Bank Overdraft Fees News and Analysis

It's no secret that banks – like airlines – charge fees for many things that, in the past, were free. Things customers once took for granted as part of the service now come with a price.

It's one reason so many consumers have been fleeing banks in recent years. One of ConsumerAffairs' readers, Penny from Fallon, Nev., wrote to say that her bank recently initiated a number of new fees.

“I just got a list of new fees that my current bank will begin charging as of September 15th,” she wrote in an email. “It will cost some customers $15 a month, just for the privilege of having an account at their bank! Actually, I am one customer who WON’T have to pay fees, because I am on automatic deposit, and only live on Social Security. But getting a printout? $5.00! And if I overdraft by one cent, fees begin – $39.50 for the first day, and $5.00 every day after that until my account is showing a ‘balance’ again.”

At least Penny is aware of her bank's fees. Far too many consumers get blindsided by them.

The personal finance website Wallethub.com has just conducted a study to determine how transparent banks make their fees on their websites, where consumers tend to shop for a bank. If customers are going to be charged a monthly service charge or a fee for talking to a teller, it's reasonable to expect those fees to be disclosed up front.

The study found that the average checking account has approximately 30 fees associated with it. But that isn't a certainty.

Hard to tell

“Once again, the variance in disclosure policies made it hard for us to determine the precise number of fees associated with each checking account, but most banks fell in the 20 to 40 total fee range, with some reaching almost 50,” the authors write. “The sheer number of different fees associated with checking accounts prevents effective product comparison and decreases the likelihood that consumers will find the best checking accounts for their needs.”

The study also names names. It said 2 banks out of 25 in the survey – USAA and M&T Bank, don't provide a fee schedule to consumers on the checking account product pages of their websites.

A check by ConsumerAffairs shows the USAA Secure Checking Account pagedoes clearly state “no monthly fees, free nationwide ATMs.” But if there are fees for other services, they don't appear to be listed.

On the M&T Bank checking account page, there is a list of different types of checking accounts, along with the monthly service charge for each. Under the “Free Checking” heading, the reader is directed to this footnote at the bottom of the page:

“Regardless of whether a monthly maintenance charge applies, M&T checking accounts (including Free Checking) are subject to transaction and service fees, including insufficient funds and overdraft fees, as noted in the Specific Features and Terms for each account and, also the Additional Fees and Fees for Use of Electronic Banking Card for Consumer Checking Accounts, which are available on request at any M&T banking office or through the M&T Telephone Banking Center.”

Some fees might be disclosed, some not

The fees might actually be disclosed on the website, but Wallethub says they may not be where you would expect to find them.

“Consumers should be aware that there are banks that disclose only a part of their full list of fees initially, another part during the application process and the rest after the consumer has signed up for the account,” the authors conclude.

They also advise to watch out for language like “A full/complete fee schedule will be provided after sign-up.”

Four years after implementation of a rule to protect consumers from overdraft fees, federal regulators report the problem isn't fixed. The Consumer Financial Protection Bureau (CFPB) reportsoverdraft and non-sufficient funds (NSF) fees constitute the majority of the total checking account fees that consumers incur.

This shouldn't be, the CFPB says. The rule that was put into place 4 years ago prevents banks from automatically “loaning” debit card customers the money they need when they make a purchase that exceeds their account balance, at a cost of about $35 a pop.

Why opt-in?

In order for banks to cover those overdrawn transactions, consumers have to “opt-in,” specifically agreeing to allow the bank to cover their overdrafts. So it bears asking, why would anyone opt-in?

For one thing, banks understandably would like to continue offering this highly profitable coverage to debit card customers. As the new rule took effect 4 years ago most banks launched marketing campaigns extolling the virtue of having overdraft coverage.

For consumers who don't opt-in, their purchase is declined if the amount exceeds the balance in their account. While it might cause a moment of embarrassment at the checkout counter, they are spared the cost of the overdraft fee.

They are still subject to a “returned check fee” if they write a check that overdraws their account, but with most transactions occurring electronically, those cases are few and far between.

Steep price

The latest report from CFPB suggests those who have opted-in are paying a steep price for the convenience of overdraft coverage. For these customers, overdraft and NSF fees account for about 75% of their total checking account fees and average over $250 a year.

The report also shows that most overdraft fees are paid by a small number of bank customers. Just 8% of bank customers pay nearly 75% of all overdraft fees. In that regard, the CFPB report suggests the rule change four years ago has, in fact, protected those who declined to opt-in from the worst of the fees.

But 8% is still too many, according to Mike Calhoun, president of the Center for Responsible Lending (CRL), a consumer group. He notes that overdraft fees on debit cards typically exceed the amount of the overdraft itself.

“The CFPB’s examination found that the median debit card transaction that triggers an overdraft is $24 – while the average charges are $34,” he said.

Calhoun cites a CRL study that found the average amount that was overdrawn in a transaction was $20, meaning that consumers paid $1.75 in fees for every $1 they overdrew.

Additional protection

“The CFPB needs to extend consumer protections across the industry,” Calhoun said. “The CFPB should use its authority to ban or limit overdraft fees on debit card and ATM transactions and rein in excessive bank fees on all checking account transactions.”

The banking industry, meanwhile, has a different take.

"No one in America has debit card and ATM overdraft protection today who did not affirmatively opt-in after receiving a one-page summary of fees and services," said Nessa Feddis, senior vice-president of the American Bankers Association (ABA). 

Feddis also says consumers have access to multiple tools to help manage their accounts and avoid over-drawing.

The CFPB report stops short of suggesting it is about to propose tougher rules. It notes that its analysis of the overdraft data is ongoing.

The ABA said it doesn't expect the agency to begin rule making on the issue before 2015.

If you look at your bank statement each month and wonder where the money went, take a hard look at the bank fees – particularly the ATM fees.

While it usually costs you nothing to use your bank's ATM, if you get money from a bank not in your network the fees quickly add up. The bank that operates the ATM charges you a fee and usually, so does your bank.

In 2013 the General Accountability Office released a report that found the prevalence and amount of ATM surcharge fees consumers paid to banks and other financial institutions have increased since 2007, with the estimated average surcharge fee for financial institutions that charged a fee increasing from $1.75 in 2007 to $2.10 in 2012, in 2012 dollars.

A consumer withdrawing just $20 from an out-of-network ATM would pay more than 10% of that amount as a fee.

Eating into benefits

While this is a drain on the average consumer's bank account, it's worse for consumers who don't have a bank account but receive government benefits through an Electronic Benefits Transfer (EBT) card, which works like a debit card. Anytime they use an ATM to get cash, financial institutions take a bite of the taxpayer money intended for assistance.

Just how much? Andrea Luquetta, Policy Advocate at the California Reinvestment Coalition, is author of a report that found $19 million of California tax dollars meant for various public assistance programs went instead to ATM fees, charged to access that aid.

“For families trying to escape poverty, these fees siphon away money that could be used for school supplies, transportation or medicine,” Luquetta said. “The current system leads too many people to pay fees just to access the very benefits they need to survive.”

The California Reinvestment Coalition is calling on the state and the financial services industry to find a solution so that aid dollars aren't eaten up by ATM fees.

Unbanked population

Part of the problem is the fact that fewer people – low-income consumers in particular – have bank accounts these days. The growing “unbanked” population has been well documented, with bank fees on checking and savings accounts driving more people to a cash economy.

Among the report's recommendations is for banks to offer inexpensive bank accounts so recipients can receive benefits by way of direct deposit, avoiding fees. In 2011, the Federal Deposit Insurance Corporation (FDIC) found that 1 in 12 U.S. households did not have a bank account, which would give them free access to an ATM.

What to do

What can consumers do to reduce their ATM costs? Planning their use of ATMs may help. A few merchants – primarily a few convenience store chains – offer access to ATMs that don't charge fees. Finding these locations and using them when you need cash can help reduce ATM expenses.

Getting cash back at the grocery store or other retail transaction is another way to cut down on ATM fees. Also, finding a bank that charges fewer and lower fees can also help.

FindABetterBank.com provides a search platform for consumers to seeking a particular benefit – such as low ATM fees – and matches them up with banks in their area. Believe it or not a couple dozen banks offer plans that reimburse all ATM fees.

Dissatisfaction with banks has been growing in recent years. Part of it may be due to the growing emphasis on fees. It may partly be due to a perceived decline in service.

Dustin, of Portland, Ore., reports an experience at Bank of America that is not all that unusual these days, especially when it comes to large, national banks.

“Normally, I go in the bank to cash my check then go outside to deposit the money in the ATM to avoid their fees and waiting period for the check to clear,” Dustin wrote in a ConsumerAffairs post. “A few weeks ago, I had to go through a big ordeal because I do it that way. The branch manager told me that I need to start depositing them or they wouldn't continue to cash my checks. Then she told me that I won't have any waiting periods if I deposit them before the close of business. On Friday, October 18th, I did as suggested and they put my check on hold till October 29th.”

Because of recent changes in the banking industry, Dustin and other consumers need to go about shopping for a bank like they would other expensive consumer products – carefully.

A lot of choices

“There are over 7,000 institutions to choose from when you are looking for a place to put your money, aside from sticking it under your mattress,” said Alex Matjanec, co-founder of MyBankTracker.com, a website covering banking issues.

He says consumers should focus on three main points. The first is location. Despite the growth in online banking, having a branch nearby is still a handy thing. The second factor is fees.

“When you're choosing a bank or institution to build a relationship with, you want to avoid fees that the institution applies to specific accounts,” Matjanec said. “The best way to avoid the fees is to look at your financial habits. Do you have direct deposit, for example? If you can direct deposit a regular check, like a paycheck, that's one of the best ways to avoid the maintenance fee on a checking account.”

The third point is the number and placement of ATMs. One advantage of a larger bank is you can withdraw money from any of its branchs' ATMs.

ATM fees

“ATM fees are the most common fees bank customers face,” Matjanec said. “Some of the largest institutions charge anywhere between $2 and $3 anytime you use an ATM that isn't associated with that bank. You can imagine that if you withdraw money twice a week from an ATM not associated with your bank you could be spending over $20 a month and over $200 annually.”

Choosing a small independent bank, however, doesn't mean you have to get stuck with a lot of expensive ATM fees. Small banks are usually members of larger ATM networks, which can be an advantage – if you are careful in your bank shopping.

“If you choose a community bank, you want to make sure the bank is part of a large ATM network,” Matjanec said. “For example, All Point is a large ATM network. If your community bank is part of that network, you'll save on fees.”

Shopping for services

Another part of bank shopping is to find the services you want to use and make sure there are no fees associated with it – or there are ways to reduce or eliminate the fees. For example, some banks offer online bill pay for free, others will charge for it. So when you choose a bank make sure you take all your financial habits into account.

Fortunately, shopping for a bank is easier than it once way, mainly thanks to technology.

“In the past I think choosing a bank was mostly driven by advertising,” Matjanec said. “Now you can go online and access information easily.”

Not only can you compare fees and interest rates, you can read reviews from consumers. While consumers generally hate fees, Matjanec says it's just the industry's response to new laws and regulations, shifting some of the charges that once fell on retailers to consumers.

“Banks have responded with higher fees for checking accounts and fewer perks for rewards programs. that's why consumers should be aware of their financial habits so they can minimize those fees.”

Being more consumer-friendly

How can banks be more consumer-friendly? Three ways, Matjanec says.

• Be more transparent. If you are going to charge a fee, provide adequate notice and explanation of why this change much happen.
• Give choice and alternatives. Can I customize an account so that I pay for the services I use and not for those that I don’t use?
• Simplify banking tasks for customers. Online bill pay helps customers automatically pay bills while cutting down on costs for banks. Consumers, meanwhile, need to come to terms with the new banking environment.

