Courtesy overdraft: bad for customers

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The latest Bankrate survey shows that consumers who overdraw their checking account continue to get soaked by courtesy overdraft programs offered by banks and savings banks around the country.

Bankrate’s survey, which examined the five largest banks and the five largest thrifts in each of the top 10 metropolitan markets, shows that the average fee charged for courtesy overdraft is $29.
That average is for the first overdraft.

Banks charge that fee on a “per item” basis, meaning it gets tacked on to each overdraft. Several institutions charge escalating fees with each ensuing overdraft, which can pile up quickly. So, if you overdraw frequently, the average fee you pay could be considerably higher than $29. For instance, Bank of America cuts first-time offenders some slack and charges $20 for the first overdraft; after that the fee rises to $35.

But the costs to consumers don’t end there. A handful of surveyed banks also charge another fee every day an account is in negative territory. Some give a grace period, and some stick the customer with a daily fee right away. Corus Bank in Chicago has a five-day grace period and then begins tacking on a $5 charge each day, while Sterling Bank & Trust in San Francisco digs right in and charges customers $10 per day from the get-go.

Many ways to overdraw
Courtesy overdraft typically allows a customer to overdraw their account up to a specific dollar amount based on their account and their relationship with the bank. The overdraft limit is usually in the $100 to $1,000 range, but the bank has no obligation to pay the overdraft. Customers aren’t limited to overdrawing their account by check. They can do it through electronic transfers or go overboard at the cash register or the ATM with their debit cards.

Some overdraft programs include the allowed overdraft dollar amount when customers check their balance at the ATM. It’s easy to see how a person who has $100 in his or her account could overdraw if he sees an allowed overdraft amount of, say, $200 added to the total balance. They may not understand that taking out more than $100 will put their account in arrears.

Common sense would dictate that if you’re trying to take out more money than is in your account, the ATM or point-of-sale authorization system should either refuse the withdrawal, just as it would with a credit card, or let you know that you’ll be overdrawn and you’ll incur a fee; but that’s not what’s happening.

Are you enrolled?
What’s also troubling is that most bank customers are automatically enrolled in courtesy overdraft programs without their knowledge. Banks aren’t required to send a notice to the customer that they’re enrolled in the program unless the bank chooses to promote the program, and most don’t. Consumer advocates say these programs are nothing more than high-interest, short-term loans foisted upon unsuspecting customers.

“Every interaction with your bank shouldn’t be an act of self-defense,” says Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending, or CRL. “It’s very reasonable to say that consumers should have the right upfront to decide whether they want their overdraft covered through ATM or debit transactions. Then you don’t have to worry about defending yourself against your bank when you’re making a debit purchase. You can make the debit purchase with confidence knowing that you can only spend what’s in your account; which is why people use debit cards in the first place.

“Right now, not only do banks not ask consumers whether they want to sign up for the program, we hear from many consumers who say they called their bank to opt out and were told they can’t, or the bank says they’ll (remove the customer from the program) but they don’t.”

Avoid embarrassment or fees?
In testimony last summer before the House Subcommittee on Financial Institutions and Consumer Credit, Nessa Feddis, senior federal counsel for the American Bankers Association, said that consumers value and expect banks to pay overdrafts.

“They value the ability to avoid the embarrassment, hassle, costs and other adverse consequences of having a check bounce or a transaction denied. Whether made by check or electronically, returning a payment to a merchant, mortgage company or credit card company usually means the consumer pays additional fees charged by the person receiving the payment.

“Customers also avoid the inconvenience of having to resolve the issue and arrange a second payment. They risk having adverse information reported to a credit bureau or ‘bad check’ database. Moreover, as the consumer pays a fee whether the bank pays the item or returns it unpaid, consumers typically appreciate the depository institution paying items when there are insufficient funds.”

A January 2007 debit card survey by CRL found that 60 percent of survey respondents said they would rather the bank deny the debit card purchase if it will overdraw their account, and “nearly all would cancel an ATM withdrawal if warned they had insufficient funds.”

It seems reasonable to assume that millions of consumers would prefer to have their overdraft paid as opposed to any of the negatives mentioned by Feddis. But what if they had $500 in courtesy overdraft protection and they made five $100 overdrafts, each one racking up the $29 average fee? Maybe they’d prefer the embarrassment of having the first overdraft refused.

Billions paid in fees

In a 2006 study of 8,500 courtesy overdrafts, CRL found that consumers paid $17.5 billion in fees for $15.8 billion in overdraft loans.

The center’s study notes that debit card transactions at the cash register or the ATM are the primary cause of overdrafts, triggering 43 percent of overdrafts across all ages, and 46 percent for 18- to 24-year-olds. But since younger people use debit cards for smaller purchases, they end up paying a median fee of $3.25 for every $1 overdrawn versus $1.94 per $1 overdrawn for all adults.

Avoid the fee trap

In her testimony, Feddis noted that consumers have multiple ways to protect themselves against overdraft fees and that they must keep track of their spending and account balance. She’s right. You don’t have to get caught in this fee trap. Ask your bank what tools they have available to help you avoid overdrafts.

“We have a free service called ‘balance alert’ that allows the customer to go online and sign up for an e-mail or text message that will notify them if their account reaches a minimum balance,” says Ferris Morrison, a Wachovia spokeswoman. “They can set that figure to whatever works for them. It’s a great way for customers to know when they might need to make a deposit or (put off) buying that extra item.”

There are other ways you might protect yourself from overdraft fees, including:

Opt for traditional overdraft protection. You’ll have to sign an agreement with the bank to have your checking account linked with your savings account or a line of credit. The bank will pay the overdraft. Fees may be per item or annual, but they’re usually fairly small, in the $10-to-$20 range.

Opt out of the plan. Tell the bank that you do not want courtesy overdraft, bounce protection or whatever they call it. If you’re automatically enrolled and you want out, tell them. If they say it can’t be done or they don’t do it in a timely fashion, call back and speak to someone higher up the food chain.

Improve your record keeping. Be diligent about recording withdrawals. It’s too easy today to take money out at the ATM and forget to note it in your checkbook register. If you only check your balance online or by phone, make sure you do it frequently and especially before you’re about to use your card. If necessary, consider keeping some extra money in the account as a cushion.

For additional information on protecting yourself against overdraft fees, visit the Federal Reserve’s Web site.

What’s ahead?

Both the Federal Deposit Insurance Corp. and a House bill are examining overdraft programs. Here’s what they hope to achieve:

The FDIC is studying overdraft programs and how consumers are using them. The data are expected to be released some time in 2008.

The Consumer Overdraft Fair Practices Act (H.R. 946), proposed by Rep. Carolyn Maloney, D-N.Y., is winding its way through Congress.

Here are some of the provisions as currently written:

1.No overdraft protection fee could be imposed on a consumer transaction account unless the consumer provided specific written consent.

2. The written agreement must clearly disclose, among other things, the amount of any fee imposed in connection with paying an overdraft, the time period in which the debt must be repaid, the circumstances under which the institution will not pay an overdraft.

3. Overdraft fees would be considered finance charges and, as such, an annual interest rate would have to be disclosed.

4. At an ATM, the consumer would have to be given notice after a transaction is initiated, but before the consumer is irrevocably committed to completing the transaction, that the electronic fund transfer requested will result in an overdraft protection fee, and the amount of the fee.