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In the United States federal law dictates that banks should provide consumers with information about fees on savings and checking accounts. However according to a report released recently by the Government Accountability Office this is not happening. The report also reveals that some of the hidden costs have also escalated over recent years an example being the overdraft fee which in the years between 2000 and 2007 has grown by 11%.

Undercover Visits

Undercover visits were made to 185 branches of 154 depository institutions throughout the country by employees of the GAO . At more than one fifth of the locations they were unable to obtain detailed lists of checking and account fees and at half of the establishments the information was not available on the Web.

Account terms and conditions such as information on when deposited funds are accessible and how overdrafts are handled were unobtainable at one third of the branches.

Federal rules demand consistent disclosure of fees and interest rates. The report discloses that from 2002 to 2006, regulators cited financial institutions 1,674 times for violations of fee-related disclosures. On an annual level that’s about 335 among the 17,000 institutions regulators oversee. Formal enforcement action was only taken in two cases because most of the banks took restorative steps either during the course of the examination or shortly after.

Director of the Washington office of the Center for Responsible Learning, Eric Halperin confirmed that their studies which have found that consumers are getting increasingly hit with overdraft fees that now reach $17.5 billion a year were consistent with the GAO Report.

Stealth Fees

These fees known as stealth fees occur when a customer overdraws their account – either at an ATM or through a debit card purchase – without being warned that their account has insufficient funds to cover the transaction. The bank approves the transaction as a “convenience” to the customer and adds a fee to their account. This happens silently, without the bank ever alerting the customer that their account is empty and that a fee has been levied. It is not uncommon for these fees to be as high as $35 each.

It is hard to believe that the approval of these transactions is about the “convenience” to the customer and not just a fantastic money making machine. Let’s see, we’ll let you go over your balance or limit and then we’ll charge you to do that.

Most people are under the impression that their debit card is a safe way to carry out transactions as unlike a credit card you can’t spend money that you don’t have. However that is a false theory as banks are turning people’s debit cards into credit cards with interest rates that are extortionate. Banks have been accused of using ’stealth’ and ’surprise’ to generate huge profits or to make up for declining returns on assets and revenue from their core lending operations.

The overwhelming majority of these fees – nearly three-quarters – are paid by financially-distressed customers who repeatedly pay a fee of more than $30 on transactions that average about $20.

Growing Bank Income From Fees

In their report the GAO say that the percentage of income at banks and thrifts which comes from stealth fees was 24% in 2000 rising to 27% in 2006.

The American Bankers Association said that it was unable to comment on the GAO’s report as it had not seen it. The American Bankers Association (ABA) is a free-trade and professional association that promotes and advocates issues important to the banking industry in the United States. The ABA’s national headquarters are in Washington, D.C. However the group pointed to their survey released last summer. According to this 20% of consumers surveyed had paid an overdraft fee in the last twelve months. Of those, about one-third said they paid the fee once, though one-third said they were charged the fee four times or more. Eighty-eight percent said they were glad the payment was covered, and 11 percent said they wished the bank had refused the payment.

An ABA spokeswoman reported that most people would rather pay a fee rather than being embarrassed in front of a cashier telling them they don’t have enough money in their account. She added that consumers have a responsibility to track how much money they have in their accounts which can also be done online. If they go above and beyond what’s in their checking account, there’s going to be a fee which is meant to be a penalty because banks incur costs. They just can’t be giving away free loans.

It is interesting that in Europe and the UK that banks are prohibited from profiting on these fees and yet in the United States it’s an open door revenue making opportunity. How can this be anything but simple profiteering by the banks on the backs of consumers they allow to get in a fee charge situation?

Regulators Aware

Five federal regulators—the Federal Reserve, OCC, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of Thrift Supervision (OTS)—supervise and examine all federally insured depository institutions. The Federal Reserve and OCC are the primary federal regulators of the largest banks in the United States.

The five federal regulators work together through the Federal Financial Institutions Examination Council (FFIEC), an interagency forum Congress created in 1979 to promote consistency in the examination and supervision of depository institutions. The 84 page GAO report recommends that the regulators incorporate ways to ensure that fee and other disclosure documents are available to consumers before they open an account. All five agencies have stated that they will address the issue.

I’m not holding my breath for a sudden change in this.

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Steve

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