“A trend we're seeing is some of the larger banks charging customers who visit their branches, which sounds a little crazy, but they're trying to encourage people to do their banking online,” Matjanec said. “They're hoping to lower their costs and keep things efficient for them. They don't want to take things away from consumers but I think they need to leverage technology to make things smarter and ultimately, lower costs for consumers.”

If consumers can adapt they may find a better relationship with their bank. It's consumers who don't adapt who may end up paying more and being dissatisfied with their banking experience.

Once upon a time you chose your bank mostly out of convenience. If it had a branch in your neighborhood or where you shopped, that was where you did your banking. One bank was pretty much like the other.

Today, if you are choosing your bank out of convenience, chances are you are paying a number of fees each month. Twenty years ago, nearly all banks offered a free checking account. Today, very few do. What's changed?

“The competitive environment that banks find themselves in since deregulation began in the mid 1980s, some of the regulatory requirements and just the nature of the way banks are viewing their business have made them really heavily dependent on fee income,” said Brian Davis, associate professor of finance at the Smeal School of Business at Penn State University. “They will charge fees as long as they can get fees.”

Changes in last five years

The financial crisis five years ago also sent a shock wave through the banking industry. Making loans – the way banks historically earned profits – was viewed as somewhat risky. Besides, interest rates were so low the profit didn't always seem to be worth the risk.

But there was something else at work. Davis, who previously served as a management consultant in the banking industry, says banks started looking at their customers differently.

“One of the things they started to do was to say, 'there are some customers that are highly unprofitable. They put just a small amount of money in the bank, they write a lot of checks and have a lot of overdrafts.' So in order to make their overall customer base more profitable, they started charging fees,” Davis said.

Overdraft fees are the fees consumers are probably most familiar with. If you write a check and have insufficient funds, the bank charges a fee. But most people, these days, use a debit card instead of a check.

Opting in will cost you

The good news for consumers is banks cannot charge an overdraft fee unless you “opt-in” to their “overdraft protection.” If you opt-in, the bank covers your purchase when you are overdrawn, but charges a fee. Unless you opt-in, your purchase will be declined if you don't have enough money in your account – but there is no fee.

Though banks will encourage you to opt-in, consumers who want to avoid paying overdraft fees should not do it. Better to have a purchase declined than rack up fees that can run $35 a pop.

When considering a bank, Davis says your first step should be to analyze the bank's fees.

“They have to disclosure whatever fees they charge in any marketing materials and on their statements,” Davis said. “Your statement is about five pages long now. All the fee information is in there.”

Trade-offs

Shopping for a bank, then, is a lot like shopping for anything else. You are looking for the best deal and the product that best suits your needs. And to avoid fees, there may be some trade-offs.

“Convenience – having a bank just a block from your house – can no longer be a deciding factor,” Davis said. “As a consumer, if that bank's fees are worrisome to you, you have to compare the convenience to the money you would save at a less convenient bank.”

And that most likely comes down to not using one of the big, national banks for your everyday banking needs. They may be a good choice for a mortgage or car loan, but if they view you as less than their ideal customer you are likely to pay some fees. For everyday banking needs, Davis suggests thinking small.

Credit unions

“My first stop is a credit union,” he said. “If I can, I'll do business at a credit union because most won't charge as many fees and the fees they do charge tend to be lower.”

Small community banks are also a competitive choice. Some might have special “rewards checking” accounts that pay you interest and waive certain fees if you meet a number of monthly requirements. It's very possible your bank could end up paying you instead of you paying it. The secret, says Davis, is being a savvy shopper for banking services.

“You have to shop around and ask very direct questions at the bank before you open an account,” he said. “Ask up front how they can save you money.”

What happens you you are presented with an unexpected expense or you run a little short because you've gone over your budget for the month?

If you are like a lot of consumers, you are simply late paying the bill or you pay it and it results in an overdraft charge. Or you visit a payday lender and get a small loan at triple-digit interest.

None of these are very good solutions, which led businessman Ryan Gilbert to co-found a company to make small, short-term loans to consumers and small businesses. Gilbert is CEO of BillFloat, which as the name implies, extends a line of credit for a specific purpose or bill, then makes the payment for the consumer.

“We believe that a very large segment of those populations – consumers and small businesses – are ignored by mainline financial institutions, in large part because of the high cost of customer acquisition and servicing, as well as the high cost of arriving at a credit decision.”

Controlling costs

Gilbert has developed a business model that reduces some of the costs. For example, you may never have heard of BillFloat. That's because the company spends little on marketing. Instead, it has developed relationships with Verizon, AT&T, hundreds of utility companies, insurance companies and all the sorts of businesses you normally pay on a monthly basis.

“The company that is their biller would tell a consumer that if they need more time to pay this particular bill, they should contact their third-party partner, BillFloat,” Gilbert said. “So it's that relationship with the billers that helps us acquire customers at a very low cost.”

Gilbert says BillFloats charges a processing fee, usually around $20, and an interest rate that varies by state, but is normally around what you'd pay on a credit card balance. The alternative is often an overdraft fee, which can be around $35, and a hit on your credit score. A visit to your neighborhood payday loan store could get you started on a a lengthy cycle of debt that could end up costing double or triple what you borrowed.

Gilbert makes clear that while BillFloat may compete for some of the same consumers who would consider a payday loan, it does not let consumers fall into a cycle of debt.

No cycle of debt

“We don't allow you to recycle, we don't allow you to refinance,” he said. “If you've taken a loan from us for $100 to pay your mobile phone bill and it's due in 30 days, in 30 days you can't come to us and take out another loan to pay for the previous loan. We're all about paying bills.”

Gilbert says BillFloat doesn't make the loan unless it believes the customer has the ability to repay the loan. The company doesn't look at pay stubs and it doesn't consider credit scores. Instead, it looks at the consumer's bank account.

“The way we answer that affordability question is by analyzing our consumers' bank accounts,” Gilbert said. “By understanding who gets paid, when they get paid, how they use the proceeds of their salaries. We develop our own ratios, based on other information we are able to acquire, to answer that key question, can you afford this credit?”

BillFloat also carefully controls the distribution of funds. It doesn't transfer money to the borrowers' bank account. Rather, it directly pays the bill the consumer says needs to get paid.

Credit harder to come by

The company has only been around since 2009 and Gilbert says he thinks it's sorely needed in the marketplace, since the Great Recession has made it harder for both consumers and small businesses to get credit when they need it.

“Bigger loans have always been the objective of major banks and when it comes to smaller loans, consumers are left to their own devices and to find other solutions,” Gilbert said. “So you are left with a situation where both small businesses and consumers are going to find payday lenders are the most likely candidate for their needs.”

Gilbert says his company competes with both major banks and payday lenders. Both, he says, have far more access to capital than BillFloat. In January BillFloat turned to venture capitalists for a $21 million infusion of cash, paying quite a bit more for the money than the Federal Reserve charges banks.

Payday lending banks

“Wells Fargo, Fifth Third Bank, Regions and others are in the payday lending business themselves,” Gilbert said. “They have short term credit with APRs in the hundreds of percent, yet their cost of funds is only 20 basis points, or 0.02%.”

Gilbert says he hope consumers who find themselves financially stretched will look into a short-term loan from BillFloat rather than go to a payday lender or rack up overdraft fees.

“I think that is a very important outcome for a consumer,” he said. “The cost of a late fee or service termination can be very high and our credit option is a viable alternative.”

It's no secret that trying to predict overdraft charges is about as simple as charting the orbits of the various comets and meteors that occasionally go rocketing past the earth.

The Consumer Financial Protection Bureau (CFPB) has been looking into the situation and is today releasing a report that raises concerns about the ability of consumers to anticipate and avoid overdraft costs on their checking accounts.

The report finds wide variations across financial institutions when it comes to the costs and risks of opting in to overdraft coverage on debit card transactions and ATM withdrawals. The report also finds that consumers who opt in for overdraft coverage end up with higher account fees and more involuntary account closures than consumers who decline to opt in.

“Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that some overdraft practices may increase consumer costs beyond reasonable expectations,” said CFPB Director Richard Cordray. “What is marketed as overdraft protection can, in some instances, create greater risk of consumer harm.”

When consumers try to withdraw more money from their checking accounts than is available, the financial institution can reject the transaction. For certain types of transactions, like checks, the institution generally charges a non-sufficient funds fee. The financial institution can also choose to cover the payment by advancing funds on the consumer’s behalf, and generally charges a fixed overdraft fee for doing so.

Automated systems 

In recent years, most banks have adopted automated systems for making these decisions. These systems have contributed to the evolution of overdraft from an occasional courtesy to a significant source of industry revenues. The CFPB estimates that overdraft and non-sufficient funds fees represent 60 percent or more of the fee income on consumer checking accounts.

The CFPB conducted this overdraft study, which reflects a significant portion of U.S. consumer checking accounts, after initial market research raised concerns about overdraft practices.

Many of these concerns are not new. Over the past decade, federal regulators have taken a number of different steps in an effort to address them. The CFPB report is intended to provide the factual basis to develop more uniform treatment of these issues across financial institutions.

Opting-in is risky

In 2010, a new federal government regulation took effect requiring that banks obtain a consumer’s consent (opt-in) before charging fees for allowing overdrafts on ATM withdrawals and most debit card transactions.

Today’s CFPB report found that new customer opt-in rates varied substantially across institutions. At some banks in 2011, more than 40 percent of all new customers opted in while other banks saw opt-in rates of less than 10 percent. The report also found that a consumer’s decision to opt in may have significant ramifications:

• Consumers who opt in end up paying higher fees: The CFPB report looked at previous heavy overdrafters who declined to opt in when the new federal requirements were implemented in 2010. It found that by not opting in these accountholders reduced their overdraft and non-sufficient fund fees, on average, by more than $450 during the second half of 2010.
• Consumers who opt in to overdraft coverage are more likely to end up with involuntary account closures: Negative account balances are a significant contributor to involuntary account closures, which can leave a black mark on a consumer’s record and make it difficult to open an account elsewhere. The CFPB report found that involuntary closure rates at some banks in the study were more than 2.5 times higher for accountholders who had opted in to debit and ATM overdraft coverage.

Highly complex

The CFPB report raises questions about the ability of consumers to anticipate and avoid overdraft costs. Each institution’s overdraft policies, procedures, and practices are highly complex and can be difficult for a consumer to navigate, yet greatly affect whether and how often they will incur overdraft fees. These complexities include:

• Complicated fee structures: Banks have different fee structures when it comes to the number of overdrafts that can be incurred in a single day. Some, for example, limit the number of overdraft charges in a day to two; others have no cap on fees or caps that allow as many as 12 overdrafts and non-sufficient fund fees in a day. 
• Overdraft coverage limits often depend on many factors: Some institutions have fixed limits on how much they will advance an accountholder; others vary the limits based on the accountholder’s individual circumstances, such as his or her balance, overdraft history, or deposit patterns.
• Complex transaction postings: The order in which check, debit card, and other transactions are posted to an account can influence the number of overdraft fees. The report found wide variation in posting practices, from institutions debiting transactions at periodic intervals throughout the day to debiting them in nightly batches.

There's a lot of talk about cutting the banking fees paid by lower-income consumers but so far it's hard to find anything more than talk.

There are scattered new entrants, like PerkStreet and Simple, that offer free checking and debit cards but they don't have physical branches. So without direct deposit -- something the underemployed often don't have -- it's difficult to make deposits in a timely manner.

And as for established banks, a new study by the Consumer Federation of America (CFA) finds that consumers are having difficulty avoiding rising checking fees unless they directly deposit regular income checks such as paychecks, pension checks, and Social Security checks.

