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Report trashes overdraft fees

By Marcie Geffner · Bankrate.com
Tuesday, August 27, 2013
Posted: 6 pm ET

A new report by the Center for Responsible Lending, a nonprofit consumer advocacy organization, has called attention to potentially abusive aspects of bank overdraft programs.

According to the report, overdraft programs can mean high fees that are disproportionate to the size of the overdraft, balloon repayments, short repayment terms, inadequate underwriting to assess the customer’s ability to repay the loan without taking out another loan and manipulation of posting order to increase fees, among other issues.

The report had some particularly harsh words for overdraft fees charged in connection with debit cards.

"Banks and credit unions have long defended overdraft fees by saying they protect customers from bounced checks, which typically trigger insufficient funds, NSF, fees and potentially merchant fees. But the same justification could not be made for debit card purchases, since there are no NSF or merchant fees charged for debit card transactions that are declined at checkout when the customer's account is short," the report said.

Debit card transactions trigger an average overdraft of only $20 and consequently incur the most expensive fees in terms of cost per dollar overdrawn at $1.75.

Some banks have capped overdraft fees, but the report said these limits and the variety of fees assessed still allow for banks to charge daily fees in the hundreds of dollars for overdrafts.

The report also cited an emerging trend toward overdraft fees being charged on prepaid cards, a rapidly growing financial services product.

"Purchases on prepaid cards can be declined at the time of purchase. But many prepaid card issuers will pay the transaction anyway and charge a high fee for each overdraft," the report said. "This is particularly problematic since many card users may be using prepaid cards because overdraft fees drove them out of the banking system in the first place."

How about you? Do you face high overdraft fees?

Follow me on Twitter: @marciegeff.

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