Report: Bank fees hurt patrons

Industry says it's serving customers

Banks and credit unions have deliberately changed the way they deal with overdrawn accounts in order to boost their fees at customers' expense, according to a new study.

The national study by the Center for Responsible Lending, a nonprofit group in Durham, accuses financial institutions of "abusive" overdraft policies.

"American consumers are being bilked by overdraft fees," said U.S. Rep. Carolyn Maloney, D-N.Y., who participated in a conference call Wednesday morning. "This abuse is taking precious dollars from millions of hard-working Americans." Maloney has co-sponsored a bill in Congress that aims to curb overdraft practices.

The day has passed when banks and credit unions declined to honor checks or debit card payments when the customers' checking account lacked sufficient funds. Today, according to the report, they routinely cover the amount of the shortfall. Then they charge a fee for doing so. They also require you to pay the shortfall amount.

The industry practices labeled by the report as abusive include:

* Financial institutions delay crediting deposits to an account, so customers may think they have more money in their account than they actually do.

* Financial institutions manipulate the order that check or debit card payments are processed, with higher amounts processed first. That can deplete an account sooner and lead to "cascading overdrafts," said Eric Halperin, the study's co-author. Banks defend this practice, saying it benefits customers because it increases the chances that crucial items -- such as mortgages and car payments -- are covered.

* Customers typically receive no warning that their accounts are being overdrawn when they make a debit card purchase or ATM withdrawal. Technology is available that would alert customers when they're in danger of overdrawing their account, but most banks and credit unions haven't adopted it, according to the report.

The American Bankers Association contends the technical and practical challenges of automatically notifying customers of an imminent overdraft are formidable.

Such an alert system "would impose initial and continuing costs as well as lengthen the transaction times," Nessa Feddis, senior federal counsel, stated in written testimony to a House committee that conducted hearings on overdraft policies Wednesday. "In some cases, it simply would not be feasible."

The fees are big money-makers for banks and credit unions, which charged consumers an estimated $17.5 billion in fees on overdraft loans last year, according to the report.

The American Bankers Association contends the industry is giving customers what they want.

"Consumers value depository institutions paying their overdrafts -- and have come to expect it -- as it helps to avoid the embarrassment, inconvenience, merchant fees and other adverse consequences of having a check bounce or a transaction denied," Nessa Feddis, senior federal counsel, stated in written testimony to a House subcommittee that conducted hearings on overdraft policies Wednesday.

Nessa also said that "consumers have many options to avoid overdraft fees." That includes arranging with their bank to have overdrafts paid through a line of credit or a savings account -- something the Center for Responsible Lending also recommends.

One sign that the system is out of balance, according to the study, is that the $17.5 billion in fees paid by consumers in 2006 exceeded the $15.8 billion in overdrafts.

The average fee for an overdraft is $34, according to the report.

"Many consumers don't even know they are getting these charges until they get the bill," said Maloney.

Banking giant Wachovia said in a statement that "We work to educate our customers about our overdraft policies and how they can avoid overdrafts."

According to the statement, the bank offers free balance alerts that send customers a text message or e-mail when their balance reaches a minimum amount set by the customer so they can make a deposit. Customers can also link their checking account to a savings account, money market or credit card account to protect from overdrafts.

Wachovia charges $22 for the first overdraft and $35 for additional overdrafts within a 12-month period.

With regard to deposits, Wachovia spokeswoman Mary Beth Navarro said that "99 percent of the funds deposited by customers are available the next day."

The amount of fees banks reap for overdrafts has risen dramatically -- up 70 percent from an estimated $10.3 billion in 2004, according to the report.

The growth is being fueled in part by more and more banks adopting overdraft programs and the increasing popularity of debit cards. Since debit cards are typically used instead of cash, "all of a sudden, there are opportunities to overdraft where you never could before," Halperin said.