The CFA found that many interest and noninterest-bearing checking accounts require consumers who are unable to maintain average balances of $1,500 -- a large majority of checking customers -- to be charged regular monthly fees that total as much as $300 annually.

Just triggering one debit card overdraft, having one check returned for insufficient funds, and having one deposit rejected could add an additional nearly $100 in charges to the annual cost of using a checking account, CFA found.

This is what happened to Mark of Fort Lauderdale, Fla., who posted on ConsumerAffairs about his recent experience with Bank of America: "I am disabled due to 9/11/2001. I have a fixed income and try to balance the account to the penny. Something went wrong this month, and I was overdrawn $3. The bank charged me $35. This is causing me to get further behind. I called a supervisor who told me I had reached my quota for courtesy adjustment and could do nothing to help."

This is not something that is flying under consumers' radar. We conducted a computerized sentiment analysis of 39,000 consumer comments on social media over the last year and found bank fees about as popular as a Black Plague epidemic, with nearly 60% of the expressed sentiments being negative.

CFA's study

CFA performed research analyzing both bank checking account characteristics and consumer attitudes towards checking accounts as part of their analysis of the 25 largest banks according to the number of branches. The research revealed a great diversity of checking policies and prices at the 25 banks. 

For example, the following banks each offer free checking with no waiver requirements – PNC’s “Free Checking,” M&T Bank’s “Free Checking,” First Citizens Bank’s “Free Checking,” Huntington National Bank's “Asterisk-Free Checking,” and New York Community Bank’s “My Community Free Checking” and “My Community Interest Checking.”  At the other end of the scale, consumers would have to keep $25,000 in combined accounts at BB&T to avoid paying $25 per month for the Elite Gold interest-bearing account or at Keybank for the “Key Privilege” account.

And while these banks may offer free and low-cost checking, that doesn't mean that every customer benefits, or that the plan always works out as consumers expect. Witness the example of PNC customer Lori, who posted to ConsumerAffairs recently about her experience: 

"They constantly reverse sequencing of checks so they can cause overdraft on checks that were previously processed. I have been overcharged huge overdraft fees because of how they reverse sequences. They make sure they process the largest check that will cause all checks that were previously processed to bounce!"

“Banks are increasing fees and balances needed to avoid fees,” Jean Ann Fox, CFA's Senior Adviser for Financial Services noted.  “These higher fees and hurdles to avoid fees are especially challenging to the 45 percent of accountholders who maintain low balances and are most likely to overdraw their accounts.”

It should come as no surprise that consumers are annoyed, even hostile, about this state of affairs. This chart shows the top negative and positive emotions expressed by consumers while discussing bank fees:

Examining the verbatim comments that are summarized in this chart, by the way, reveals that the positive emotions are generally related to banks and credit unions that do not gouge their consumers. There were virtually no positive comments directed towards high-fee banks.

Low balance

An analysis of Raddon Financial Group survey data on consumer checking accounts found that nearly three-fifths (59%) of respondents saw checking balances fall below $500 in a typical month, with over one-third (36%) saying their balances fell below $100.  And less than one-quarter (24%) said they had been able to keep balances above $1,000.  

The survey found that those with low balances were the most likely to overdraw their accounts.  Two-fifths (40%) of those with low balances below $500 said they had overdrawn their checking account in the past two years, while only 3 percent of those with low balances above $1,000 said they had done so.  Thirty percent of all respondents said they had overdrawn their checking account in the past two years.

Direct deposits and income

The likelihood of directly depositing income checks was also highly correlated with income.  Only 25 percent of those in the lowest income quintile used direct deposit.  That figure was 52 percent for the second quintile, 66 percent of the third quintile, and over four-fifths of the upper two quintiles.  These differences are important because a large majority of big banks will waive minimum or average balance requirements if income checks are directly deposited at least monthly.

“The families who most need free or low-cost checking are the least likely to be paid by direct deposit, either because their employers do not offer the service, they work in short-term positions, or because they are unemployed,” noted Stephen Brobeck, CFA's Executive Director.  “Consumers who cannot waive fees through direct deposit and who do not have a comfortable cushion in their accounts at the end of the month pay the full freight for checking accounts.”

Unfortunately, even those who carefully set up and maintain direct deposits are not immune from high overdraft charges, as Chase Bank customer Natalie of Woodridge, Ill., reported in a posting to ConsumerAffairs:

Diverse checking accounts

CFA surveyed checking accounts at the 25 largest banks by number of branches, collecting information on each bank’s budget or all-electronic account, mainstream non-interest checking account and the lowest-cost interest-bearing account.  One positive finding of this research is that nearly all bank websites now include both useful summaries of each checking account and also links for fuller descriptions of the accounts including monthly fees, though finding details on overdraft fees and practices sometimes required further searching.

• Budget Checking:  Nine of the 25 surveyed banks offer accounts described as "budget" or "basic."  These accounts cost $7 or less a month even when checks are not directly deposited and any required minimum balances are not met.  Most of the free accounts, listed in paragraph 3 of this release, fall into this category.

• Electronic Accounts:  Bank of America, Fifth Third, and Keybank offer electronic accounts that usually require customers to conduct all banking at ATMs or online.  Monthly fees can be avoided, depending on the account, by maintaining a $500 minimum balance or directly depositing income checks.

• Non-Interest Checking:  Most consumers utilize non-interest bearing checking accounts, which we found at 24 of the 25 banks surveyed.  Monthly fees on these accounts, when minimum or average balance requirements are not met, are usually $9-10 but were found to be as high as $15.  CFA’s research found that nearly all banks will waive these fees if the minimum or average balance requirements are met which most commonly is $1,500, or if funds are direct deposited.  Additionally some banks will waive the fees if a minimum number of transactions occur during the billing-period.

• Interest Checking:  All surveyed banks offered at least one account that received interest on deposits. These accounts generally are subject to higher minimum/average balance requirements and monthly fees than non-interest accounts. These average balances are as high as $25,000 at BB&T and at Keybank, while the monthly fees are $25 per month at Bank of America, Chase, BB&T, TD Bank, and Keybank.

“As the FDIC’s 2011 Survey of Unbanked and Underbanked Households found, high fees and minimum balance requirements are an obstacle to account ownership for some unbanked consumers, especially for households who had recently been banked,” Fox noted.   “Since the FDIC survey was conducted before the rash of fee hikes and higher minimum balance requirements in late 2011, it is likely that rising fees and higher thresholds to avoid fees are a serious barrier to bank account ownership for families struggling in this economy.”

The complete report can be found here.

Bankrate.com's latest checking account survey may tell you all you need to know about the state of relations between consumers and their banks. The survey -- the 15th annual -- shows the percentage of free checking accounts offered by U.S. banks continues to fall as other checking fees continue to rise.

Specifically, the cost of using an ATM at the typical bank climbed in the last year. The survey found the average ATM surcharge -- the fee charged by an ATM operator to a non-customer -- rose four percent to a record $2.50.

The average ATM fee increased for an eighth straight year and, for the first time, 100 percent of banks that Bankrate.com surveyed charge non-customers to use their ATMs.

Many banks also charge their own customers for using another company's ATM. This fee jumped 11 percent to $1.57. For a typical bank customer paying both fees, the average total of $4.07 is a record and is up nearly seven percent from last year.

Free checking is fast disappearing

In addition to raising ATM fees, more banks are saving money by doing away with free checking policies. Only 39 percent of non-interest checking accounts surveyed are available to all customers free of charge, down from 45 percent last year and the peak of 76 percent in 2009.

Some banks raised their fees on checking accounts, a move the survey shows tends to lose customers.

Seventy-two percent of consumer say they would consider switching checking account providers if their financial institution raised its fees on checking accounts, compared with 64 percent in March 2011. Households earning $75,000 or more are the most likely to say they would switch, at 82 percent.

Banks saw this demonstrated last November when one disgruntled consumer organized National Bank Transfer Day, a grassroots movement in which hundreds of thousands of consumers switched their accounts to small banks and credit unions, which charge lower fees.

"Checking accounts that are free on a standalone basis continue to diminish," said Greg McBride, Bankrate.com's senior financial analyst. "But a free checking account is still within reach of the majority of Americans, whether by getting the fee waived through direct deposit or moving to a bank or credit union that still offers free checking."

McBride says consumers who practice good financial habits should rarely -- if ever -- incur ATM and overdraft fees.

In the last few years Congress has passed new consumer protections for bank customers, but that hasn't stopped fees from rising. A semi-annual study by MoneyRates.com finds that bank customers saw all types of fees creep a little higher in the first half of the year.

For example, checking accounts got more expensive. The average monthly service fee on checking accounts is $12.08, compared with $11.28 in the previous six months. That's just under $145 a year for the privilege of having a checking account at a bank.

For those who wanted to open a checking account in the first six months of the year, the amount of funds needed to do so also rose. The average amount to open an account is $408.76, versus $391.41. While that's not a fee, that amount -- as it rises -- acts as a barrier to prevent poorer consumers from opening a checking account.

Rising minimum balance

If you want to avoid that monthly service fee on your checking account, you can do so at many banks by keeping more money in the account. But again, that threshold is rising. The study shows you now need an average of $4,446.57 in an account to avoid the fee; it was $3,590.83 in the previous six months.

Of course, if your bank offers free checking, there is no minimum balance and no monthly service fees. But finding one of these banks got a little harder in the first half of the year. Only 35.3 percent of the accounts in the survey were free of the monthly fee, down from 38.8 percent.

Thanks to new regulations consumers must now opt-in for overdraft "protection," meaning they can avoid overdraft fees altogether by not taking that action. But for those who are still paying for overdraft coverage on their checking accounts, they're paying more.

The average overdraft fee in the first six months of 2012 was $29.83, up 60 cents from the previous six months.

All fees are rising

The analysts at MoneyRates.com say in the past, their surveys showed some fees rising and some falling or staying the same. This survey is different, they say, because the average fee rose across all categories.

But there was a difference when you broke banks down by size. The bigger the bank, the more the fees went up. For example, the average monthly maintenance fee at large banks was $13.88 but only $9.87 at small banks. And almost all the free checking accounts were found at small banks.

Last November a grassroots backlash against rising bank fees resulted in "Bank Transfer Day," when fed-up consumers were encouraged to switch their accounts from banks with high fees to small banks and credit unions where fees were lower. The result appears to be even higher fees for those consumers who remained behind.

Bank of America learned a bitter lesson last year when it tried to impose a $5 monthly fee on its debit card users. 

Or did it?

Maybe the lesson the bank learned isn't the one all those outraged consumers thought it learned.  Maybe the real lesson was that banks need to find a way to blame the fees on the consumer.

AT&T has always been pretty good at this.  It blames consumers for using too much of their "unlimited" smartphone data plans and then imposes limits.  

Bad consumer.

Bank of America thinks this might work in the banking realm as well.  For example, what if consumers were told their checking account was "free" as long as they maintained a certain balance or agreed to take out a car loan or credit card account?  

That's good, right?  Free is good. So the customer opens the checking account, then lets the balance drop and is told she doesn't qualify for the car loan or credit card.  Whose fault is that?  Certainly not the bank's.

Bad consumer.

Not their fault

Well, you know, you can't blame them though.  Banks just aren't making as much as they're used to, not since they made all those bad loans and had to eat all those rotten mortgages and especially since the feds came along and put limits on overdraft fees and other splendidly profitable plunder.

Take Bank of America.  Its 2011 revenue dropped by $26 billion, or 22%, from its 2009 level. Think the Board of Directors likes that? Not likely.

