I stumbled across the following Q&A while looking for other guidance, do any other experts agree with this answer? Does this mean South Carolina (and maybe GA?) banks cannot charge a $5.00 overdrawn daily fee?
Question
On the Federal Reserve's Web site, they have an example of an explanation of overdraft services that a bank might send. In that explanation, they include this: "Also, if your account is overdrawn for 5 or more consecutive business days, we will charge an additional $5 per day." I also understand that Bank of America is charging this exact fee. Our bank is considering charging this fee, are there any hurdles or obstacles we must overcome to charge this fee?
Answer
As of 3/22/2010
I wish the Fed had not used that in its example because it ignores the variety of state usury laws. The example must be adapted for state law and actual custom and usage.
I\'m concerned that some Texas banks might think that the Fed is approving a daily fee. Alternatively, some banks may adopt the Fed\'s example without noticing that the fee is in the example or without knowing that charging this fee may be usurious.
The Texas case that we call Tony\'s Tortilla Factory (because that\'s the name of one of the parties) holds that a one-time charge on an overdraft is not interest because the formula for interest is:
PRINCIPAL X RATE X TIME = INTEREST.
With a one-time charge, there isn't principal, rate, or time; therefore, there is no interest.
If instead you charge $5 per day after the account is overdrawn for 5 business days, you do have principal (the amount of the overdraft), time (one day or more), and rate ($5 per day). If $5 per day is more than 18% per year, then it is usurious. On a $50 overdraft, you could charge $0.02 per day.
By my calculation, in Texas, you may charge $5 per day for overdrafts, but only if the overdraft is $20,277.76 or more.
So, how does BOA get away with charging this fee? They are using another state's laws.