How to avoid debit-card overdraft fees ahead of Fed's new rules

Under new rules announced Thursday by the Federal Reserve, banks will no longer be allowed to automatically enroll their customers in expensive overdraft loan programs. Banks will be required to get their customers’ permission first before they can charge expensive fees when debit and ATM card transactions trigger an overdraft.
 
The rules don’t kick in for new cards until July 1 and for existing accounts, Aug. 15.  And, the rules don’t cover checks or recurring debit transactions—like those for utility, phone, or rent payments.
 
Most large banks automatically enroll their customers in overdraft programs, which are really high-cost loans that generate billions of dollars in excessive fees every year. Banks are expected to collect more than $38 billion in fees from overdrafts this year.
 
Debit card overdrafts could be prevented with a warning that there are not enough funds in the account, or by declining the transaction. Instead, most banks let these transactions go through and charge consumers a fee for each overdraft; the average fee is $35, according to Consumer Federation of America.  If you don’t pay back the overdraft within a few days—or sometimes a single day—you’ll be hit with additional overdraft charges.
 
Here’s an example: According to Consumer Federation of America, a Bank of America customer who overdraws on four transactions that total more than $10 would be charged $35 each for a total of $140. If the overdraft isn’t repaid in five days, the customer would get hit for another $35 sustained overdraft for each unpaid overdraft. Total: $280 in fees in under a week.
 
Until the new rules kick in there are a few things you can do:
 
• Link your checking account to a savings account and set up overdraft transfer protection. With this method, the cost for overdrawing the checking account is generally lower, say $10 each time.
• Opt out. Bank of America already allows customers to opt out of its overdraft program by calling 888-717-3999. Chase and Wells Fargo have announced that they will soon implement an opt-out provision, and like B of A are limiting when and how many overdrafts they charge.
• Budget better. Balance your check book and sign up for e-mail or text message alerts from your bank or from a personal finance Web site to tell you when you’re account has fallen to a certain level.  
• See the Consumer Federation of America's study of the major banks, so you can choose a bank that works for you. Don’t forget to check out your local bank, which might have more consumer-friendly terms.—Chris Fichera 

New on Top 10 Complaint list: Sleazy credit-card & lending practices

The National Association of Attorneys General recently released a list of the 10 complaints consumers filed most frequently with state AGs in 2008. It includes two gripes of particular interest:

•Greedy banks that coaxed people into mortgages they knew couldn’t be paid back are evicting folks from their homes (no. 6)

•Greedy banks are raising interest rates, cutting credit limits, tacking on new fees, and otherwise overcharging for credit and debit cards (no. 4, a tie).

I certainly wasn’t shocked that a lot of people voiced those complaints, especially given the dastardly role the banking industry played in the near-collapse of the U.S. economy. But I was surprised to learn that this is the first time predatory lending and unfair credit-card practices were among the top 10 complaints since NAAG began compiling its yearly list.

Maybe it took the Great Recession for people to stand up for their rights on those two critical issues. But in many financial disputes, consumers may not know their rights under the law. In the November issue of Consumer Reports Money Adviser we explain consumers' legal rights in 11 typical clashes with retailers and service providers.

Consumer protection laws vary from state to state. Here's contact information on your state’s AG office.–Jean Pietrobono

Considering a layaway purchase? Read this

Last year at this time, Sears and Kmart helped consumers rediscover the old-fashioned concept of the layaway purchase, in which shoppers make periodic payments to a special account to save up for big-ticket goods and take them home only after they’re paid for in full.

With so many Americans still struggling financially and reeling under credit-card debt  -- our recent holiday poll reveals that an estimated 13.5 million consumers are carrying debt leftover from last Christmas – layaway is likely to be an even more attractive alternative to pay for gifts this holiday season. Beside Sears and Kmart, major retailers offering layaway plans include Toys “R” Us, Babies “R” Us, TJ Maxx, Marshall’s, and Burlington Coat Factory.  Layaway is also available for many online purchases through third-party firms like eLayaway, which has an affiliate relationship with more than 1,000 merchants such as Best Buy, Bass Pro Shops, Apple Store, and The Home Depot.

