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Opting in can be costly

By Marcie Geffner · Bankrate.com
Saturday, June 15, 2013
Posted: 6 am ET

A new report from the Consumer Financial Protection Bureau, or CFPB, adds more weight to concerns about the cost to consumers of bank and credit union overdraft protection services.

The report found that large financial institutions had wide differences in their overdraft coverage fees and practices for debit card transactions and ATM withdrawals, and that consumers who opted in to this coverage ended up paying more costs and suffering more involuntary account closures.

Overdrafts can occur when a consumer attempts to spend or withdraw more money than is available in a checking account. When that happens, the bank or credit union can cover the payment or return the item. If the consumer has opted in to overdraft protection and the payment is covered, an overdraft fee might be charged. If the item is returned, a nonsufficient funds fee might be charged.

Most banks have automated systems that determine how overdrafts are handled. These systems have contributed to an evolution of overdraft services from an occasional courtesy to a significant source of revenue for banks and credit unions, the CFPB said.

A consumer's decision to opt in to overdraft services can have significant consequences. The CFPB study found that:

• Average annual overdraft charges varied among financial institutions. On average, consumers who overdrew an account paid $225 annually in overdraft and insufficient funds. Those costs varied from an average high of $298 to a low of $147.

• Consumers who opt in to overdraft services are more likely to end up with involuntary account closures since negative account balances are a significant contributor to that outcome. The rate of involuntary closures appeared to vary by nearly 9 percent among the banks in the study.

• Banks and credit unions have complex and often unique overdraft policies, procedures and practices that can be difficult for consumers to understand. For example, some banks limit the number of overdraft charges while others have no cap.

"Because bank and credit union overdraft policies, procedures and practices are so different, the outcomes for consumers at the various banks in the study also varied. This raises questions about why some consumers are incurring much higher costs than others, especially when overdraft costs are not upfront fees, but automated back-end charges (that are) largely difficult for the consumer to predict," the CFPB said.

In a statement, CFPB Director Richard Cordray said consumers need to be able to anticipate and avoid unnecessary checking account fees, but some banks' overdraft programs might be increasing consumers' costs.

"What is often marketed as overdraft protection may actually be putting consumers at greater risk of harm," Cordray said.

Follow me on Twitter: @marciegeff

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