Unwarranted Bank Overdraft Fees

In October 2009, shortly after TD Banknorth changed its name to TD Bank – “America’s Most Convenient Bank” – there were apparently some major IT glitches that resulted in many customers having difficulties with their direct deposits and viewing real-time account balances. As a result, many customers, including myself, were charged overdraft fees through no fault of their own. It was at this time, while viewing numerous overdraft fees on my statement, that I became aware of a little known banking trick. When there are several current debits to an account, many banks, not just TD Bank, apply the debits in reverse order of their value and not the chronological order that they were posted to the account. Therefore, no matter the order received, the largest current debit is applied to the balance FIRST, then the second largest debit, third largest debit and so forth. This is important because, if for some reason that largest debit makes you go over your balance, you are then charged overdraft fees for every other debit – even if the remainder of the debits would have been covered by your initial balance. (read this customer’s complaint.)

For example, on one date this past fall, a TD Bank customer had approximately $2500 in a checking account and had previously scheduled electronic payments in the amounts of $12, $300 and $2700. Additionally, on that day, two checks written for $20 were presented for payment and $200 in cash was withdrawn at an actual bank location. As bank policy is to apply the largest debits first, TD Bank applied the $2700 electronic payment first, thereby overdrafting the account of $2500. This resulted in the first of six $35 overdraft fees totaling $210 – only one of which was actually greater than the balance of $2500 and three of which were actually less than the $35 penalty. However, had TD Bank applied the lesser debits first, the account would only have been overdrawn for one transaction (notwithstanding the questionable banking practice of charging the $35 overdraft fee in the first place – without any consent from the customer to engage in this practice.)

Based on this system of accounting, excessive bank overdraft fee lawsuits have been filed against numerous banks, including Wells Fargo, Bank of America, M&T Bank and Wachovia. The lawsuits allege that these banks have used unethical practices to send bank accounts into overdraft mode. More specifically, the lawsuits allege that the reordering of credits and debits so that customers are forced into unwarranted overdraft fees is outrageous. Further complicating the issues with this practice is that bank customers have never actually requested any type of overdraft protection.

Legislation currently under consideration in Congress would prohibit banks from levying more than one overdraft fee per month or six per year. According to a Bill under consideration in the House, overdraft fees would be subject to the Truth in Lending Act, requiring consumers’ permission before enrolling them. Further, it would prohibit rearranging the order in which transactions are posted, which can trigger an overdraft, and it would require fees to be in proportion to the amount overdrawn (i.e. a $5 purchase could not have a $35 fee).

This proposed legislation could save each bank customer hundreds of dollars, and prevent banks from preying on these unsuspecting customers to the tune of millions of dollars each year.

If you have been the victim of these deceptive bank practices, please do not hesitate to contact POGUST, BRASLOW & MILLROOD.