Overdraft Protection - Is this legal?

Question

I recently got an overdraft when I forgot about a pending transaction. That's completely fair and I understand what happened.

However, what followed concerns me deeply. I had OD protection on my account. When my checking account went negative, OD Protection was triggered and, even though I don't deposit money into my savings, the interest I've earned on my savings account ($0.04) was transferred into my checking account under the guise of OD Protection and I was charged an additional $10 on top of the $32 for the OD.

How is that legal? How is that ethical or customer focused? It seems like a predatory policy that is designed to prey on financially struggling customer.

I've since disabled that feature on my account. Apparently, I signed up for it when I created the checking account.

Look, if I had money to transfer that would cover the OD, I would completely see the benefit of this program. However, when I don't have the funds, it seems like it is just kicking someone while they are already down and smells unethical to me.

Am I mistaken in my assesment? Is it legal to tack on charges like that? Apparently this wasn't covered in the overdraft law?

EDIT

Maybe this narrative will help explain:

• Bank: I see you've overdrafted your account, bad news.
• Me: Yep, my bad, here take $32.
• Bank: Wait, bro, looks like you have $1250.04 in your savings. We can transfer $0.04 to protect you from the overdraft.
• Me: Ok, but my overdraft is more than $0.04, though.
• Bank: That's cool, broseph. We'll transfer it and charge you another $10 anyways.
• Me: So is OD Protection a misnomer? What was I protected from? Having more money?
• Bank: evil laugh .. continued evil laughing

EDIT 2

I recently heard back from the account specialists with my bank. Although the initial customer rep informed me everything was valid and worked as it was supposed to, the following account specialist insisted what happened to me was a "bug" and the OD Protection transfer shouldn't trigger if the funds don't cover the overdraft, which is how it should work. I don't know if he was being disingenuous or not. He couldn't comment on if other members were affected, but he "assured" me a case is opened and being investigated to gauge the scope of the "bug".

My problem is, with the research I've done, I find it hard to put weight into the "bug" argument. Apparently overdraft related fees are a multi-billion dollar racket. Moreover, the entire system was intentional designed to be that way and the architects worked very hard to ensure an income stream at the expense of their customer's ignorance and financial mismanagement. I just find that baffling this is legal and some political entity hasn't championed the affected consumers, but I suppose lobbyists are quite effective.

Answer 1

I work at a bank. Here's an explanation plus a few thoughts for your situation. Obviously, these statements are "in general" - your bank may vary slightly in its policies and procedures.

The overdraft protection policy is to take money from your other accounts and attempt to cover your transaction so you don't overdraft. So, let's say you have $1 in your checking account, $100 in your savings, and you try and make a $15 transaction with your debit card. The system detects that you don't have enough money, so it transfers $14 from your savings to your checking account to cover the transaction. It then charges you $10 for the service. However, in your situation, you only had $.04 transfer. So, they charge you $10. But, since you still couldn't cover the transaction, you also still overdrafted your checking, meaning you were charged an additional $32.

Is it legal to tack on charges like that?

Yes, it is. Unfortunately, when you signed up for it, you probably checked a box or something that opted in to activating this service. If you're the type to fly through financial paperwork, you probably just checked it assuming it would be good for you.

Apparently this wasn't covered in the overdraft law?

Correct. A few years ago (I forget exactly which year), it became legally mandatory that overdraft protection was opt in only. So, legally, only consumers who wanted the service would have the service. Obviously, there are many situations like yours where people opt in because "hey, it's a service my bank is offering ... cool, I'll take it" is sort of the default.

Now, here's the good news. Most banks nowadays are aware that overdraft protection seems to harm people more often than it helps. Like you said, in many situations, it seems to be like kicking people when they're down. So, for you, the best plan of action is as follows:

1. Call your bank and explain that this was a one-time thing. Say you're usually very careful with your money, but you messed up this time. Many banks have a grace policy of one or two slip-ups. Make sure to mention this. If you need a script, here's one: "Hi, my name is _______. I recently got an overdraft charge plus an overdraft protection charge. I'm normally really good with my finances, but this time, I lost track. I know that banks often have grace policies, so I was hoping you could make a one-time exception to refund these fees." If you're polite and non-demanding, I'd say this works 99% of the time.

