If you are in the area of the University of California, Berkeley, stop by Mulford Hall tonight to see a screening of Overdrawn!, a documentary film by Karney Hatch. In the film, Karney takes a hard look at practices by big banks, primarily overdraft fees. The documentary follows the writer/director as he talks to bankers, a former loan collections agent, a loan shark, consumer advocates, Ralph Nader, and members of Congress in attempt to explain the inner workings of the consumer banking industry to the public.
I took away several interesting points from the film.
The application of deposits and withdrawals
Many Consumerism Commentary readers already know this, but it’s an important reminder. Banks will “apply” deposits and withdrawals in the order that favors the institution. Even if you deposit cash on January 2, if you have checks that pay that day or ATM withdrawals, at the end of the day, the bank will apply your debits before your credits, increasing the chance of an overdraft.
Additionally, the debits are ordered from largest to smallest. If your ending balance on January 1 was $500 and on January 2, you have two checks paid, one for $550 and one for $20, the check for $550 will be applied first. You’ll receive an overdraft fee for the first $50 overdraft. Next, your $20 check will be applied, inducing a second overdraft fee on the same day.
Overdraft fees and interest rates
The Federal Reserve Board as well as consumer groups consider overdraft fees to be loan interest. Overdraft protection, a service offered by banks, is basically a loan extended to the customer. If you don’t have money in your account when your check is cashed or when you use your debit card in a transaction, rather than disapproving the transaction or bouncing the check, the bank does you a favor by letting you use their money for a time.
The size of the overdraft fee does not depend on the amount of the overdraft. Charge $0.05 more than you have in your account or $500 more, you will be assessed a $30 fee, for example. Fund your account back to zero within 24 days, and your $30 fee on a $0.05 equates to an annual interest rate of 219,000%.
Overdraft fees make a payday loan, with typical interest rates of 100% to 1,000%, sound like a good idea.
In Overdrawn!, Karney Hatch beat his bank’s overdraft policy through small claims court. His bank reversed the overdraft fees incurred through his experiment. With the bank’s bottom line always in mind, the company decided it was less costly to credit his account for the fees and court costs rather than face legal expenses.
If you can’t make it to Berkeley tonight for the screening, Karney is taking the film on tour. In addition to college theaters, you can find the film in some locations projected onto the white walls of bank buildings for a unique experience. If a public showing isn’t available for you, you can also order Overdrawn! from Amazon.com or directly from Karney Hatch.
Updated June 24, 2016 and originally published October 27, 2008.