Of course, there are banks that still offer free checking with no strings attached.  The list is long and most, but not all, of them are smaller. TD Bank, for example, is a big bank but it didn't write all those bad mortgages, didn't take any bail-out money and it offers several types of free personal and business checking accounts. Heck, they're even open weekends.

But the big guys -- you know, the ones too big to fail, like BA, Chase and Wells Fargo -- they're having a hard time getting by so they're all nosing around looking for fees and charges that can either raise more revenue or encourage (i.e., intimidate) customers into doing more business with them.

Bank of America has been trying various plots -- uh, pilot -- programs in Arizona, Georgia and Massachusetts, where it's charging customers anywhere from $6 to $9 for stripped-down checking account. Basically, they're trying to find the pain point, the point at which consumers stand up and say no.

For obvious reasons, BA and the other banks aren't saying much about these plans.  But when they do, you can be sure they'll leave no doubt about whose fault it is.

Bad consumer.

The Consumer Financial Protection Bureau (CFPB) is launching an inquiry into checking account overdraft programs to determine how these practices are impacting consumers.

As part of that inquiry, the CFPB is seeking public input on a prototype “penalty fee box” – a disclosure on a consumer’s checking account statement that would highlight the amount overdrawn and total overdraft fees charged. Something along these lines, perhaps:

“With today’s technologies, consumers have more opportunities to access their checking accounts and cause overdrafts,” said CFPB Director Richard Cordray. “But overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it. We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees.”

An overdraft occurs when a consumer spends or withdraws more money than is available in his or her checking account and the financial institution advances funds on the consumer’s behalf. Banks generally charge an overdraft fee for each transaction that they choose to cover.

For point-of-sale debit card and ATM transactions, regulations by the Federal Reserve Board that became effective in 2010 prohibit a bank from charging the overdraft fee unless the consumer has opted-in. For check and online bill payments, as well as recurring debits, banks can charge an overdraft fee without any affirmative request from the consumer.

$30-$35

According to various industry sources, the average overdraft fee ranged from $30-$35 in 2011 and has increased by 17 percent over the past five years. A study by the Federal Deposit Insurance Corporation published in 2008 found that consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees annually.

The inquiry the CFPB is launching today will provide insight into overdraft practices. The inquiry is focused on four main areas:

• Transaction Re-ordering that Increases Consumer Costs: The CFPB is concerned that overdraft practices employed by some financial institutions increase consumer costs. One such practice is commingling of all checks, bill payments, debit card transactions, and ATM withdrawals each day and processing the largest transactions first. This maximizes the number of transactions that will trigger an overdraft fee. The CFPB will examine how prevalent this practice is and how it impacts consumers.
• Missing or Confusing Information: The CFPB is exploring whether consumers can anticipate and avoid overdraft fees. The CFPB will examine how clearly overdraft terms are disclosed and the extent to which consumers are made aware of, qualify for, and take advantage of, alternative means of covering overdraft transactions.
• Misleading Marketing Materials: The Bureau is looking into reports that consumers are receiving misleading marketing materials about overdrafts. Initial data suggests that opt-in rates differ widely among institutions. The CFPB seeks to understand how differences in the way institutions explain and promote overdraft programs may affect opt-in rates.
• Disproportionate Impact on Low-Income and Young Consumers: The Bureau is revisiting the 2008 FDIC study that found that 9 percent of checking account customers bear about 84 percent of overdraft fees. Evidence suggests that overdraft programs disproportionately impact low-income and young consumers. According to this study, 46.4 percent of young adult accountholders incurred overdraft fees, and of those, 15 percent recorded more than ten overdrafts in one year.

To submit comments to CFPB on the overdraft inquiry, visit the CFPB's website.  

Banks rely more on automation to save money these days, but when machines begin making account calculations instead of humans, a growing number of customers have begun to question the results.

The New York Times reports some customers using an Apple iPad to access Citibank's online bill pay are being charged twice for some transactions, essentially paying the same bills twice. It apparently stems from a bug in the bank's iPad app, according to a bank official interviewed by the Times.

The problem began as early as the summer though Citibank wasn't made aware of it until December.

Mysterious fees

Meanwhile, other customers are increasingly questioning the way Citibank - and other banks - determine fees. For example, Latasha, of Farmington Hills, Mich., said she recently closed her Citibank account.

"Citibank charged me $25 in fees," Latasha told ConsumerAffairs.com. "The first $15 was a general account fee, after the account was closed, and the second was the automatic 10 dollars for the overdraft protection because the accounts were empty at the time."

Keep in mind Latasha didn't overdraw her account. She took her money out of her account and closed it. It isn't clear what the $15 fee was for, but because she had emptied her account in order to close it, it triggered an overdraft fee.

Questions

"If the account were closed, then how could they deduct $15 plus the $10 from my final check from the bank," Latasha said. "It's a bug in their system."

It does seem perplexing that the fees were deducted from the money the bank gave Latasha when she closed her account. That suggests there was money still in the account when the overdraft fee was assessed. Otherwise, how could it be deducted from the account balance Latasha received in the form of a check?

Latasha said she questioned the teller about the fees as she withdrew her money and was told "the account was empty, so they had to activate the overdraft." It might pay Latasha to seek a more detailed explanation from the branch manager.

Overdraft fees are definitely a sore spot for many consumers. Customers at other banks have long complained that they were assessed multiple overdraft fees when only one transaction placed them in a negative balance.

At Citibank, meanwhile, officials say they have fixed the glitch that caused the double payments and the bank will reimburse any fees charged customers due to the double payments.

Bank customers often complain about bank overdraft fees, saying they don't understand why they were charged a fee when they should have had money in the account.

Colleen of Everett, Wash., says she ran into that very problem and, when she questioned US Bank about it, got a detailed explanation.

"I had $412.00 in my checking account," Colleen told ConsumerAffairs.com. "I went to a US Bank ATM on a Saturday and drew out $400.00, leaving $12 in my account."

The following Monday, Colleen says her husband asked her to make a $38 purchase for him, promising he would transfer $40 into her account that day to cover the charge.

"I made the purchase and when I got home my husband said he had forgot to do the transfer, so we logged onto our Internet banking and transferred the $40. It said the $38 was pending, so we thought we were in the clear."

Two fees, not one

But the next day, Colleen said she logged into her account and saw two overdraft fees, at $33 each. One fee was for the $400 withdrawal and one fee was for the $38 purchase.

"I could understand one fee but not two fees, as I did have $412.00 in my account," Colleen said.

So Colleen said she called the bank and got this explanation: the first fee was assessed as a result of Colleen's $400 withdrawal. Although it was listed as "pending," it reduced her available balance to $12. When she made the $38 purchase, it overdrew her account.

Colleen said she understands that fee and has no argument. But what about the second fee? She was told that when the $400 withdrawal went from pending to active, her account was already overdrawn, triggering a second overdraft fee.

Withdrawal counted twice

But Colleen argued that the $400 withdrawal is being counted twice; once as "pending," reducing her available balance to $12, and a second time, when she was already overdrawn. Despite her protests, she says the bank held firm.

Just last week a judge approved a $410 million settlement with Bank of America and depositors who claimed the bank processed debit card charges in a way to maximize fees. The bank insisted its process was proper, despite the settlement.

The obvious way to avoid this situation in the future is not to opt in to the bank's overdraft "protection." Under new rules consumers must choose to allow banks to cover their overdraft purchases and assess them a fee. It sounds like Colleen has opted in to US Bank's overdraft coverage.

If she had not, here's what would have happened: After Colleen withdrew the $400 from her account and then attempted to make the $38 purchase for her husband, her debit card would have been declined, because she only had $12 in her account. It might have been inconvenient but it would have saved her $66, since it would have prevented both overdraft fees.

Using checking as savings account

Another way to avoid this situation is to keep any savings in your checking account instead of a savings account. Savings accounts produce almost no interest, so keeping an extra $500 or $600 in your checking account will prevent overdraft fees.

You just have to be disciplined and not spend your savings. But it it saves you from $200 or more in overdraft fees each year, it's much better than earning $4 or $5 in interest.

Once upon a time, banks attracted customers with the promise of a free checking account. In return, the bank snagged a customer for the long-term, who might also need to borrow money to purchase a home or vehicle, or need other financial services the bank provided.

These days, banks are on the prowl for fees and a checking account provides a target-rich environment. As a result, only 45 percent of non-interest checking accounts are free, down from 65 percent in 2010 and the peak of 76 percent just two years ago, according to Bankrate.com's 2011 Checking Study.

"The decline of free checking is in full swing, however, savvy consumers can take advantage of an increasing amount of fee waivers, most commonly with direct deposit," said Bankrate's senior financial analyst, Greg McBride. "Ninety-two percent of non-interest accounts are either free or can become free."

Balance requirements growing

Consumers are finding that when it comes to fees, both interest and non-interest checking accounts are seeing big increases. Some banks offer free checking but require a minimum balance throughout the cycle to maintain them. The study shows the balance required to keep a free checking account truly free is going up.

On interest-bearing checking accounts, the balance required to avoid the fee jumped 43.9 percent to $5,587 from $3,883, though these balances are increasingly permitted to be held in other accounts and not strictly in the checking account.

On non-interest accounts, the sharp decline in free accounts means 60 percent more accounts now carry fees and balance requirements. The average monthly fee is $4.37, up from $2.49 last year, and the balance required to avoid it is $585, more than double the $249 from one year ago.

One year after the Federal Reserve required banks to get customers’ permission to charge overdraft fees on debit card transactions, fees charged by banks have not dropped for what amounts to short-term loans, the Consumer Federation of America (CFA) reports.

While some banks have modified the order in which they process payments from accounts, most banks continue to pay the largest transactions first, which can drive up overdraft revenue at the expense of struggling families.

CFA surveyed overdraft fees at the 14 largest banks and found only Citibank and HSBC not charging overdraft fees for debit-card and ATM transactions.

“Bank overdraft fees at the largest banks remain steep, ranging from $33 to $37, and far exceed the typical $20 debit card overdraft,” said Jean Ann Fox, director of financial services for CFA.

“Some banks have hiked the number of overdraft fees consumers can rack up in a single day to as many as ten, costing consumers as much as $370 in just one day.”

BB&T doubles fees

In the last year, BB&T doubled the number of overdraft fees it charges per day, capping fees at 8 per day, and Regions Bank raised its daily limit from 4 to 6 per day. Only TD Bank reduced the number of fees per day from 6 to 5.

The CFA survey found two-thirds of the largest banks pile on second and multiple fees if consumers do not repay overdrafts in just a few days. SunTrust charges a second $36 fee after seven days while JP Morgan Chase adds $15 after each five-day period an overdraft remains unpaid.

Overdrafts and fees must be repaid immediately to avoid extra fees or as soon as the next paycheck or benefit check hits the customer’s account. Banks repay themselves directly out of the consumer’s funds, making overdrafts balloon payment loans and the top priority for scarce family funds.

Most large banks solicit their customers to opt in to paying g overdraft fees for debit card purchases and ATM withdrawals that could be denied for no fee. Notable exceptions are Citibank, which never charged overdraft fees for debit card and ATM transactions, and HSBC which no longer permits overdrafts by debit card at the cash register or ATM.

Bank of America does not permit debit card overdrafts for single purchases, but in the last year resumed permitting consumers to overdraw at the ATM at a cost of $35 per transaction.

Manipulating payments

Manipulating the order of processing payments from accounts results in more fees for consumers who struggle to make ends meet. In 2010 almost all major banks processed payments largest to smallest or reserved the right to do so.

In the last year, three banks improved the order in which they process payments from accounts. Citibank now processes checks smallest to largest and will begin processing ACH payments smallest first in October. Fifth Third and Wells Fargo made changes in the order in which some transactions are paid which should lessen the number of overdraft fees triggered. But most banks haven’t improved their posting process.

