Through the combined efforts of the Federal Reserve and the Congress, new rules have been recently enacted to protect consumers from predatory credit card issuers and retail banks. First, the much anticipated Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 became law on May 22, 2009, and most of the provisions of the act became effective on February 22, 2010. Among other protections, under CARD:
- Card issuers have to bill consumers at least 21 days before payments are due (to stem a flood of late payment fees);
- Card issuers are prohibited from raising interest rates on existing balances;
- Card issuers must provide adequate notice for rate increase on future purchases; and
- Limits are placed on fees and penalty interest.
Unfortunately, soon after Congress passed CARD last May, but before its protections went into effect, credit card companies responding by significantly increasing may consumers’ rates, closing accounts that were only profitable when exorbitant rates and unfair fees could be imposed, raising minimum payments and adding numerous new fees. In other words, banks enacted as many unfair rate and fee increases as they could before CARD went effective.
In addition to CARD, the Federal Reserve enacted significant consumer protections when new rules on overdraft charges took effect for checking accounts in July and August, 2010. Prior to the enactment of these rules, banks provided overdraft protection as a "courtesy" in which customers were automatically enrolled. In fact, this was no courtesy, as banks charge an average of $35 per overdraft according to the Consumer Federation of America. Indeed, such automatic enrollment in overdraft programs, which had become an industry standard, was deceptive because most people assume they can only spend money they have when using debit cards. Thus, banks did not provide overdraft protection simply for the benefit of their customers; to the contrary, overdraft programs were a major contributor to profits, and in 2007 alone, banks earned approximately $29 billion from overdraft fees. Now, consumers can no longer be automatically enrolled in banks’ “overdraft protection” programs; instead, banks must obtain their customers’ affirmative consent by requiring them to “opt in” to overdraft protection programs. Under the new rule, banks and credit unions are also required to provide adequate disclosures to their customers concerning how their overdraft policies function in connection with consumers’ use of debit and ATM cards.
It is important to note that the new rules do not apply to checks, automatic payments consumers set up using on-line banking, or other payments, such as mortgage bills, automatically paid from consumers’ accounts. Banks may still charge overdraft fees on these transactions, and it is up to consumers to be diligent.
In the face of these new restrictions on banking profit centers, it is not surprising that banks are looking for ways to replace profits lost under the new rules and to continue to profit using other questionable practices. For banks seeking to maintain high profits from consumer checking accounts, the recent changes may well mean the return of monthly fees or minimum balances for checking accounts, and consumers should be careful that such changes do not catch them unaware. Banks are also likely to try and force customers to use lower-cost services like online banking, and the number of branches will likely decline. Also expect banks to find ways to encourage customers to increase debit card use, from which banks profit from store interchange fees.
Consumers that choose to enroll in overdraft protection programs should be aware of a widespread deceptive practice known as “resequencing.” Banks almost uniformly sequence the charges debited to their customers’ accounts from the largest to the smallest amount each day, regardless of the actual chronological order in which such charges come in or are paid. Banks resequence the chronological order of customers’ debit, check and automatic charges so that the highest charges are subtracted from available funds before lower charges, the result of which is increased numbers of overdrafts and significant fees and profits to banks by transforming one overdraft into as many as four. For example, if a customer with $100 in an account uses a debit card to buy a cup of coffee in the morning for $2.00, gets gas for $40 on the way to work, and buys lunch for $5, and then a check for $110 is presented to the bank in the afternoon, the customer is not just charged one overdraft fee for the $110 check; instead, the bank first debits the $110 check, overdrawing the account. The debit card payments are then charged to the overdrawn account, resulting in four fees, despite the fact that there were sufficient funds to cover the debit charges when they were made.
On the credit card front, consumers are reporting that banks are holding customers’ credit card payments, whether made electronically or via written check, for several days so that the due date passes and they can charge late fees. Credit card users have also seen a substantial increase in cash advance fees, as well as continued use of “penalty” interest rates, which a disturbing number of credit card companies fail to adequately disclose.
If you are a credit card or checking account consumer who incurred charges as a result of these or other improper banking practices, please contact us to discuss your legal options.