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Why you pay for someone else's bad check

Your good buddy Jeff gives you a check for $100 to pay for the four barely bald tires he bought from you. You deposit the check in your account at the MoreFeesForUs Bank.

A few days later you receive notice that Jeff's check bounced higher than a rubber ball and the bank is now docking your account with a $6 fee.

If there's ever a bank fee that doesn't seem fair, it's this one -- the "Deposit Item Returned" fee, DIR for short.

"The depositor is the victim here," says Jean Ann Fox, director of consumer protection at Consumer Federation of America. "Victimized by the person who wrote the check and then by the bank that's charging them a penalty."

Financial institutions don't quite see it that way.

A spokeswoman for an Akron, Ohio, credit union who didn't want to be identified, said, "The reason we charge it is the last person that endorses a check is responsible for that check. If someone writes a check and doesn't have the money in their account, you're responsible for that check."

Ouch!

The spokeswoman likened it to the risk a store takes when accepting a check as payment.

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When in doubt, check it out
Stan Lata, spokesman at Bank One, which charges $4.50 for returned deposit items, says if you have any qualms about a check you've received, check it out before depositing it.

"If a person is uncertain a check will clear, either they or our bank teller can contact the bank to make sure the funds are there."

Fox says she doubts many people would realize they could do that.

"If you make out a check to a business, they may have the wherewithal to call the bank and ask if there is enough money to cover it," Fox says. "But to tell consumers to do that, that's really putting the burden on folks to do something they probably don't even think they have the right to do. They probably wouldn't think that information is available to them."

Complicating the issue is the practice a lot of banks employ if they receive several checks drawn on an account. They pay checks in descending order -- the largest checks first -- rather than by date.

If the account is short of money, this method may cause several checks to bounce rather than just one large check bouncing if the checks were paid in the order they were written. That way the bank can charge more NSF fees.

For example, you have $700 in your checking account. You write six checks over a six-day period, mailing them as they're written. The checks are for $25, $35, $225, $200, $325, and $40.

The bank receives the checks all at once and pays them in descending order. That means only two checks, $325 and $225 would be paid; the other four would bounce. If the bank had paid the checks in the order they were written, the first four checks would be paid and only two checks would bounce.

"I suspect that a lot of checks that individuals get from folks are situations where the person who wrote the check didn't realize the account was overdrawn," Fox says. "The person who wrote the check might not have realized the order in which the bank cleared the check.

"Both parties involved in the transaction may be disadvantaged by the practices the bank chose to use."

This isn't to excuse people who write bad checks. They should balance their checkbooks or get overdraft protection. But everyone makes a mistake once in a while and banks are making hay of that.

As Fox points out, with all the bank mergers it's becoming increasingly likely that the check writer and the check receiver are using the same bank and that institution is collecting the non-sufficient funds fee from one customer and the DIR fee from another.

All the banks we talked with said they charge the DIR to pay for handling costs.

Fox disputes that.

"These fees run about 10 times what it costs to handle it -- of course they're punitive."

In 1998, the last time Consumer Federation of America examined bounced check fees, the banking industry collected $5.6 billion from consumers in NSF charges and another $1.1 billion in DIR fees.

The victim pays
The average DIR fee was $6.28 at banks, and $7.65 at savings associations, according to data released by the Federal Reserve in 2000.

Fox says those numbers have only gone up.

Make no mistake; consumer activists don't think banks should be left holding the bag on either side of the scenario. But a fee that charges a possibly innocent person leaves a bad taste.

Representative Anthony Weiner of New York introduced legislation in 1999 to ban DIR fees. The "Fairness to Check Cashers Act" never made it out of committee.

Nevertheless, Weiner continues to believe that imposing a fee on the individual who cashes a bad check is akin to punishing the victim, according to Weiner spokesman Anson Kaye. Kaye says Weiner plans to reintroduce the measure.

If you deposit a bad check and get zapped with a fee, call the bank and ask if the fee can be waived. Every financial institution we talked with said they would work with a customer with whom they have a "good relationship."

In other words, they may give you a break if you don't bounce checks and if you haven't deposited a bad check before, or at least not in a long time.

If your relationship with the bank is less than perfect, you'll have to ask the check bouncer for the fee if you don't want to get stuck with it.

If you accept checks from a lot of people you don't know well, get in the habit of calling the bank before depositing the check.

Also, go beyond the basics when comparison shopping for an account.

Fox says most consumers rarely look past the minimum to open an account and the minimum to avoid monthly fees; but financial institutions have a long list of fees that people never even think of until they incur them.

-- Posted: April 15, 2002

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See Also
Five ways to avoid bouncing a check
Checking account study
More checking stories

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