Ask Stacy: Is It Legal for Banks to Stack the Deck?

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For years it's been common practice for banks to clear checks and debit card transactions to maximize overdraft charges. Is it legal?

It’s not legal for Vegas casinos to cheat by stacking the deck. But your bank won’t get busted for stacking the checks… or debit card transactions.

Here’s a recent viewer question…

I would like to know, is it legal for banks to change posting order of transactions for checking accounts? For example, you have four small transactions pending and a check is presented that is larger than the four already pending. The bank posts the larger check and pays the four smaller checks, but charges you $35 per check, instead of paying the larger and  charging one insufficient check charge of $35.
Thank you,

I did my first news story concerning this practice more than 15 years ago. It’s an old banking trick: clearing transactions specifically to maximize overdraft fees.

Although RaeLa did a good job of explaining the scenario, just to make sure you’re hip to her drift, here’s an example:

You’ve got $1,000 in the bank. You perform five checking or debit card transactions on the same day…

Transaction 1: $5
Transaction 2: $30
Transaction 3: $20
Transaction 4: $10
Transaction 5: $1,000

The bank has several choices: They could pay the first four charges, then bounce the last one, since there’s not enough left in the account to pay it.  They could pay the last one and bounce the first four. Or, they could do some combination.

If they charge $35 for overdrafts, in the first scenario they’d only make $35, because they’d only bounce the final transaction: the one for $1,000. The second option, on the other hand, earns $140 in fees, since they’d pay only the $1,000 transaction, then bounce the other four.

If you paid $140 in fees rather than $35, you’d argue the bank is taking unfair advantage of your bad luck. The bank, on the other hand, would likely counter they were doing you a favor by paying the biggest, and therefore presumably most important, charge.

Over the years, I’ve heard both of these arguments. Who’s right? In my opinion, the consumer is. Bank sequencing of checking account transactions to maximize fee income is simply  kicking people when they’re down.

So much for the moral argument, but…

Is it legal?

Technically, yes. There’s no law against it. But maximizing fee income this way is frowned upon by banking regulators. Here’s an excerpt from a Federal Deposit Insurance Corporation (FDIC) Supervisory Guidance FAQ page:

Transactions should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer overdraft and related fees. Examples of a neutral order include order received, check number, serial number sequence, or other approaches when necessary based on sound business justification.

Re-ordering transactions to clear the highest item first is not considered neutral because this approach will tend to increase the number of overdraft fees. By contrast, processing batches of transactions in a random order or order received is a neutral approach; however, institutions should not arrange the order of types of transactions (i.e., batches) cleared in order to increase the number of overdrafts and maximize fees.

If this is what happened to RaeLa, she should stroll into her bank, ask to speak to the manager, and politely point out that processing checks in order to maximize overdraft fees is in direct conflict with FDIC guidance.

She might also point out that Congress is currently considering legislation to curb abusive overdraft practices with a bill called the Overdraft Protection Act, which would curb this and other questionable overdraft practices, like charging a $35 overdraft fee when someone overdraws their account by purchasing a $1 cup of coffee.

Finally, she might mention that many class-action lawsuits have arisen over just this issue. For example, White v. Trustmark National Bank was filed on April 30, 2012, just five days after Citizens Bank paid more than $130 million to settle a similar suit. And that’s just the tip of the iceberg – there are tons of similar suits already settled or in the works. You can read many more at this page of the Center for Responsible Lending’s website.

RaeLa should explain to the bank manager in the nicest possible way that she hates lawsuits, especially when it involves her friendly local bank.

Is it preventable?

As I said at the outset of this post, I’ve been warning consumers about this banking practice for more than a decade, and I hope it’s clear I’m not sympathetic to the banks that employ it. However, now that we know it can happen, let’s take a little responsibility.

Keeping a balance in your bank account sufficient to cover the money you withdraw isn’t rocket science. It requires reconciling your account monthly and, if you live precariously, prearranging for a fee-free credit line or automatic transfer from savings to cover potential shortfalls. If you can’t find a cooperative bank, move your account to a credit union – they’re generally a better deal anyway.

In short, while it’s righteous to blame the mugger, accept some fault if you frequent dangerous neighborhoods.

Stacy Johnson

It's not the usual blah, blah, blah

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