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Banks scrap check-clearing practices that promote overdrafts

Processing biggest payments first had led to high fees, consumer complaints

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Consumer groups are praising decisions by two major banks to end questionable check clearing practices that led debit cardholders to overdraw their accounts.

Citi and Wells Fargo plan to begin processing checks and debit card purchases in ways that may reduce the likelihood of customers overdrafting their accounts or racking up multiple overdraft fees for small-dollar purchases.

"Citi saying they will clear checks from low to high is another example of Citi really being a leader on these issues," says Rebecca Borne, senior policy counsel for the Center for Responsible Lending, a North Carolina-based consumer advocacy and research group.

Lawmakers and consumer advocates have long accused banks and credit unions of deliberately manipulating the check posting process to maximize their profits from overdraft fees. Instead of processing checks, debit card transactions and ATM withdrawals in the order that they are received, many banks routinely post items with the highest withdrawal amounts first. This practice, according to bank executives, was intended to help consumers because larger items are typically for rent, mortgage or other important payments that, if rejected for insufficient funds, would cause consumers greater angst.

However, posting from the highest amount to the lowest at the end of the day meant that accounts could appear to show positive balances earlier in the day when customers used their debit cards to make purchases. Those same purchases could later generate overdraft fees simply by virtue of the bank's policy to withdraw large checks from the account's balance first. Since many people often make numerous small debit purchases of $5 or $10, they can be hit with multiple overdraft charges of $30 to $39.

Low to high
Starting July 25, 2011, Citibank will scrap its "biggest first" check-clearing policy. "Citibank will process customers' checks from low to high -- in order of the smallest dollar amount to the largest dollar amount -- nationally," says Citi spokeswoman Natalie Marin. The change affects Citi customers with consumer checking accounts (not small business accounts) and does not include automatic bill pay or ACH (Automated Clearing House) transactions, according to Citi. By posting checks to accounts from low to high, customers will be less likely to incur overdraft fees.

Citi began sending notices of the change to its customers this week. Citi has never charged customers for debit card overdrafts because the bank processes those transactions in real time. If account holders don't have enough money in their accounts at the time of an ATM withdrawal or at the point of sale with a debit card, their transactions are denied.

Beginning May 16, 2011, Wells Fargo is expected to begin chronologically processing debit card purchases, ATM withdrawals and online bill payments first by date, then time and, if no time is indicated, from the lowest amount to highest. After that, checks and ACH transactions will continue to be posted from highest amount to lowest. Because checks will be processed after debit and ATM withdrawals, this method should help reduce debit card overdrafts. 

"We think that these changes benefit the customers and simplifies the process," says Wells spokeswoman Richele Messick. 

In August 2010, a federal judge in California declared that Wells Fargo's practice of charging multiple debit card overdraft fees was "unfair and deceptive." The judge called the practice "gouging and profiteering" and ordered the bank to repay consumers $203 million in fees. Wells Fargo is appealing the ruling, which came as the result of a class-action lawsuit filed by customers.

Messick said the court ruling, which affected only California, did not influence the bank to change its nationwide policy. 

More check-clearing change sought
Borne said more can be done to help bring fairness to consumers, including having all banks eliminate overdraft fees altogether for debit card transactions. Citi and Bank of America follow that policy and don't charge customers anything for debit card overdrafts. Instead, they decline the purchase at the point of sale if there are insufficient funds to cover a transaction. Chase and Wells Fargo follow the federal rules and ask customers to opt in to overdraft protection programs which allow the banks to charge fees if debit cardholders overdraw their accounts. Both banks limit the number of times an account can be overdrawn in a single day: Chase allows three and Wells Fargo four times.

"How a bank is ordering transactions is going to be a bigger deal at banks that are charging debit card overdrafts," Borne added. "We continue to urge an end to high to low on all transactions."

The check-clearing practice was among several banking procedures questioned by consumer groups during Congressional hearings in 2010 on a proposed federal debit card overdraft law. That legislation never passed, but the Federal Reserve issued debit card overdraft rules that took effect in July and August 2010 requiring banks to get customers' consent to opt in to overdraft protection programs. Lawmakers complained, however, that the Fed rules did not go far enough in curbing debit card banking practices. The Fed rules allow banks to post an unlimited number of overdrafts during a single month and do not limit how much banks can charge for overdraft fees -- two practices that would be banned under proposed federal laws. 

Bank of America stopped charging customers debit card overdraft fees in 2010. "The changes we made have significantly reduced fees to those customers who excessively overdraw their account," says BofA spokeswoman Anne Pace.

If customers do not have enough money in their accounts to cover everyday debit card purchases, the transactions are declined at the point of sale and account holders are not charged overdraft fees. Customers can still incur overdraft fees for checks, automatic or recurring debit card purchases and ATM withdrawals, although ATM machines alert customers that they may overdraw their accounts and give them the option of canceling the withdrawal. The bank limits the number of overdrafts a customer can receive to four per day.

BofA still processes checks from highest amounts to lowest, however. "We first add deposits and then deduct transactions from a customer's checking account in order of largest dollar amount to smallest," according to Pace. "A primary concern related to high-to-low posting order was that it leads to more fees for customers. We addressed those concerns when we stopped charging customers overdraft fees for everyday debit card transactions last year."

According to a spokesman for JP Morgan Chase, that bank processes deposits and withdrawals in the following order:

  1. All deposits received during the day.
  2. All debit card and ATM withdrawals in the order they were made during the day.
  3. All checks and other withdrawals from the highest to lowest.

Chase began processing debit card and ATM withdrawals before checks in early 2010. The bank limits the number of overdraft fees that can be assessed to an account to three per day.

Borne, from the responsible lending group, praised Citi for being the first bank to acknowledge that high-to-low posting practices were not helpful to consumers. "Big banks were all saying that high-to-low posting order is best for customers. We have always thought that was baloney," Borne says. "Citi was the first to say, 'You know what? Low to high minimizes overdraft for our customers.' We think that's a big deal. It's the first time that I know of that a big bank has said low to high is better than high to low for our customers. That's what we believed all along." 

See related:  Fed: Consumers must opt in to bank overdraft fees, Debit card payments surpass checks, credit cardsVideo: Should you enroll in overdraft protection?, Debit card overdraft protection: When to avoid it, when to opt in, Six ways to prevent bank overdraft

Published: April 7, 2011


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