“Banks extend credit when they pay overdrafts with the bank’s money,” Fox noted. “If the cost is computed as for a payday loan, banks are charging triple and quadruple-digit rates to borrow money when all the fees are added up.”

The highest cost of a $100 overdraft loan repaid in two weeks, if computed as a closed-end payday loan, is 3,259% APR at Fifth Third Bank, 2,799% APR at RBS Citizens, and 2,574% APR at PNC Bank. There is no legal limit to the size of overdraft fees, the number of fees banks can charge, or the length of time consumers have to repay these loans.

“Consumers need stronger protection from abusive overdraft fees and practices,” Fox said. “Regulators should prohibit banks from manipulating payment processing order to drive up overdraft fees and should require banks to offer consumers the lowest cost overdraft coverage for which they qualify. Banks should be prohibited from charging for overdrafts triggered by debit cards that can be denied at no cost to consumers,” she urged.

The Comptroller of the Currency is accepting comments through August 8 on proposed guidelines for bank overdraft practices and other loans based on bank accounts. Consumers can use an easy comment form provided by the Center for Responsible Lending to tell the OCC about needed overdraft reforms.

Nearly three-fourths of Americans with checking accounts support regulations that would require banks to better disclose the terms, conditions and fees associated with their checking services, according to a new poll commissioned by the Pew Health Group.

The support cuts across all political affiliations, with solid majorities among Democrats, Republicans, independents and those who say they agree with the positions of the Tea Party. All of these groups favor stronger disclosure requirements, according to the survey by the bipartisan team of Hart Research Associates and McLaughlin & Associates, which conducted the poll for Pew. 

The data show that 81 percent of Democrats, 66 percent of Republicans, 65 percent of independents and 62 percent of those aligned with the Tea Party have a positive view of Pew’s recommendations for banks to provide a summary of overdraft options and to issue a one-page summary of pertinent checking account information.

“Regardless of political affiliation, the majority of Americans with checking accounts view stronger oversight of this financial product as a positive move,” said Susan Weinstock, director of Pew’s Safe Checking in the Electronic Age Project. “As the Consumer Financial Protection Bureau begins its directive to protect American consumers, we urge the bureau to make checking accounts, which nine out of 10 adult Americans currently have, safer and more transparent.”

Even respondents that say there is already “too much” or “about the right amount” of government oversight and regulation of banks support these new rules related to detailing account terms and overdrafts.

Among all survey participants:

• Eighty-three percent say it would be a positive change to require banks to provide a summary of information about the overdraft options they offer, how the options work and a description of the fees;

• Seventy-eight percent say it would be a positive change to require banks to provide a one-page summary of information about their checking accounts' terms, conditions and fees;

• Seventy percent say it would be a positive change to require banks to process transactions in the order in which they occur as opposed to processing them from highest dollar amount to lowest dollar amount, which can lead to more overdraft fees; and

• Sixty-nine percent say it would be a positive change to require banks to limit overdraft fees based on how much it costs the bank to provide the overdraft.

Even account holders who say they have a high level of trust in banks find these recommendations “favorable” with two-thirds or more saying each one would be a “positive change.”

“Americans want to know their checking accounts are safe and that the terms of their accounts are disclosed in an easy-to-understand format,” said Weinstock. “The Consumer Financial Protection Bureau currently has the authority to better protect consumers by requiring banks to issue a one-page document, similar to the form currently used for credit cards, and to provide a summary of overdraft options. The bureau should implement these changes now.”

Bank of America will be putting $410 million into an escrow account to be divided among its customers who were charged overdraft fees because of checking and debit-card transactions dating back to 2001.

The payment is part of a federal court settlement tentatively approved by a federal judge this week. All of the bank's customers will be eligible, not just those involved in the suit.

The law firm that brought the class-action lawsuit says that about 1 million customers will be eligible for payments, although legal fees are likely to eat up about 30% of the amount.

Randy of Yonkers, N.Y., might be one of them.

Last fall, he overdrew his checking account by writing an $80 check when there was only $53 in the account. Then the bank applied overdraft fees to three debit card charges that Randy said had already been paid.

“They manipulated those $35 fees to be deducted from my account” and made it appear there was no money in the account when in fact the account was not overdrawn at the time the transactions occurred, he said.

“All they tell me is they can't change it,” Randy ruefully told ConsumerAffairs.com last October.

'Resequencing'

The suit was one of several that challenged the way banks treated debit transactions. The suits accused the banks of “resequencing” debit transactions, recording the largest one first rather than in chronological order – thus causing the customer's balance to dwindle faster than it might have otherwise.

Bank of America and about 30 other banks named in the action have denied they did anything wrong but a Bank of America spokesman was quoted as saying the bank was “pleased to reach a resolution” and hoped the settlement was produce “a standard solution that would ensure a consistent posting order approach across the industry.”

Other banks named in the suit, which was consolidated from several individual suits, include J.P. Morgan Chase, Wells Fargo, U.S. Bank and SunTrust. Fifth Third Bank settled last year.

Federal regulations now prohibit banks from charging overdraft fees on debit card purchases unless they first get customers' approval to do so. Some banks have been aggressively urging customers to opt-in to overdraft protection but Bank of America no longer covers overdrafts on debit cards, simply rejecting the transaction at the point of purchase.

A survey by the Center for Responsible Lending (CRL) finds that banks are using misleading and aggressive marketing to sell their consumers on overdraft protection.

The Federal Reserve issued its rule requiring banks to obtain customer consent before approving debit and check transactions that would overdraw their accounts. The Fed was trying to protect consumers from unwittingly subjecting themselves to $34 fees for each overdraft incident.

But the survey found instead of providing customers with simple and informative explanations about the program, banks instead launched hard-sell campaigns to sign consumers for the high-profit overdraft protection, which is more accurately described as a high-interest, short-term loan.

The center's survey found that marketing materials often created the false impression that emergency action was needed on the account. For example:

We Need to Hear From You . . . To keep your account operating smoothly . . .  To avoid any interruptions in how we service your account, we need to hear from you.

Your Debit Card May Not Work the Same Way Anymore Even If You Just Made a Deposit.

Please keep in mind that this option [not opting in] may prevent you from completing everyday transactions including Any store and gas station purchase, Emergency home and car repair...Purchases when traveling, Medical or health emergencies.

Banks also conflated the treatment of checks and debit cards, implying that opting in would protect them from bounced check fees:

Save money by avoiding retailers’ returned check fees

Relax and protect yourself from the inconvenience of an overdrawn account and retailer fees

The Bounce Overdraft Program was designed to protect you from the cost and embarrassment of having your transactions denied. (emphasis added).  

You can protect yourself from the inconvenience of declined transactionsand additional fees normally charged to you by merchants for returned items. (emphasis added)

Survey Shows Low Opt-ins, Misperceptions

Even given misleading marketing, only 33 percent of accountholders opted-in to overdraft coverage, and most who did based their decision on information that was deceptive.  The survey found:

• Sixty percent (60%) of consumers who opted in stated that an important reason they did so was to avoid a fee if their debit card was declined. In fact, a declined debit card costs consumers nothing.

• Sixty-four percent (64%) of consumers who opted in stated that an important reason they did so was to avoid bouncing paper checks. The truth is that the opt-in rules cover only debit card and ATM transactions.

• For almost half of those who opted in, simply stopping the bank from bombarding them with opt-in messages by mail, phone, email, in person, and online banking was a factor in their decision.

These findings strongly suggest that an opt-in rate of 33 percent exaggerates interest in high-cost overdraft coverage for debit card transactions. Rather, the banks succeeded in confusing and wearing down some of their customers to the point that they accepted a product that would ultimately cost them unnecessary, exorbitant fees.

Regulatory changes now require banks to obtain customers' consent to be enrolled in debit card overdraft protection. That was supposed to end the practice of consumers being charged a $35 anytime they made a purchase that exceeded their balance.

According to the Pew Health Group’s Safe Checking in the Electronic Age Project, it may not be working out that way.

According to the report, these charges are estimated to cost Americans $38.5 billion in 2011, which would be an increase of $18.6 billion since 2000. While banks have to incur a risk that they will not be repaid, most institutions manage this by limiting the overdraft amount given to any costumer.

Big source of profits

In recent years banks have made huge profits on overdraft fees. Until the regulatory change, a customer had no choice. If they used their debit card for a purchase and the amount exceeded the funds available, the bank covered the purchase, but charged the customer an overdraft fee.

Many consumers complained, saying they would prefer their purchase be declined instead of being covered, and then being charged a fee. Federal regulators thought that was a good idea, and changed the rules so that a customer had to “opt-in” to continue receiving that “protection.”

Banks mounted a furious marketing campaign, urging their customers to opt-in, lest they lose billions in revenue from these fees. Apparently, they have little to worry about.

Pew’s research reveals that the median overdraft penalty fee is $35, which is an increase from $27 in 2007.  Likewise, the FDIC documents the median overdraft amount at $36.

5000 percent interest

If overdraft fees were treated like a short-term loan with a repayment period of seven days, then the annual percentage rate, or APR, on the typical overdraft would be over 5,000 percent, Pew notes. Additionally, Pew found that as of October 2010, when the data was collected, 100 percent of the accounts that were examined retained the right to re-order withdrawals from the highest to lowest amount and eight out of the 10 banks reserved the right to post withdrawals before deposits. Since then, several banks have reformed these practices but the playing field is not level, the report says.

In a separate survey, the Center for Responsible Lending said 33 percent of major bank customers have “opted-in” for the expensive overdraft protection, and that most did so based on misleading marketing information from their bank.

“Sixty percent of consumers who opted in stated that an important reason they did so was to avoid a fee if their debit card was declined,” the CRL report states. “In fact, a declined debit card costs consumers nothing.”

'Wearing down their customers'

The report concludes banks “succeeded in confusing and wearing down some of their customers to the point that they accepted a product that would ultimately cost them unnecessary, exorbitant fees.”

Pew agrees that consumers need better information. The study says most checking accounts still carry the hidden risks of costly fees and need to be more transparent, pointing out the median length of checking account disclosure documents at the 10 largest banks is 111 pages.

“It is exceedingly difficult for the average consumer to find the basic information needed to either select a checking account or to responsibly manage the one they currently have,” said Shelley A. Hearne, managing director of the Pew Health Group. “We are calling on policy makers to ensure that overdraft fees are reasonable and proportional. They must also address both the length and clarity of checking account disclosures, which are often 111 pages.”

For this study, Pew analyzed more than 250 types of checking accounts offered online by the 10 largest banks in the United States, which hold nearly 60 percent of all deposits nationwide.

When Congress passed and President Obama signed the CARD Act, it put a serious dent in the billions of dollars in overdraft and other fees banks were collecting from consumers. So it looks like the banks are trying to make up for that lost revenue - with more fees.

Quietly, the large national banks have begun raising the fees they charge non-customers for using their ATMs. After all, it's not like they're putting the squeeze on their own account-holders.

In Illinois, JPMorgan Chase has raised its fee for non-customer ATM withdrawals to $5 from $3. The fee change is in effect at 1,700 ATM locations in the state.

The Chase ATMs installed at Illinois Walgreen Drug Stores are reportedly exempt from the fee increase. Non-Chase customers will continue to pay a $3 fee in those locations.

More fees

The Wall Street Journal reports consumers can expect to pay all sorts of higher bank fees in the months ahead, comparing banks to the airline industry, which has altered its business model in recent years to build revenue on fees for checked bags, snacks, and other "perks" once provided for free.

And while banks may feel safe in upping the fees for non-customers, they aren't opposed to charging their own customers higher fees as well.

