Some rubber checks cost you more than others
By Laura Bruce • Bankrate.com

You may have received a letter recently from your bank or credit union cheerily noting what a valued customer you are and telling you that if you bounce a check or two every now and then, don't worry, we'll pay it and then just charge you our standard nonsufficient funds fee.

You won't be embarrassed by mean Mr. Grocer posting your name on the "bounced checks" list at the cash register, and you won't have to pay Mr. Grocer's bounced-check fee.

And, you don't even have to sign up for this overdraft privilege, as it's often called; you're automatically enrolled.

Sounds pretty good, doesn't it? Consumer groups say it's anything but a good deal. It takes unfair advantage of unwary customers and encourages irresponsible banking habits.

The typical overdraft protection many financial institutions offer is very different from these offerings for bounce protection. Customers sign up for standard overdraft protection. The overdrawn check is paid and no NSF fee is charged. The customer agrees in advance to have the overdrawn amount deducted from their savings account, or a line of credit, or charged to their credit card. Fees, and any interest charges if the overdraft is paid through a line of credit or credit card, are known in advance.

Bounce-protection literature typically states the amount that a customer may overdraw their account, usually $100 to $1,000. If the overdraft exceeds the bounce protection limit the bank may decide not to pay the check.

The institutions charge the customer the NSF fee, often $35, and sometimes a daily fee, anywhere from $2 to $10, is charged until the account is brought into balance.

Most bounce-protection plans require the overdraft and fees to be repaid within 30 days, but some expect repayment in 16 days or even five. After that the account can go to collection, or in some cases, the customer can opt for a risk-management program that allows the customer to keep their checking account open but the bank debits the account for 10 percent of the amount due a month until it is repaid.

In addition to checks, bounce protection can be used through ATMs and debit cards.

What's your balance?
A major complaint of consumer advocates is that some institutions include the bounce protection in the balance when a balance inquiry is requested.

Suppose you have only $100 cash in your checking account, but you have $200 in bounce protection. Do a balance inquiry by phone or at the ATM, and some institutions will tell you there's $300 in your account. Some people might overdraw their accounts without even realizing it.

Consumer groups say bounce protection amounts to a form of short-term, high-cost credit.

"These checks have to be repaid in 30 days instead of installments over time. We believe this is payday lending done by banks," says Jean Ann Fox of the Consumer Federation of America.

"They don't do an ability-to-repay credit evaluation of you, and they demand immediate repayment all at once, and they don't tell you what it's going to cost."

Bren Pomponio, an attorney for Mountain State Justice, a Charleston, W.Va., practice that represents low-income people, has a 71-year-old client who he says was charged $75 in bounce-protection fees for a $35.79 "loan" of less than two weeks.

The woman has a checking account with City National Bank, which, in addition to the $30 NSF fee, charged $5 a day for each day the account remained in negative balance.