2. Immediately opt out of overdraft protection. If you don't want this to happen again, disable the protection. Like you said, the service is nonsense. The more people that refuse to partake in it, the quicker the banks will stop offering it.

3. Let your displeasure be known... but be polite and civil about it. Don't pick up the phone and start yelling at people because that's an express ticket to having your thoughts getting ignored. Tell them that you think this practice is predatory and that it needs to stop. Or at least that consumers need to be made more aware of the implications before signing up for it.

4. In the future, read documents more clearly, especially when it has to do with your money. Hopefully this will be a lesson learned for you, and it only cost you $42. I have friends who have been screwed out of much more money simply because they didn't read the documents they were signing (car dealerships anyone?). Yes, the banks suck for putting this service out there, but the prerogative is on you to make sure what's happening to your money.

Answer 2

Is it legal to tack on charges like that?

When you signed the account terms and conditions, it contained provisions for overdraft 'protection'.

How is that ethical or customer focused?

The practice is most certainly neither ethical nor customer focused.

It has been a practice of banks for decades now to include overdraft 'protection' with most checking and debit accounts. This is sold on the premise that "You wouldn't want your good name to be besmirched by having a transaction rejected due to insufficient funds!" What is not commonly known is that these protections have very little benefit for the account holder, and mostly benefit the banks and the business with whom you transact. Businesses like the additional sales they make from people who's cards would be otherwise rejected, and banks LOVE the fees tagged onto accounts (from which they make a good deal of their profits).

You actually got off easy- if you had performed several transactions on the date in question, many banks are in the practice of ordering transactions from greatest to least to maximize the penalties accumulated.

... It seems like it is just kicking someone while they are already down and smells unethical to me. Am I mistaken in my assessment?

Not at all, it stinks to high heaven for anyone who's ever had to deal with these scenarios. I, for one, would never again set foot inside KeyBank to save my life. As the second link above demonstrates, lawsuits have been filed over this practice and many settlements (read "hush money") have been paid. Your primary alternatives are to threaten them to take your accounts elsewhere if they don't refund the charges (and carry through with it), make it known far and wide through all avenues available to you about how despicable your particular institution is (yelp, google reviews, customer comment pages, etc), or to call your congressman and state representatives and voice your displeasure about these disreputable organizations in the community.

Answer 3

This isn't law.stackexchange, so not addressing the legality of it...

From a practical point of view, does it really matter whether it was a bug or intentional activity as long as they refund your $10?

I would personally be inclined to accept it as a bug, because the gain is $10, but I would expect most people to complain, for them to correct it and thus it is a net loss. If they don't refund you at least the $10, then maybe it is deliberate.

I would also expect it to be bad publicity either way (I don't know why you haven't include the name of the bank, particularly if you think it was illegal/unethical and not just a bug).

Overdraft fees have definitely been abused, but they generally try to promote it as a positive thing: taking insufficient funds (possibly as little as a single penny) and then charging both the overdraft and the overdraft coverage handling fee (which is typically just pure profit), is impossible to spin as an attempt to help or normal practice (which is what they said they were doing by paying the larger charge and its overdraft fee first). Since you say you had enough in the overdraft account to cover the amount, it sounds even more like a bug. Obviously what they should have done is taken 12.xx from your savings and charged you a $10 fee, which you couldn't argue wasn't better than the alternative.

Banks make a lot of money ripping off poor people that don't know how to handle their money, but this doesn't seem like that -- there's reaaly no justification for it, which is why I think it was a bug, and they will fix the extra charge.

Not legal advice, but I think a court would find a contract that let them charge you a fee without it being either a penalty for your failure to live up to your part of the bargin or in exchange for a benefit to you as invalid.