Overdraft fees can be a nightmare

By Jon Bartholomew

, Nov 28, 2009 (2 Reader comments)

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If someone offered you a $20 loan with a 3,889 percent interest rate, would you take it?

Most people wouldn’t, but that’s exactly what average Oregonians are subject to through their bank’s checking account.

That’s just one of the ways banks are taking advantage of their customers with their “overdraft protection” programs. Banks are also refusing to allow customers to opt out of these programs and are manipulating the way they clear transactions so that they can charge more fees to the consumer.

As Oregonians continue to endure the worst economic crisis since the Great Depression, OSPIRG set out to document the day-to-day experiences that Oregon consumers have with their banks.

Our objective was to determine what consumers are really paying to maintain basic banking services in Oregon and which sorts of fees and financial-institution policies have the biggest effect on consumers’ bottom line. So we analyzed 64 checking and savings accounts offered by 10 banks and eight credit unions in Portland, Eugene and Ashland, including the largest institutions in the state.

One of the key findings of our report, “Tricks and Traps: The Hidden Cost of Banking in Oregon,” is that overdraft protection fees continue to be a potential nightmare for consumers.

Overdraft protection programs are analogous to involuntary payday lending. An overdraft protection loan of $20 with a fee of $29.92 (the average of the banks surveyed) is equivalent to a loan with an annual percentage rate of 3,889 percent if paid off after two weeks.

That interest rate is more than seven times higher than the 521 percent APRs that were common in the payday lending industry before Oregon established effective regulations in that market.

Many of the institutions surveyed also manipulate their customers’ checking accounts to artificially trigger an overdraft charge. The most common method found in our survey was to clear the largest transaction first, causing more transactions to overdraw the account.

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