Bank's overdraft rule confounds checkwriters
The Star-Ledger - February 24, 1999
The Star-Ledger Archive COPYRIGHT © The Star-Ledger 1999
Date: 1999/02/24 Wednesday Page: 039 Section: BUSINESS Edition: FINAL Size: 1057 words
Bank's overdraft rule confounds checkwriters
Funds 'unavailable,' costing customers fees
By Sam Ali Star-Ledger Staff
Bounce a check these days and you'll probably pay a whopping fee for the transgression.
As much as $30 for each bounced check, in some cases.
But if you think overdraft protection is always going to protect you, think again.
Many times, overdraft protection - a line of credit that automatically grants you a cash advance to cover unexpected cash shortages - only protects you when you have "insufficient funds" in your account.
But when it comes to "unavailable funds" - when you deposit your paycheck, for example, but it has not cleared - beware.
It's a subtle distinction in banking vernacular, but it's one that almost cost Christina Lenihan, a 39-year-old mortgage broker in Bergen County, a pretty penny last week.
Her bank, Summit Bancorp., changed its overdraft protection rules on Jan. 26. The bank's overdraft protection, called Cash Reserve in New Jersey, now covers only "insufficient funds," but not unavailable funds, as it did before.
Bank spokeswoman Barbara Horn said Summit sent a letter to all its Cash Reserve customers as well as a statement stuffer to alert them of the change.
But Lenihan, who has $25,000 in overdraft protection, says she never saw either.
What she did see was a penalty notice from the bank telling her she owed $90 in bounced check fees because she didn't have enough money in her checking account on Feb. 12 to cover three checks valued at $208.41. But isn't that the whole point of having overdraft protection in the first place, Lenihan wondered - to cover unexpected shortfalls?
Well, under the old rules, yes.
But under Summit's new rules, Lenihan was out of luck. That's because her checking account didn't really run out of money - the bank's definition of "insufficient funds."
When you have insufficient funds, your overdraft protection does indeed kick in, the bank said.
Instead Lenihan was penalized because she had "unavailable funds" - she deposited a $2,000 cashiers check into her account the previous day, Feb. 11, and that check simply hadn't cleared yet. Under that scenario, Lenihan's funds were plenty "sufficient," but simply "unavailable," according to the bank.
Hence, no overdraft protection and the $90 in bounced check fees.
''This is unconscionable," said Lenihan, a former banker at Chase Manhattan, who fought hard to have the $90 fee waived this time around, and eventually won. "I mean, congratulations to the cowboy that came up with this idea to generate fees. They obviously found a loophole, but they are violating the spirit of what overdraft protection is for."
An informal survey of big banks that operate in New Jersey shows that Summit's overdraft policy is not the norm, although Fleet Financial Group has a similiar policy.
But quite a few banks don't make a distinction between "unavailable" and "insufficient" funds in their overdraft protection policies, including First Union Bank, Chase Manhattan Bank and Sovereign Bank.
In its own defense, Summit says overdraft protection has historically been used to cover only insufficient funds. Even though Summit's overdraft protection honored "unavailable funds" for years, it was never part of the bank's stated overdraft policy, the bank said. By implementing the change, they are simply "going back to the original intent of Cash Reserve," Horn said.
Currently, Summit has more than 250,000 Cash Reserve accounts.
''I can't imagine a consumer would understand the difference between insufficient and unavailable," said Jean Ann Fox, a spokesperson at the Consumer Federation of America. "If you have overdraft protection, you believe you are protected for any reason if your account runs out of money. This hits people who have done their best to be responsible and careful."
So, if you have overdraft protection or are thinking about getting it, read the fine print and make sure you know what your overdraft protection is, in fact, protecting, consumer advocates say. Last year, consumers paid $5.6 billion a year in bounced check fees, according to the Consumer Federation of America.
Lenihan, a former vice president with Chase Manhattan's regional credit office for nearly 15 years, says she won't rest until Summit changes its overdraft policy.
Lenihan said it's impossible for the average consumer to keep tabs on when funds in their checking accounts are "insufficient" or merely "unavailable."
''On the check-writing side, you as a consumer have no idea when a check is going to hit," Lenihan said. "On the deposit side, you have no idea when a deposit is going to clear. Some checks can take one day, five days, three days. How are we supposed to know? That's why most people sign up for overdraft in the first place. To avoid all this anxiety."
Consumers with overdraft protection should also pay close attention to one other thing: their ATM receipts.
Some banks lump credit line funds together with customers' actual ledger balances on ATM receipts.
Summit recently stopped this practice after its Cash Reserve customers complained that it was creating entirely too much confusion.
After all, if you have only $1,000 in your checking account, but your ATM receipt says you have a total of $2,000 in your "available balance" - thanks to a boost from your credit line funds - you might inadvertently tap into that credit line when you withdraw money from an ATM, thinking it all belongs to you.
The error is often discovered when monthly statements arrive in the mail and customers realize they have to pay these mini-loans back, plus interest.
Overdraft protection, after all, isn't free money. It's a credit line and anytime you dip into your cash reserve you are charged a daily periodic interest rate on the balance you withdraw.
At Summit, the average annual interest rate on its overdraft protection is 15 percent.
That comes out to about .0004109 percent a day, but it can add up as the months go by.
''By including the cash reserve amount in available balance (on ATM receipts) we were creating unwanted loans for our customers," said Horn as to why Summit stopped the practice. "Customers said it was confusing."