Sherri, a Chase customer from Burleson, Tex., recently noticed that the bank had charged $12 fees to both her checking and savings accounts. After talking to a bank official, she learned Chase had instituted a new set of fees.

New requirements

"It seems that even though it's your money, upon making transfers online from checking to saving, you are only allowed so many per month," Sherri told ConsumerAffairs.com.  "Otherwise you get charged $12.00 a month, and you must maintain $1500.00 in your savings account in order to not be charged as well."

Sherri said she was also told that to avoid a $12 monthly service charge on her checking account, she must have at least one direct deposit per month of at least $500.

Early in 2011, a number of major banks began charging some new fees to their checking and savings customers. 

The new CARD Act, which did away with overdraft fees, has removed billions from banks bottom lines. The banks appear to be looking for ways to make up that lost revenue.

Among the consumers who have suddenly noticed the changes is Sherry, of Burleson, Tex. She noticed Chase had charged $12 fees to both her checking and savings accounts.

'$24 coming out of my pocket'

"I kept my cool but was somewhat disgruntled at the idea of $24.00 coming out of my pocket and not knowing why," Sherry told ConsumerAffairs.com. I went to the bank the next day, having already made up my mind to close my savings account so I wouldn't have two charges coming out for whatever reason."

Sherry said bank personnel explained the new fees this way: if you exceed a set number of online transfers from checking to savings in a given month, it's a $12 fee. If you don't maintain a balance of at least $1,500 in your savings account, it's a $12 per month fee. If you don't have a $500 or more direct deposit go to your checking account once a month, it's a $12 fee.

Part-time employee

That last fee is a problem for Sherry because she works part-time. Her direct deposit checks usually don't total $500, she says. She says she feels she is being punished because of what she earns and would like options.

One option might be a credit union, though those institutions aren't without their problems. Many smaller, community banks may also offer more competitive services for bank accounts. Sherry should also read How To Fight The New Bank Maintenance Fees.

Most big banks are raising fees on checking accounts and other services, but PNC says it will keep its basic checking account free, although some perks will go away.

The Pittsburgh-based bank, the nation's sixth-largest, says basic checking customers will no longer get debit card rewards or refunds of fees when they use a non-PNC ATM machine, but basic checking will remain free.

"We are focused on understanding what our customers want and need to achieve their financial goals," said Joseph Guyaux, president of PNC. "As a result, we've made it easier for them to save, manage spending and avoid fees."

Banks have been piling on new fees in anticipation of a new federal law that limits how much banks can charge merchants for debit-card transactions. Banks say they need to make up for that lost revenue but although PNC estimates it will lose $800 million from the new rule, it thinks it can squeak by without jacking up fees for its poorest customers.

PNC hopes it will attract some new customers from Bank of America, J.P. Morgan Chase & Co. and other banks that are raising their fees. It also hopes that some of its basic customers will sign up for fee-based accounts that offer more services and is lowering the minimum balance requirements for some types of accounts.

PNC estimates about 70 percent of its customers currently have free, basic checking accounts.

PNC said it would introduce a prepaid, reloadable card for lower-end customers in June. Other banks also are introducing prepaid cards for customers whose checking accounts carry low balances, making them less profitable for the bank.

PNC also said it is reducing restrictions on Virtual Wallet, its online and mobile bank account to encourage greater use by its mainstream checking-account customers.

The new rules that cap fees on debit transactions take effect in July. Banks are fighting the provision.

Currently, banks charge merchants an average of 44 cents to process a debit card sale. The Federal Reserve is proposing to cap that figure at between 7 and 12 cents.

Bank of America has settled a lawsuit alleging that it charged excessive overdraft fees, agreeing to pay $410 million to put the action to rest.

Lead plaintiff Ralph Torres, a Miami resident, said in the complaint that he signed up for an account with Bank of America after seeing ads touting “free checking.”

“The bank actively provides false or misleading balance information to these customers, including plaintiff, that in turn deceives these customers into making additional transactions that, in turn, will generate even more overdraft fees for the bank,” the complaint alleged.

Multiple states and defendants

The suit, consolidated in a federal court in Florida, encompasses actions brought on behalf of consumers in 14 states who said that the bank processed debit transactions in order of size -- largest to smallest -- rather than chronologically. As a result, consumers were more likely to overdraw their accounts -- and once they overdrew once, subsequent overdraws were more likely to occur, causing some consumers to accrue hundreds of dollars in fees.

Along with Bank of America, the suit named two dozen other banks as defendants, including JPMorgan Chase, Citigroup, Wells Fargo, U.S. Bancorp, SunTrust, and Huntington Bancshares.

Overdraft charges cost billions: study

According to the Center for Responsible Lending, consumers paid $23.7 billion in overdraft fees in 2008, compared to just $10.3 billion in 2004. The center found that low-amount debit card transactions were the most frequent trigger of overdraft fees -- an average debit transaction of $20 triggered an average overdraft fee of $34.

The center further found that “16 percent of people who overdraft pay 71 percent of overdraft fees,” and that overdrafters are “more likely than the general population to be lower income, single, non-white, and renters.”

Dubious “overdraft protection”

As ConsumerAffairs.com  reported in August, many consumers still choose to enroll in “overdraft protection,” the deceptively-named program that actually enables exorbitant overdraft fees. Consumers who decline overdraft protection simply have their card declined when their account has insufficient funds; consumers who opt in to the program, by contrast, are allowed to use their card but have to cough up the accompanying overdraft fee.

New rules require opt-in

Under rules promulgated in 2009, banks are no longer allowed to automatically enroll consumers in overdraft protection; they must first obtain their permission. Before a consumer is allowed to consent, she “must be provided a notice that explains the financial institution's overdraft services, including the fees associated with the service, and the consumer's choices,” according to a press release issued by the Federal Reserve.

Bank of America announced last March that it was doing away with overdraft fees altogether. Although the bank at first said that it would allow consumers to opt-in to overdraft protection, it later backtracked and said that no customer would be charged an overdraft fee.

“When you looked at it in hindsight, it's not the right way to treat them,” Bank of America CEO Brian Moynihan told The Wall Street Journal of the overdraft fees. “I don't think them opting in is going to change that dynamic, and I think they'll be upset once they opt in down the road.”

National City Bank customers who were wrongfully charged for overdrafts would be eligible for refunds under a class action settlement tentatively approved by a Washington, D.C., judge.

Judge John Bates gave preliminary approval to a $12 million settlement in a class action that allegedNational City improperly charged overdraft fees on debit card transactions and provided false information about account balances.

The plaintiffs charged that National City, now owned by PNC, reordered debit transactions in a manner that depleted available funds as quickly as possible to increase overdraft fees.

Settlement class members will receive $36 for each an eligible overdraft charge incurred on debit transactions between July 2004 and August 2010.

The allegations in the lawsuit mirror the experiences of Veronica of Sauget, IL, who complained to ConsumerAffairs.com last January.

“They get a little crazy with the overdraft fees meaning I can't pay my bills this month because I just paid enough in overdraft fees to pay someone's salary for the week,” she said.

Kim of Milwuakee, WI, said the bank“charged me overdraft charges on my savings and checking, 3 times, for a $59 debit they put through twice … Now I'm out $75 for something they didn't even pay with overdraft protection that does not exist.”

Under the terms of the agreement, class members can be compensated for an unlimited number of overdraft charges incurred in any two calendar months during the class period. The months do not have to be consecutive.

Judge Bates said he restricted compensation to two months to prevent “chronic overdrafters … from being unjustly rewarded for their behavior.”

The next hearing in the case, to determine the fairness of the settlement, is set for June 13.

The full text of Bates' ruling is available online.

If you live in Arizona, Georgia or Massachusetts, Bank of America has its eye on you. The giant bank, which has some kind of banking relationship with half of all U.S. households, has chosen those states as test markets for a new batch of fees aimed at squeezing more money out of consumers.

Forget free checking, no-fee ATMs and statements in the mail. Nearly every activity will cost you something under the new fee structure, which has not been formally announced but became publicly known after a series of employee meetings this week.

The most basic checking account will cost about $6 a month while those with more features could cost as much as $25, press reports said.

As always, some fees might be waived for “better” customers, meaning those who maintain certain balances, keep a healthy balance on their credit cards, have a mortgage with the bank or do all of their banking online.

Ironically, the stiffer fees are at least partly in response to new regulations designed to protect consumers from predatory banking practices., including overdraft fees, high interest rates on credit cards and debit card “swipe” fees.

The changes are costing big banks billions and banks are moving swiftly to recover at least some of that revenue through new and higher fees.

A study by Bankrate.com recently found that the percentage of banks offering free checking has dropped from 76 percent in 2009 to 65 percent in 2010.

Wells Fargo and Chase are also trying out new fees.

The new Bank of America fee structure sets up four “tiers” – Premium, Enhanced, eBanking and Essentials, The Wall Street Journal reported.

The paper said the Premium and Enhanced tiers will be for customers who have multiple accounts with the bank. Ebanking is for customers who do all their banking online and Essentials is the most basic account, for those who have one checking account and a debit card.

Thanks to a change in the law, bank customers have the right to "opt in" for overdraft coverage that used to be mandatory, carrying with it hefty fees whenever a consumer exceeded their account balance.

But even though consumers no longer have to be covered by these plans, the Federal Deposit Insurance Corporation (FDIC) is telling its member banks they must still maintain "robust" oversight of the overdraft programs for consumers who choose to remain enrolled. FDIC has issued guidance to make sure member banks comply with the rules.

"This guidance promotes common sense overdraft programs by setting out our expectations. While many community banks already prudently manage their overdraft programs, some banks operate automated programs that lead to excessive use of these high-cost, short-term credit products," said FDIC chairman Sheila C. Bair. "When banks spot a pattern of excessive use of an automated overdraft program, they should contact their customers about a more appropriate and lower-cost alternative that better suits their needs."

In response to concerns about automated overdraft programs, the FDIC on August 11, 2010, proposed guidance for public comment on how the banking institutions it supervises should monitor and oversee overdraft programs. The proposed guidance stemmed from both the FDIC's November 2008Study of Bank Overdraft Programsthat disclosed growing use of such programs and increases in consumer complaints related to overdraft programs.

The FDIC said it received more than 900 written comments on the proposed guidance from financial institutions, their industry trade groups, individual consumers, consumer advocacy and public interest groups, and one member of Congress. The final guidance incorporates suggestions from commenters to refine and clarify expectations.

The guidance won enthusiastic support from at least one consumer group.

"Unfair transaction posting—especially the practice of reordering checks and debit card transactions to deduct the largest checks and charges first—significantly increases the number of overdraft fees customers are charged," said Michael Calhoun, president of the Center for Responsible Lending (CRL). "Customers are charged a separate fee—usually about $35 per item-for each charge that is posted to an overdrawn account. By posting the largest items first, the balance dips below zero sooner, and each subsequent, often small transaction, triggers a fee."

Calhoun said the FDIC guidance sets a standard he thinks other federal regulatory bodies should follow.

The final guidance provides information to assist FDIC-supervised institutions in identifying, managing and mitigating risks associated with overdraft payment programs, including risks that could result in serious financial harm to certain consumers. The guidance focuses on automated overdraft programs and encourages banks to offer less costly alternatives if, for example, a borrower overdraws his or her account on more than six occasions where a fee is charged in a rolling 12-month period.

Additionally, to avoid reputational and other risks, the FDIC expects institutions to institute appropriate daily limits on customer costs and ensure that transactions are not processed in a manner designed to maximize the costs to consumers, such as by processing checks from the largest to the smallest. The guidance also reminds institutions of existing requirements under applicable laws and regulations.

