There’s no shortage of dumb laws on the books in this country — you can’t, for example, delay or detain a homing pigeon in New Jersey or give a dog whiskey in Chicago. But what really confounds me is all the lousy things that remain legal. Sure, on any given Sunday it’s illegal to hum while on a public street in Cicero, Ill., but the municipal ordinances are silent when it comes to the high crime of selling tickets to a Justin Bieber concert.
To find the scurrilous activity that really takes the cake in the category of “How is this thing STILL legal?” you’ve got to turn to banking and the little-known — but highly profitable — practice of “check ordering.”
Check ordering occurs when bankers clear your checks, ATM withdrawals and debit-card transactions not in the order they arrive but from the largest amount first to the smallest amount last. The reason is that if your account is low on cash, check ordering increases your number of overdrafts.
Getting a bounce in profits
If you have $200 in your account and take $50 out of the ATM, then make a $75 debit-card purchase before a $150 check you forgot about hits the bank, it’s only that last transaction that overdraws your account. But with check ordering, bankers clear the check first, so that both the $75 and $50 transactions slap you with overdraft fees.
This is big business, according to a study conducted for the Wall Street Journal, because overdraft fees totaled $31.9 billion last year in what is nearly pure profit for banks. I’m not arguing that people should bounce checks, just that the punishment should fit what’s mostly an accidental crime. The median debit-card transaction that prompts an overdraft fee, according to the Consumer Finance Protection Bureau, is a mere $24. But the median overdraft fee is $34.
And it’s not like banks are taking a big risk when they pay that charge instead of rejecting it. Customers cover the majority of their overdrafts in three days. That makes the overdraft fee a three-day loan with an annual rate of 17,000 percent interest.
Banking on fraud
For years, big banks swore that paying the big charges first was what customers wanted, so that the mortgage check didn’t bounce even if the one for Girl Scout cookies did. This lie was exposed in 2010 when a federal judge looked at emails and memos from Wells Fargo and found “the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts.” He ordered the bank to cough up $203 million in a class-action suit, ruling that check-ordering is a complete fraud.
In later nationwide suits, Bank of America paid $410 million and JPMorgan Chase paid $110 million over check ordering, then changed their policies. And yet, according to The Journal’s study, hundreds of small and regional banks continue to clear checks from largest to smallest even today.
Fortunately, the consumer finance bureau is considering whether to limit or even ban the practice outright. If that happens, there’ll be one less legal but disgusting thing to worry about. Then we just need to get those regulators to a Justin Bieber show.
Brian O’Connor is author of the award-winning book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”