Strange Bank Account "Overdrafts"

[treehugger1]

I've been looking at some other boards and speaking with folks who have the ability to drive down their checking accounts to the negative thousands of dollars. I'm hearing that WAMU, Wells Fargo, etc allow consumers to take "cash advances/cash withdrawls" for $1000's of dollars when they have no money in their accounts. This is NOT based on overdraft protection where a separate account with high interest rates covers overdrafts to your checking. In addition, there does not appear to be any "fine print" that even authorizes such a thing. The costs of doing so are equivalent to payday loans.

How do the banks even begin to collect on such "overdrawn" accounts? Is this even legal? One would think that in these trying times for financial insitutions, such a scenario as mentioned above would have been shut down.

This may not be the appropriate area of this forum to post this thread, but the more I look into personal finance issues, the more I see what I would consider to be 1) stupidity on the institution's part, or 2) no original contractual obligation. How on earth, do these folks ever attempt to collect?

Pretty weird, but not surprising.

[WhatMoney]

WAMU normally allows $1000 overdraft protection per checking account, if you are in good standing as a customer. I don't know if they even check your credit report before giving you this automatic protection. They have not lowered my $1000 overdraft protection on any of my accounts, even though my credit report has been thoroughly trashed in the last two years. But I did open my checking accounts with them 15 years ago and have always righted any overdrafts plus fees with them within 2 weeks. So I assume my banking history helps.

I think what you are asking is, if you do not re-balance your account within a certain period of time (probably over 30 days) will they attempt to collect with a collection agency or lawsuit or just write it off, since there appears to be no written loan contract for this type of overdraft protection in their account regulations. I suspect they just write it off. However they will freeze and/or close your overdrawn account, remove any overdraft protection from other accounts and possible close them, never do any new business with you again, and report the overdrawn balance to chexsystems and the credit agencies. In other words there are penalities to pay for not paying them the money they advanced to you.

Since the amount involved is only a maximum of $1000/account, their accountants have concluded that given the default rate this is still a profitable policy. Say the default rate (deadbeats who never pay back the overdrawn account) is 2%. And say their stats tell them that on average 98% of all the other accounts incur at least one overdraft fee of $27/account per year. So they lose $2000 and gain $2,646 on each 100 accounts per year. So on 500,000 accounts they have a net fee profit of $3.23 Million per year from this "generous" overdraft policy. Since most other banks have a lower overdraft amount with higher fees, the number of new and continuing customers is a competitive advantage. In fact retail banking is the only strong point with WAMU. They may still be taken over soon (this week?) because of their dismal mortgage portfolio.

If the checking account default rate gets too high WAMU may have to change the policy or increase fee rates. Wells Fargo "payday loan advance" program is much more expensive - they charge you $2 for every $20 overdrawn up to $500, or $50 for a $500 overdraft. WAMU charges a flat $27 for any overdraft up to $1000. Both programs require no line of credit or backup accounts.