Collective Conscious

If you run out of money in your check­ing account dur­ing a debit trans­ac­tion, you get charged an over­draft fee. Gen­er­ally these are a fixed cost of some $20 or $30 for each trans­ac­tion over the limit — and until the pre­vi­ous credit card reform bill passed, trans­ac­tions were gen­er­ally processed in the order which would result in the great­est total fee. You don’t get any option to decline such a trans­ac­tion; you sim­ply get hit with the charge.

This isn’t fair, for sev­eral rea­sons. First of all, an over­draft “fee” is really a short-​​term loan. It’s true that you’re get­ting charged for a ser­vice, but because the ser­vice is the spe­cial case of a cash advance (you do, after all, have to pay back your over­age), over­drafts tech­ni­cally ought to fall under the reg­u­la­tion that applies to lend­ing. In the UK this is widely under­stood, and over­drafts are treated as short-​​term loans with an appro­pri­ate rate of inter­est, as well as an “over­draft cap” — effec­tively a credit limit — beyond which harsher penal­ties are applied.

So why not sim­ply treat over­drafts as loans in the US as well? The key prob­lem is the man­ner by which the fed­eral sys­tem reg­u­lates inter­est rates. Many states have enacted usury laws, which cap the legal rate of interest. However, because of the pol­icy of “inter­est rate expor­ta­tion”, lenders get to apply the capof the state in which the lender is incor­po­rated (usu­ally South Dakota, which has no cap because its loan laws were writ­ten by bankers), not of the state in which the loan occurs. This means that US inter­est rates are effec­tively unlim­ited for a major corporation.

What all this means is that an attempt to reg­u­late over­draft fees through the loan sys­tem open up a big ol’ can of worms about the usury law sys­tem, and inter­est rates in gen­eral. Polit­i­cally, that’s a heavy lift, and it’s not going to hap­pen. South Dakota went through enough trou­ble to make itself a lender’s par­adise, and it wants to stay that way. Plenty of other states ben­e­fit off the equally short-​​term, equally extor­tion­ate “pay­day loan” indus­try, which charges com­par­a­tively exor­bi­tant rates in the form of “fees” on cash advances to cash-​​strapped work­ers. Nei­ther of these indus­tries are vul­ner­a­ble to reform, for the same rea­sons that car deal­ers dodged new lend­ing reg­u­la­tion this week: they’re all extremely prof­itable, and they all adversely affect a rel­a­tively poor con­stituency (read: not an “impor­tant” one).

In other words, don’t expect action — we’re lucky enough that Con­gress is able to cut abu­sive over­draft fees, even if it costs us our beloved free check­ing (which isn’t really free anyway).

(Photo: laver­rue)