There's nothing like cash as an incentive to do something. But you should always be wary when something sounds too good to be true. Like banks giving away free money just so you'll open a checking account. Those cash incentives are quickly erased by hidden fees and restrictions.

Still, these "free money" offers have more than doubled over the last year. Schwark Satyavolu, CEO ofBillShrink.comtracks bank account trends. He says Citigroup has started to lure in new customers with up to $300. Meanwhile, Capital One is offering $200 while JPMorgan Chase is handing out a miserly $125. Not to be outdone by Citigroup, the online bank WTDirect.com is also offering to $300 for opening a new savings account.

So what's going on? Even in the last month, more than half a dozen small banks have also rolled out similar cash incentives of up to $220. Have the banks suddenly become generous? Don't count on it. For the banks, this is a calculated tradeoff.

You see as soon as the banks start lending again and many of them have, they need more cash to help fund car loans and mortgages. Where do think they get it? From all those checking and savings account deposits. So while you may think you've just found some free money, the bank is the real winner because they've just taken in your money in that new checking or savings account.

As Satyavolu explains it, banks are targeting "good" would-be customers, who are likely to maintain high balances and use their debit cards frequently. In exchange, they hope new account-holders will raise banks' revenues and apply for loans down the road. When customers need a mortgage, they tend to turn to the bank they have their core relationship with.

No free lunch

We all know there's no such thing as free money. You're going to have to do some serious depositing to even qualify for that incentive.

Let's say you go to Citigroup. It's going to take you about two weeks to get the money and that's provided you open a Citigold interest checking account, which offers an interest rate of 0.15%. Wow! How do you even compute such a low rate? That's a whole 15 cents on $100.00.

Then you have to deposit at least $1,000 by November 18 and maintain an average daily balance of $1,000 through the end of the month. You'll also have to sign up for three more Citi products -- like a savings account, certificate of deposit or a credit card --within two months of opening the account.

When you do finally get the money, you'll have to pay taxes on it. Cash incentives are taxed as regular income. So if you're in the 25% tax bracket, that $300 award drops to $225 in after-tax dollars.

That's not all. Even after you get the money, you could lose it to other new and increased fees such as a failure to meet the minimum balance requirements. According to Bankrate.com, the average minimum balance requirement is $3,883 for a no-fee interest-bearing checking account. That's an increase of 15% from last year.

Bankrate.com says the minimum falls to $249 on non-interest checking but that is 34% higher than last year. The average customer who falls below the threshold pays a fee of around $13. So try to find accounts that have zero minimum balance requirements. ING Direct has one but it doesn't give out as much "free" money either. The ING Direct account doesn't require a minimum balance and has no fees associated but only gives out $50 as a new account bonus.

Bank of America offers you $25 for signing up a friend, who also gets $25. But that doesn't go very far once service fees kick in. Bank of America charges a $12 maintenance fee for its regular checking accounts that fall under its minimum daily balance requirement of $750 and that fee is going up to $14 on November 4 for balances that dip below $1,500. You can, however. link your checking account with a savings account at the bank, but even then, you'll need to keep at least $2,000 total between the two accounts to avoid the fee.

At Chase, you can open an account with just $25 and still receive a $125 cash bonus. But you'll be charged $6 per month if you don't buy something with their debit card five times each month or have at least one monthly direct deposit posted to their account. That's similar to ING which requires three transactions - debit card purchases or transfers from your account to someone else's - within the first 45 days to get the bonus. 

Overdraft fees

Then there are those overdraft fees. Banks want you to get what's called "overdraft coverage" on your checking account. Don't. In 2009, banks took in $37.1 billion in overdraft fees. These fees get charged any time a consumer withdraws more money from their checking account than they have in it.

As of August, new Federal Reserve rules prevent banks from automatically enrolling consumers in debit-card overdraft coverage. It's that coverage which permits purchases to go through even if the consumer doesn't have enough money in their checking account. This is what allows banks to collect their fee. Now, customers who do nothing will have their overdraft purchases declined, which may be humiliating but it's not going to cost you extra fees.

The fee per overdraft averages $30. To further confuse you, sometimes banks will post transactions out of order. So let's say you have $150 in your checking account. You buy something for $100 and then something else for $200. If the bank posts the $200 purchase first, you'll get hit with two overdraft fees. There is an option that could help save you money. Ask the bank to link your checking to your savings account to avoid overdraft fees. Chase and Bank of America offer this service, but it costs $10 each day the checking account is overdrawn.

See, nothing's really for free.

A coalition of consumer groups is calling on the Office of Comptroller of the Currency (OCC) to adopt stricter guidance that requires banks to use fair overdraft practices and fully inform consumers.

In a letter to Acting Comptroller of the Currency John Walsh, the groups - including the Consumer Federation of America, the National Consumer Law Center, the Center for Responsible Lending, Consumers Union, Consumer Action, National Association of Consumer Advocates and U.S. Public Interest Research Group -- note that the nation's largest banks charge customers overdraft fees averaging $35 per transaction, often adding up to hundreds of dollars per day.

Overdraft triggers

The most common triggers of overdraft fees are small debit card transactions -- which cost the consumer nothing when they are simply denied due to lack of funds.

Over the summer, a new Federal Reserve rule went into effect requiring banks to get consumers' consent or "opt-in" to pay overdraft fees for debit card single purchase and ATM overdrafts. But because the Fed did not address the size or frequency of overdraft fees, banks still have strong incentives to push customers to opt in, and then continue to barrage them with fees, the groups contend.

Banks are sending letters to consumers trying to persuade them to opt into paying fees for overdrafts, saying that they may need this service in an emergency. The groups claim the banks typically carry a far lower-cost option -- an overdraft line of credit -- and many also offer transfers from savings accounts or credit cards, which are also usually less expensive.

Time to step up

"The FDIC and Office of Thrift Supervision have already proposed strengthening overdraft guidelines for the banks they oversee. Now it is time for the OCC to take action," said Rebecca Borne of the Center for Responsible Lending. "The OCC should prohibit banks from steering customers into the highest cost overdraft option. Banks should be required to evaluate any customer who wants overdraft coverage to determine whether the consumer qualifies for a lower-cost overdraft option."

Lauren Saunders of the National Consumer Law Center notes that the largest banks typically rearrange and process payments largest first, which significantly increases fees for low-balance customers by causing multiple fees when a single large payment exhausts available funds. "The OCC should make it clear to banks that they should not post transactions in an order that maximizes fees," she says.

Time for action

The OCC's recent $33 million enforcement action involving Woodforest National Bank "illustrates the need for the OCC to address excessive overdraft fees across the board," said Jean Ann Fox of the Consumer Federation of America. "Woodforest Bank's practices do not appear to be atypical. The OCC should also limit the number of overdraft fees to six per year, consistent with the FDIC's recent proposal recognizing that charging more than six fees per year constitutes excessive use."

Consumers Union's Lauren Bowne says it appears that during the last few months a number of banks have been pressuring consumers or asking them repeatedly to opt in to overdraft coverage. She believes the OCC put a stop to it adding, "If a consumer declines to opt in or to provide an answer, the bank should be required to assume that the consumer does not wish to opt in and not solicit the consumer again."

Informing consumers

"Consumers must be given information about the comparative cost of each alternative in order to make a truly informed and meaningful choice, including a sample APR disclosure to compare fee-based overdraft loans with a traditional overdraft line of credit or transfer from a credit card," according to Linda Sherry of Consumer Action. "Every opt-in form should prominently display that the cost of not opting in to ATM and one-time debit card overdraft coverage is $0."

Consumers should get a clear and prominent message that declining to opt in means they will never incur any overdraft fees for ATM and single debit card transactions, the groups said.

The last of a series of new overdraft rules goes into effect August 15, after which banks cannot automatically enroll new or existing customers in an overdraft protection program that smacks consumers with a hefty fee when the bank makes good on an overdraft. The banks have come to rely on the revenue from those fees and are worried about losing them.

It turns out they might not have as much to worry about as they thought. Research shows a surprising number of consumers have already "opted in" for the continued coverage and another large group indicates it plans to do so.

When the Federal Reserve drafted new rules preventing banks from making its overdraft coverage mandatory, consumer advocates were certain that most bank customers would say "no thanks." After all, complaints about overdraft fees, famously making a $5 latte a $40 purchase, have filled pages on ConsumerAffairs.com.

But a new report from Mintel Comperemedia, a service that provides direct marketing competitive intelligence, found that 26 percent of consumers said they had opted in for their bank's standard overdraft services and another 26 percent said they planned to do so in the future.

Marketing blitz

Mintel notes that the banking industry has engaged in a marketing full court press to achieve these results, incorporating direct mail, email, web and phone campaigns to encourage consumers to remain in a program that will charge them fees whenever they overdraw their account with their debit card. Those who decide to live without the overdraft protection will have their cards declined when a purchase would overdraw their account, but will not pay a fee.

In recent years, consumers have paid $23.7 billion per year in costly overdraft fees, which average $34 per incident. However, the Center for Responsible Lending (CRL) says there are a number of less costly alternatives to standard overdraft coverage.

"To avoid costly fees under standard overdraft coverage, customers can sign up for lower cost overdraft alternatives at their bank, such as linking a savings account or credit card for back-up funds, or applying for an overdraft line of credit," the group says on its website.

CLR maintains that banks' recent marketing blitz has been targeted at the most vulnerable consumers because they are the ones most likely to have incurred overdraft fees in the past. To induce these customers to accept overdraft coverage, CLR asserts, many marketing campaigns use scare tactics or incomplete information. For example, they fail to emphasize customers can have debit card transactions declined at no cost rather than incur a $34 overdraft fee.

The proposal primarily focuses on finding effective ways for banks to monitor their overdraft programs for excessive or chronic use by customers as a form of short-term, high-cost credit instead of its intended use: protection against inadvertent overdrafts. It also provides an overview of how banks can avoid compliance and safety-and-soundness risks.

"This guidance proposes common-sense ways to mitigate risks to both consumers and banks. Ensuring that their customers are educated on the appropriate use of overdraft payment programs is just one more example of how community banks understand their customers and play a role in helping individuals find suitable financial products," FDIC Chairman Sheila C. Bair said.

Consumers who chose to remain in an overdraft program will continue to pay a fee whenever the bank covers a debit purchase for which there are insufficient funds.

Under new rules that recently took effect, banking institutions already must give customers an opportunity to opt-in to programs that charge a fee to cover ATM and point-of-sale overdrafts.

It's anticipated that most customers will not opt in for this service. Consumer advocates are concerned about those who do.

Less costly options

American families, especially those most vulnerable financially, could save millions of dollars a year in costly overdraft fees if guidelines the FDIC proposed are adopted, said Michael Calhoun, President of the Center for Responsible Lending.

The guidelines would encourage the banks the FDIC oversees to offer customers lower-cost overdraft alternatives rather than charge unlimited high-cost overdraft feesas many banks do, even on small debit card transactions.

Under the proposal, a bank would contact a customer who incurs six overdraft fees within 12 months and offer and explain less costly options. The bank would be encouraged to provide the customer with a reasonable opportunity to choose one of them. Banks the FDIC oversees also would be discouraged from re-ordering transactions to maximize overdraft fees.

The proposal comes just days before new Federal Reserve's August 15th rules take effect requiring banks and credit unions to obtain a customer's signature before enrolling them in a costly overdraft program for debit cards.

Many banks don't give consumers real choices among alternatives, Calhoun said. Instead, they steer customers into the highest cost overdraft coverage they offer.

By Mark Huffman
ConsumerAffairs.com

June 21, 2010
Starting July 1, new Federal Reserve rules will prevent banks from automatically charging overdraft fees when debit customers exceed their account balance.

