Why Customers Are Suing Banks Over Overdraft Fees

For years, bank customers have been plagued with the hefty charges of overdraft fees. However, it's not until recently that some customers have started suing these banks over overdraft fee practices.

What exactly are overdraft fees and why do customers find them unfair? An overdraft fee is when a bank allows a customer to spend more money with his or her debit card than is in the bank account. The bank pays for the purchase upfront, then slaps on a $35 overdraft fee for each extra purchase made by the customer.

This sounds fair enough, except for the fact that many customers don't know they're signed up for this system. Banks often sign customers up for the overdraft protection program automatically.

Also, banks don't always process debit card purchases in the same order they were made-which is one of the complaints in the lawsuits. This means that banks often subtract first from a customer's account the largest purchase in a series, instead of the one that was made first. If this first, large purchase pushes the customer's bank account into the red, then any additional charges will each incur a $35 overdraft fee. This can quickly add up to be a big charge for the consumer.

The banks have been arguing that their practices are not unfair and asking judges to dismiss the suits. However, a federal judge in Miami dismissed the banks' objections, saying that customers have a right to challenge practices they see as manipulative.

The banks that are being sued are Bank of America, Citibank, Union Bank, JPMorgan Chase, U.S. Bank, Wachovia and Wells Fargo, according to an article by the Miami Herald. The final case has not been decided, but the outcome will likely make a big impact on the overdraft practices of banks in coming years.

The Federal Reserve has also taken action on overdraft fees. Starting this summer, the Fed will prevent banks from automatically enrolling customers in an overdraft protection program: customers will have to sign up for the program themselves.

Until then, it is good for customers to read the fine print and know exactly what programs they are signed up for at their bank. No one wants the surprise of a $35 overdraft fee.

Source: Miami Herald, interviews.