Under growing pressure from regulators, some banks are retreating from aggressive checking account practices that cause some customers to run up higher overdraft fees.
Atlanta-based SunTrust Banks, Georgia’s largest, recently said it plans to change the order in which it processes checks and debit card charges from its current method, which applies daily charges from highest to lowest, maximizing the potential for overdraft fees.
Such overdraft fees can quickly mount to hundreds of dollars if a bank customer spends money than he or she has in the account.
SunTrust, for instance, charges up to $36 for each overdraft. The maximum is six a day — or as much a $216 daily.
Many banks cause those fees to rise even faster, critics say, by processing the highest checks and debit card charges first each day, ahead of smaller payments. By hitting the account with the biggest payments first, this “high-to-low” method increases the likelihood that the account will run out of money and generate multiple overdraft fees for later payments.
“The only thing that it does is rack up fees,” said Susan Weinstock, director of the Pew Charitable Trusts’ consumer banking project. “It just should be outlawed. People don’t understand it.”
Angela Ren, a software engineer working in Atlanta, said she doesn’t blame her bank for charging a $35 overdraft fee when two checks she had written emptied her checking account three years ago.
“I just forgot to check my checking account because I didn’t think they would post (the two payments) at the same time,” she said. She wishes the bank had warned her the overdraft was about to happen, because she could have transferred money from a savings account at the same institution. Afterwards, she added, the bank told her she could have linked the two accounts to avoid such overdrafts.
“They can have a better approach,” she said.
Federal regulators have responded to such complaints on a number of fronts.
The Consumer Financial Protection Bureau is expected to roll out new rules limiting some overdraft practices, and the federal agency recently fined a large bank for alleged fee abuses.
Federal legislation in 2010 required banks to get customers’ express agreement to the overdraft service. Without it, customers’ checks aren’t honored and they aren’t charged overdraft fees. But they’ll likely face other issues like bounced checks and related fees.
In the first quarter, the Federal Deposit Insurance Corp. also started requiring many banks to report how much they collect in overdraft fees, ATM charges and certain other fees.
Big business
The disclosure rules, which apply to banks with at least $1 billion in assets, show that overdraft fees are big business. The nation’s 625 largest banks collected more than $2.5 billion in overdraft fees in the first quarter, according to FIG Partners, an Atlanta bank advisory firm.
Georgia’s 17 largest banks collected more than $81 million in such fees in the first part of the year. SunTrust accounted for most, with almost $69 million, among its largest sources of fee revenue, according to a recent FDIC filing.
Meanwhile, the CFPB is expected to roll out new rules, possibly later this year, that could limit how banks charge for the lucrative service.
The federal watchdog may not go as far as capping overdraft fees, or how many daily fees they can impose, said FIG Partners. But the agency is likely to focus on other practices that critics consider abusive, according to industry analysts.
“There’s been a lot of political pressure,” said Keefe Bruyette Woods analyst Christopher Mutascio, to steer banks away from check-processing methods that critics say artificially boost overdraft fees.
He said SunTrust executives recently disclosed that the bank plans to quit using the “high-to-low” method. He said the move will reduce SunTrust’s overdraft fees, but have a small impact on the bank’s total revenues. Its first-quarter revenues were $2 billion.
SunTrust declined a request for an interview, but confirmed in an emailed statement that it plans to start processing checking account payments chronologically next year.
Meanwhile, many financial institutions now send overdraft fee disclosure letters to customers after the CFPB recently hammered another large regional bank for allegedly failing to adequately warn customers about the costly fees.
Regions fined
In April, the agency fined Regions Bank $7.5 million – the first fine of its type — for charging overdraft fees without customers’ written permission.
The CFPB said the Birmingham-based bank charged hundreds of thousands of customers fees of up to $36 to cover each shortfall in their accounts, even though many hadn’t agreed to overdraft service.
Such fees typically exceed the size of the transactions that cause the overdrafts.
The CFPB said Regions Bank has since refunded at least $49 million in overdraft fees to customers. Regions Bank is the sixth largest bank operating in Georgia in terms of deposits.
Under a federal law enacted in 2010, banks are supposed to decline checks or debit card charges on over-drafted accounts, and not charge a fee, unless customers have specifically asked for the overdraft service ahead of time.
However, the agency said Regions Bank continued to charge the fees on many accounts for more than a year after staff told executives of the violations.
Sean Sposito contributed to this story.
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