If you’re unfamiliar with the layaway process, here’s how it works:  You enter into a contract and make an initial deposit based on a percentage of the purchase price, along with a service fee to administer the plan and keep the item in storage. There are no interest payments, since you don’t actually take possession of the merchandise until you’ve paid for it.

Like any transaction, you can avoid potential pitfalls by doing some preliminary legwork. Toward that end, the Better Business Bureau just released a checklist of key questions to ask before opening a layaway account:

• How much time do I have to pay off the item? The usual timeframe is usually 30 to 90 days.

• What’s the minimum down payment? Ten to 20 percent is common.

• When are payments due? After the initial down payment, some contracts require additional contributions weekly or every two weeks; some let you make payments whenever you want during the timeframe.

• Are there storage or service-plan fees? Kmart charges a flat $5; Toys “R” Us has a $10 fee.

• What happens if a payment is missed? Are there penalties? Does the item return to inventory? If you miss a payment or fail to pay the minimum due, you might have to double up on your next scheduled payment.  At some stores, the merchandise is returned to the shelf as soon as 7 days after a missed payment.

• Can I get a refund or store credit if I no longer want the item after making a few payments? Cancellation fees typically range from around $5 to $10. At Burlington Coat Factory, layaway deposits and payments are non-refundable, but may be converted to a gift card if layaway is cancelled. In addition, the company won’t give you a refund if you decide to return an item you’ve paid for in full, only a gift card.

• What happens if the item goes on sale after I’ve put it on layaway? Kmart won’t make any price adjustment after 7 days from the date you open a layaway account. Sears gives customers a 30-day window.

• Get it in writing. Don’t take the salesperson’s word for it. Ask for the complete terms and conditions in writing. And be sure to keep detailed and accurate records of all payments made.

Layaway plans aren’t specifically regulated by Federal law, although the Federal Trade Commission can go after a company for unfair or deceptive practices. Click here for information about filing a claim. Check with your state attorney general, local consumer protection agency, or the local Better Business Bureau  to find out if state or local laws cover layaway purchases.

 

'Unfair and deceptive' practices among 100% of top banks' credit cards

Anticipating the February trigger of the Credit CARD Act's final phase, banks have dramatically raised interest rates, imposed new fees, jacked up old fees, and changed terms, a new report by the Pew Charitable Trusts says. In fact, 100 percent of cards issued by the nation's 12 largest banks used practices that would be considered "unfair and deceptive" under the new law, the report says. 

The report, which follows up on a similar study done in the spring, shows rampant anti-consumer activity:

•Nearly all (99.7 percent) of bank cards allowed the issuer to raise interest rates on outstanding balances by changing the account agreement unilaterally. That's up from 93 percent last December.

•95 percent of cards allowed issuers to apply payments in a manner that the Federal Reserve found "likely to cause substantial monetary injury to consumers." (The other 5 percent weren't necessarily good guys; they just didn't disclose their policies.)

•The median late fee remained unchanged, at $39. Eighty percent of bank cards also charged a $39 overlimit fee. The median penalty rate was $28.99 percent; 90 percent of banks allowed that rate to continue even after the consumer resumed on-time payments. 

•Credit unions, another option for consumers, offered interest rates between 9.9 and 13.75 percent, about 20 percent lower than comparable bank rates. And their penalties were generally less severe than those of banks. Most credit unions levied late and overlimit fees of $20. 

The report recommends consumers consider obtaining cards from credit unions, though they represent only 1 percent of the credit-card market. Consumer Reports does the same; read more of our tips on finding good credit cards. And here's some sage advice from Consumer Reports Money Adviser on the right way to pay off your credit-card debt.

