Banks, NSF Fees, NSF Loans, Overdraft Fees:Legal Consumer Fraud at its Worst

Recently, I awoke to an unwelcome surprise. Perusing my checking checking account online was my usual routine. I was flabbergasted to find that my checking account was $700.00 overdrawn. This happened over a weekend in which the Friday preceding that weekend, I made a sizable deposit to clear any charges coming through on the following Monday morning.

How could I be overdrawn when ample funds were cleared on Friday night to covered any charge?

I tried relentlessly to construct a series of events that could have caused this, but to no avail. After speaking with several banking representatives, each giving their own customized evaluation of what had taken place, I was yet confused.

I had eight Non-Sufficient Fund charges totaling $ 272.000, taken
from my account. Why? I had asked myself as I continue to do so. For those of you who are unfamiliar with the terminology, NSF Fees, Overdraft Fees and NSF Loans are terms that mean the same. The later NSF loans refers to the schemes whereby banks "loan" or advance money into your account to cover checks, withdrawals or electronic charges which come through your account. They then charge you a hefty fee for doing so. National City bank, which is my Financial Institution currently charges an outrageous loan-sharking rate of $ 34 per overdraft.

Research into what transpired is becoming clearer as evidence of “check and charge manipulation” on the part of banks becomes increasingly clearer. More and more people are witnessing drastic increases in these so-called NSF Loans and manipulation of charges so that larger checks are paid first and the smaller electronic charges, last.

If you try to get an answer from a bank representative on the order in which charges are processed, you run up against a stone wall, or in some cases, they don't even try to hide their schemes to "overdraft" you account. Of course, they don't call it that, but by letting you know that it's written in the fine print that you signed when you opened the account, you have little recourse. Some of them even put in the contract that they have the right to change the terms and conditions of an agreement without notice.

In my case, on the date that these NSF charges were accessed, I was able on two separate occasions to take a sizable amount from the ATM machine at my bank and to issue a check to a friend who went directly into the bank and cashed it. When I asked how this could happen, if my account was in the negative and with a receipt in hand denoting my balance, I was taken on a merry-go-round of explanations, all of which made no sense and convinced me that the dirty little secret of” manipulating charges on customer checking accounts for NSF fees, is real.

Last year, financial institutions generated $17.5 billion in fees from overdraft loans according to a study conducted by the nonprofit Center for Responsible Lending. Also, in 2006, 60 percent of all bank fee income was generated by overdraft loan fees. This amounted to a 15% percent increase over 2004..

Almost half of all overdrafts (46%) are triggered by debit cards at the ATM or the point of sale. These overdrafts could easily be prevented with a warning or denial. Most debit point-of-sale overdrafts are small, averaging less than half this $34 fee, meaning that these overdraft loans cost nearly $2 for every dollar advanced to cover the shortfall.

Past records by federal regulators indicate that in 2001, this practice began and financial institutions began systematically dictating the order in which your transactions are processed electronically. As I believe and as many others do, this is done to maximize the amount of overdrafts on an account. Today this practice is standard operating procedure.

If you think that I had problems obtaining an explanation on how I could have obtained 8 overdrafts and still manage to take money out of the bank and issue a check that was cashed, all leaving a positive balance and still end up with eight bounced transactions, what about the explanation to the Feds who began an investigation into the banking industry this past year and their overdraft charges?

It turns out that FDIC regulators were unable to obtain clear information on overdraft programs at 33 percent of all financial institutions that were investigated throughout the country. Their investigation further revealed that the processing methods in place at banks and credit unions make it hard if not impossible for the customer to pinpoint how these overdraft or NSF fees are generated.

The latest methods involve intentional manipulation to customers accounts, which itself is a type of underlying deception. Payments are not processed in the order in which they are received, but by various methods of holding, batching and otherwise “manipulating” the way transactions clear. In doing so, the financial institutions are able to generate more overdraft fees( ie-Clearing charges checks from highest to lowest).

Some banks and credit unions are posting charges against a checking account quickly while intentionally delaying deposits, lowering account balances by configuring debits to clear high-dollar items first and failing to warn customers during debit card or ATM transactions that they are about to overdraw their account.

In my case 3 larger charges were cleared and a host of smaller charges, some below $ 5.00, were assessed NSF fees. When I tried to obtain information on which charges cleared first, I was given a run around and several different explanations to the same question.

Here’s an example of how it works, based upon reports by the FDIC:
Say you have $ 96.00 left in your checking account. Now, at some point you have four transactions come through $ 32.00, 43.00,, 13.00, and 11.00 respectively and these are followed by a $ 100.00 transaction. Many banks will clear the $100.00 transaction first, but still charge an NSF fee( known as "NSF Loans"). They will then clear and charge NSF Fees(Loans) on the remaining four transactions. This way, they collect NSF fees(loans) or “overdraft” fees on five separate transactions instead of one.

Even if you have overdraft protection, the banks will still charge you a fee for it to kick in and in most case put it in larger increments than what you need. This has the effect of then shifting your available overdraft credit to a lesser amount, just as though you had a credit card charge come through.

They use larger increments to deposit into your account so they can reduce your overall available overdraft credit and you owe more, just as you would on any credit card.

They even charge fees for people who have a secured overdraft deposit. These are funds which you have already deposited into a savings account linked to your checking account, to cover any overdraft. Each time that they put these funds into your account, they charge you a fee, thereby slowly whittling away at your money in your overdraft account.

The FDIC has found the larger banks are implementing software programs to batch transactions and assess overdraft fees. Even smaller banks are in Kohoots, often contracting to outside companies to design and implement overdraft programs for them. Many of these companies are then guaranteed a portion of the profits from these overdraft fees, with commissions as high as 10 to 20 percent of the additional fees which are generated via these programs.

So, now we also have to question the ethics of any company that designs programs willingly, while knowing that their design has the objective of manipulating deposits and charges which come through a financial institution's customer account.

Currently, legislation is under way to reign in this practice. The Overdraft Protection Act would require that banks more accurately represent the nature of their programs. It would also restrict a bank’s ability to cover overdrafts unless specifically approved by the customer at point of sale. If it is passed, it would amend existing federal regulations, including the US Expedited Funds Availability Act by forbidding computerized manipulation of customer transactions.

For an assessment of how much APR these fees or “loans” as they are called is costing you take a look at this example. Does this bring to mind “legalized Loansharking”?