FDIC spokesman Andrew Gray stated that the purpose of conducting the study was to inform policymakers and customers of the trends and findings of the financial industry. This study was highly beneficial to both federal regulators and daily consumers of banks and credit unions, who are hit with these fees daily.

Avoiding Overdraft Fee Problems

Consumers often go through the process of setting up a checking account without being informed of the ramifications of their decisions, particularly toward the bank’s overdraft policy

There are three ways that a consumer can set up their checking account to cover non-sufficient funds.

• A customer’s checking account can be linked to another account in the bank, such as a credit card or savings account. When the checking account becomes overdrawn, one of the other accounts is tapped and produces the necessary funds to complete the purchase.
• Alternatively, customers can set up a contract between themselves and the bank, where the bank can loan money to cover the overdraft; the charge is based on the interest charges on the funds advanced.
• A third option, is the infamous automatic overdraft fee process, which many customers do not realize is enacted.

Consumer advocates advise that the best method of paying to cover an overdrawn checking account is to keep the standard overdraft protection offered by the bank. Consumers should choose this option when their checking accounts are opened, and should sign an agreement detailing the overdraft protection policy. 

Credit Union Overdraft Fees Investigated

Many of the overdraft fee policies highlighted in the 2008 FDIC study have since been abandoned by big banks after a slew of class action lawsuits took them to task for using deceptive practices. Now, class action lawyers have their sights set on local credit unions, which may be implementing similar unlawful practices.

A class action lawsuit investigation is looking into allegations that some credit unions may be steadily increasing the amount they charge consumers when they spend or withdraw more money than they have in their checking accounts. Some consumers have also accused credit unions of processing their transaction history out of order, to allegedly maximize overdraft fees.

The following credit unions, worth $10.3 billion in assets, are being scrutinized by class action lawyers:

• Navy Federal Credit Union, Vienna, VA
• State Employees Credit Union, Raleigh, NC
• Pentagon Federal Credit Union, Alexandria, VA
• Boeing Employees Credit Union, Tukwila, WA
• SchoolsFirst Federal Credit Union, Santa Ana, CA

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