Some members of Congress have introduced legislation to rein in credit-card issuers now. Click here to tell your Congressperson to speed up the Credit CARD Act's effective date to Dec. 1, 2009. And feel free to comment below on what you've experienced.  As comments on our previous credit-card blogs show, consumers are outraged with the banks' ugly last hurrah.–Tobie Stanger

Latest phishing scam: Mobile text message from bank

Paul Eng, our electronics blogger, recently discovered a new phishing phenomenon: a mobile text message posing as a legitimate communication from his bank. He was sharp enough to know something was phishy, and avoided the potential scam. 

The incident underscores the need for vigilance in all your communications, particularly with merchants, financial institutions, and government agencies. As the holiday shopping season rolls around, it's a good time to review these cautions to prevent identity and data theft, outlined by the Federal Trade Commission. 

CFPA: Much consumer financial regulation under 1 roof

Here's a potent illustration, provided by the Consumer Federation of America, of one benefit of the proposed Consumer Financial Protection Agency, which was approved by a House panel today by a vote of 39-29. What's that benefit? Simplicity.

The CFPA would consolidate much of the regulation of consumer financial products and services under one agency, rather continuing with the convoluted system that exists today. One regulator handling many functions could better ensure a more efficient, less redundant regulatory system.

As proponents such as Harvard Law Professor Elizabeth Warren have noted, today's rat's nest of regulators has allowed many financial companies to cherry-pick for the least restrictive overseer. Other financial companies have escaped any meaningful regulation at all. Those situations helped contribute to the unbridled marketing of dicey consumer financial products that led many families astray in the last couple of years. 

$30+ billion saved? Fed to set rules on costly overdraft programs

The Federal Reserve announced it will issue a rule within a month that would require banks to obtain consumers’ consent before signing them up for overdraft programs under which banks charge exorbitant finance charges when they process check or debit-card transactions that exceed a customer’s balance. 

As we’ve reported, banks are expected to collect more than $30 billion in such fees this year. Public outcry over these overdraft programs has grown, as has Congressional pressure to curb what National Consumer Law Center Staff Attorney Chi Chi Wu labels “one of the most expensive and exploitative credit products on the market.”  

While several of the nation’s largest banks have recently announced changes in their overdraft programs that make them slightly more consumer-friendly, the changes are unlikely to significantly reduce costs to customers, according to a recent report from the Consumer Federation of America.

The report provides details of overdraft programs at 16 banks throughout the U.S. and calculates what a $100 overdraft would cost if it remains unpaid for seven days, computing the finance charges as an annual percentage rate, akin to a payday loan. The APR for such an overdraft actually exceeds 3,000 percent at six banks: Bank of America, BB&T, Citizens, Fifth Third, Sun Trust and U.S. Bank.

To truly address the problem, Congressional action is needed, argues Travis Plunkett, legislative director at the Consumer Federation of America. “The Consumer Financial Protection Agency, under consideration this month by the House Financial Services Committee, is needed to restore consumer protections to bank overdraft lending,” says Plunkett. 

Not surprisingly, the banking industry is lobbying against creating this agency that would be dedicated to putting consumers’ interests first.–Andrea Rock 

             

 

 

Astor case: How to prevent financial elder abuse by family

The guilty verdicts on Brooke Astor's son, handed down yesterday by a Manhattan jury, highlight a sad fact about financial elder abuse: All too often, it's the children who are at fault. 

“We see a lot of cases where the kids help themselves with the intention of paying the money back," says Bernard Krooks, an elder law and estate attorney in New York City. "It becomes a bad habit.” In other situations a nearby child, who is the caregiving relative by default, feels justified taking money from a parent’s accounts. But “you don’t have an entitlement to dip into Mom’s bank account just because you’re taking care of her,” Krooks says.

How to prevent it

Ideally, adult children should include their elderly parent in a family meeting to determine who will look after him or her physically and financially. Family members can write up an agreement outlining how much the caregiver should receive for that service from the parent’s accounts. While that set-up involves some complications--including FICA withholding and payment of income tax--it helps reduce stress among siblings, Krooks says. And because a salary is not a gift, the arrangement also reduces the likelihood that Medicaid would later deny the parent benefits for drawing down assets.

Paul Greenwood, a deputy district attorney in San Diego and head of the office’s elder abuse prosecution unit, advises caution in assigning power of attorney to a relative. “Even the person who you think is the nice relative can turn on you in desperation,” he says. Greenwood recommends appointing a bonded, licensed professional such as an estate attorney with expertise in elder law, a financial planner, or a bank officer. 

The National Association of Geriatric Care Managers (www.caremanager.org) says 30 to 40 percent of its members do that kind of work. For less than half of what an attorney would charge, they can pay bills, monitor repairs on a property, deal with insurance claims, and so on.

For no extra cost, the power-of-attorney document can be drawn up with limits, such as assigning a relative or friend to monitor the relative with power of attorney, mandating a periodic written report of finanicial transactions, or assigning joint powers of attorney, which requires two signatures on every check. 

For more on this subject, click here, and check out our featured article on financial elder abuse in the November Consumer Reports Money Adviser.–Tobie Stanger

 

FTC: Bloggers who shill must also tell

The Federal Trade Commission voted unanimously on Monday to require bloggers and other Internet opinion makers to tell consumers if they received payment for their review of a promoter’s product or service. 

The new rules, effective December 1, are part of a general update to the FTC’s “Guides Concerning the Use of Endorsements and Testimonials in Advertising,” which address endorsements by consumers, experts, organizations, and celebrities, as well as the disclosure of important connections between advertisers and endorsers. The guides, last updated in 1980, are administrative interpretations of the law aimed at helping advertisers comply with the Federal Trade Commission Act, and they’re not binding law themselves.

One problem with Internet reviews, as we reported here in June, is that a blog or online user review that seems to have been written by a sincere, unbiased mensch just like you, may be tainted by a behind-the-screen payment of freebie products or cold cash. Such payments are part of a new form of advertising, called word-of-mouth marketing, in which advertisers pay your favorite bloggers to review their products. Bloggers have been paid in the form of free product samples; gift certificates for JCPenney shopping sprees; cash payments; and the loan of a $30,000 Ford Flex for a year. We've reported examples of such payments–sometimes called blogola–in the electronics industry as well. 

The Internet advertising world didn’t welcome the proposed setting of standards, and instead wailed about “a chilling effect on blogs” and “bloggers in handcuffs.” Their recommended solution was “self-policing,” which requires consumers to rely on the kindness of quietly paid bloggers to behave like disinterested judges. Hah! Or should I say, LOL!

Buzzword: Fiduciary standard

What does it mean? Financial advisors who follow a fiduciary standard are required to put the needs of clients first. They must fully disclose how they are compensated, and any conflicts of interest they might have. Registered Investment Advisors (RIAs) have such a duty, and are registered with Securities and Exchange Commission. Members of the National Association of Personal Financial Advisors and Financial Planning Association have taken similar oaths or adhere to codes of ethics. The vast majority of brokers, however, many of whom work for the large brokerage houses, have no fiduciary duty. The commissions they earn for selling investments may lead them to promote their own company's products or ones that earn them the most money. Their loyalty is to their company first, not to you. Advisors with a fiduciary responsibility, however, forgo commissions and often are fee-only, meaning they charge a flat fee or charge based on a percentage of assets under management.

Why the buzz: This slightly arcane subject has taken on new importance in light of the market meltdown of 2008. Some of the stock brokers or other investment professionals on whom people relied for guidance in making financial decisions may have not provided the best advice (one of the charges in lawsuits against Bernie Madoff was "breach of fiduciary duty"). Brokers have the duty to ensure the "suitability" of investments for their clients, but critics say that standard doesn't necessarily restrict fee-laden investments or place clients in investments that correspond with their tolerance for risk. As a result, Congress is this week discussing how to introduce more transparency into the world of financial advice as part of the Investor Protection Act of 2009 and potentially bring all people who dispense investment advice under a fiduciary standard. Whether the job of creating new regulations for investment planners will fall to Congress, the SEC, or independent regulator, FINRA, remains to be seen. For advice on screening a broker, check Consumer Reports' advice here.–Chris Fichera