Currently, when a consumer goes into the red, banks automatically honor the purchase but tack on a hefty fee -- usually around $35. Starting next month, banks will not be able to enroll a consumer in this "courtesy" overdraft protection unless the consumer "opts in," specifically agreeing to the coverage.

In addition, some banks have announced they will no longer charge an overdraft fee if a customer's credit card purchase puts them just a few dollars over the limit. Other institutions, like Bank of America, have already discontinued its courtesy overdraft protection, based on customer feedback.

Banks, of course, are hoping many consumers will "opt in" for the continued overdraft coverage, since overdraft fees add up to billions of dollars in revenue for the industry. But as a consumer, you will now have the power to choose.

What you should know

Starting July 1, your bank must first get your permission to apply its standard overdraft practices to everyday debit card and ATM transactions before you can be charged overdraft fees. To grant this permission, you will need to respond to the notice and opt in.

This is important because, if you take no action, you will not be granted the overdraft protection, but you will also not be charged overdraft fees. If you do not opt in, beginning August 15, 2010, your bank's standard overdraft practices won't apply to your everyday debit card and ATM transactions, according to the Fed. These transactions typically will be declined when you don't have enough money in your account, but you will not be charged overdraft fees.

If you open a new account on or after July 1, 2010, your bank cannot charge you overdraft fees for everyday debit card and ATM transactions unless you opt in. If you open a new account before July 1, 2010, your bank will treat you as an existing account holder: you will receive a notice about your bank's standard overdraft practices and will have to decide if you want them for everyday debit card and ATM transactions.

Whatever your decision, the new overdraft rules give you flexibility. If you opt in, you can cancel at any time. If you do not opt in, you can opt in later.

It's important to remember that the new rules do not cover checks or automatic bill payments that you may have set up for paying bills such as your mortgage, rent, or utilities. Your bank may still automatically enroll you in its standard overdraft practices for these types of transactions. If you do not want your bank's standard overdraft practices in these instances, talk to your bank; you may or may not have the option to cancel.

Bank of America says it is ending its practice of automatically charging consumers $35 when they make a debit card purchase that exceeds the funds in their account. Under the new policy, such purchases will be declined at the point of sale unless customers have requested overdraft "protection."

"Our customers have been clear that they want to know if a purchase is going to overdraw their account," said Susan Faulkner, Deposits and Card Product executive. "Our solution is simple, clear and helps customers control their finances by reducing the possibility of over-extending themselves at the point of sale with a debit card."

Nearly all banks provide what they call "courtesy overdraft protection" to their customers, whether they want it or not. While this policy allows the sale putting the account in the red to go through, it costs the consumer $35 per overdraft.

Most consumers have said they would prefer to have the purchase declined rather than be hit with a $35 fee, often assessed on a purchase that overdraws their account by only a dollar or two.

Bank America's move is widely seen as an attempt to get out in front of new Federal Reserve regulations that will severely limit the use of overdraft fees. Under the new Fed policy that takes effect later this year, customers must be allowed to "opt in" to overdraft protection. In other words, banks can't automatically provide it.

The new Bank of America policy takes effect June 19, 2010, for new customers and in August for existing customers, the bank said. The new Fed regulations go into effect July 1.

Sore point

Mandatory overdraft protection has long been a sore point with consumers, who have complained over the years that banks seemed to be exploiting any overdraft. For example, if a consumer were shopping and made five small debit purchases that all went over the amount of money in their account, the bank charged five $35 fees.

"We understand that the environment has changed, and we are changing with it," said Faulkner. "We will continue to make changes to our products, services and solutions that deliver more value to our customers by providing the clarity, control and choice they need to better manage their everyday finances."

While Bank of America's policy change is bound to please consumers, it could have an impact on the bottom line, since all banks have begun to rely on fees on customers for a big source of profits. Various financial analysts put the revenue generated by fees at between $30 billion and $40 billion per year.

Bank of America, for its part, says its new policy goes "above and beyond" the new government regulations. It is the second major bank to take this step. Citigroup has already adopted a similar policy.

A group of Fifth Third Bank customers has filed a lawsuit against Fifth Third Bank, seeking refunds of millions of dollars in overdraft charges the plaintiffs contend were taken illegally.

The suit maintains that the overdraft fees were often charged when the customers had enough funds in their accounts to pay for purchases.

"It is one thing to charge an overdraft fee when someone has actually overdrawn their account. It is entirely another to charge an overdraft fee when the customer's account has sufficient funds, said Hassan Zavareei, a partner at the Washington, D.C.-based law firm Tycko & Zavareei LLP, which represents the plaintiffs.

The suit charges that in some cases Fifth Third charges overdraft fees and additional fees for every day an account is overdrawn -- even when an account is overdrawn solely because of bank fees charged by Fifth Third.

"The bank is essentially charging overdraft fees on overdraft fees," said Zavareei. "This is outrageous bank conduct, made worse by the fact that most of the bank's victims are struggling to make ends meet."

Over the years, ConsumerAffairs.com has received similar complaints about Fifth Third Bank, particularly its overdraft policies.

The lawsuit was filed in federal court on behalf of Marlene Willard, of Hephzibah, Georgia, and other bank customers who claim they were unfairly and illegally charged overdraft fees by Fifth Third Bancorp for charges they made on their ATM/debit cards.

The class action lawsuit alleges that these fees violate federal and state law, as well as the contractual relationship the bank has with its customers. The lawsuit seeks certification of a class action on behalf of Fifth Third Bank customers who were improperly charged overdraft fees or who received insufficient disclosures about such overdraft fees.

"Manipulation" alleged

The complaint alleges that Fifth Third Bank manipulates debit transaction posting to cause overdraft fees even when there are sufficient funds to pay for a certain purchase. Further, the suit claims Fifth Third Bank fails to properly disclose fees that will be charged at the point of sale, and uses deceptive disclosures in its contract with customers to hide its true overdraft policies.

"We are continuing to investigate Fifth Third and other banks around the country. Customers must be compensated for bank practices that caused hundreds of millions of dollars in improperly charged fees," Zavareei said.

The complaint also alleges that Fifth Third Bank has not allowed its customers to opt out of "overdraft protection," as recommended by Federal regulators.

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has over $100 billion in assets and operates 16 affiliates with 1,306 full-service Banking Centers in Ohio, Kentucky, Indiana,Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina.

The Federal Reserve this week issued a new rule requiring banks to allow customers to decide whether they want the automatic "courtesy" overdraft protection, that covers debit card purchases when they overdraw their accounts, but nicks them with a hefty fee.

Under the new Fed rules, bank customers must be allowed to "opt-in" for this protection. It addresses a longstanding consumer complaint that paying the overdraft fees is much worse than having a purchase denied due to insufficient funds.

While the new rule should go a long way in mitigating this consumer complaint, some think it doesn't go far enough. Rep. Carolyn Maloney (D-NY) has drafted legislation that also allows bank customers to "opt-in" to overdraft protection.

"I'm glad that the Federal Reserve has recognized the need to address outrageous overdraft policies by requiring a strong affirmative opt-in to debit-card overdraft plans, and I commend Chairman Bernanke for taking the regulators in this direction," Maloney said. "The Fed's rule is an endorsement of the need for more overdraft protection for consumers."

But Maloney said Congress still needs to act on the issue. She says there are shortcomings in the new Fed rule that her bill would address.

"The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts," Maloney said. "Under the Fed's new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!"

Maloney says her bill, H.R. 3904, caps the quantity of fees at one per month or six per year, requires that fees be reasonable, and prohibits posting-order manipulation, and includes all transactions, not just debit cards. She says her bill has wide support, including from House Financial Services Chairman Barney Frank, who is a co-sponsor.

Unintended Consequences

But as with the credit card reforms passed earlier this year, some in the financial industry warn of unintended consequences. They point out that banks will likely respond to rule changes - that remove billions from their revenue lines each year - with some rule changes of their own.

For example, Tim Smith, CEO of Probity Financial Services and the former President of a nationwide bank consulting firm, says nothing in the new Fed rule or the Maloney bill requires banks to keep customers.

What will banks do when a consumer hits the six overdraft fee maximum in a year? Smith says the most likely outcome will be to close their accounts, just as credit card companies have been closing many cardholder accounts in the wake of the credit card reform bill.

Smith cites an FDIC study of bank overdraft programs to suggest more than one in ten checking accounts would fall into this category. He says these consumers may be forced to turn to check cashing services and prepaid debit card services to meet their spending needs, both of which are likely to be just as expensive as bank's overdraft programs.

"Banks can and should adapt to limitations placed on their aggressive overdraft policiesBut, let's be honest, if Congress establishes a limit on the number of overdrafts a bank can charge in a given year, there is a very real possibility that millions of consumers will be forced out of the banking system," Smith said. "This is a classic case where the intentions are good, but the outcome will likely be very different than what Congress envisions."

Amid consumer outrage and Congressional pressure, banks are beginning to make changes to their overdraft fees. But they aren't about to wean themselves off fees altogether, and that has consumer groups demanding more reforms.

"None of the largest banks reduced their overdraft fees, which average $35 per overdraft, or dropped sustained overdraft fees tacked on if consumers cannot repay in just days," noted Jean Ann Fox, Director of Financial Services for the Consumer Federation of America. "For a $100 overdraft repaid in one week at that $35 fee, consumers are paying 1,820 percent APR if computed in the same way as a short-term loan. A single $10 overdraft loan can still cost up to $70 if not repaid in just five days."

Banks extend credit when they cover overdrafts for a fee. However, the Federal Reserve does not require banks to comply with the credit laws that apply to other short-term cash loans. As a result, consumers are permitted to overspend their checking accounts without affirmative consent, do not get comparable cost-to-borrow information, and are not warned when a transaction will trigger an overdraft.

It now appears the Federal Reserve will change rules requiring banks to allow customers to decide whether they want their banks' "courtesy" overdraft protection, in which the bank covers the overdraft but charges the consumer an overdraft fee of about $30 per overdraft. Fed Governor Daniel Tarullo told the Wall Street Journal that change is likely.

JP Morgan Chase, Wells Fargo and Bank of America, anticipating these changes, recently announced liberalization of their policies that assess consumers a hefty service charge when they make debit purchases that exceed the funds in their accounts. Some consumers who routinely draw their checking account down to the bare minimum can end up paying hundreds of dollars a month in overdraft fees.

"Overdraft loans are one of the most expensive and exploitative credit products on the market," said Chi Wu, National Consumer Law Center Staff Attorney. "A few limited reforms by a half dozen banks aren't going to stop the abuses. These reforms are too little and too late, coming after years in which banks made billions off of overdraft abuses."

Recently announced changes in overdraft programs by some large banks are unlikely to reduce costs significantly to customers, said the groups. Some banks have changed the threshold that triggers overdraft fees and have lowered the total number of overdraft fees a consumer can be charged in one day. But none of the banks are lowering the fees charged for initial or sustained overdrafts.

Chase Bank plans to permit its existing and new customers to sign up affirmatively to use overdraft loans, while other large banks have announced that they will permit existing customers to opt out of using the banks' most expensive form of credit.

In some cases, banks will permit only new customers to opt in to some forms of overdrafts in the future. Citibank does not permit its customers to incur overdrafts when using debit cards or at ATMs, and Citibank customers can incur four overdraft fees per day for checks.

"The Consumer Financial Protection Agency, under consideration this month by the House Financial Services Committee, is needed to restore consumer protections to bank overdraft lending," said Travis Plunkett, CFA's Legislative Director. "The Consumer Financial Protection Agency will monitor these types of transactions and provide a floor of protections for consumers so that Americans are not left to the mercy of the banks to decide on fundamental protections and fair transactions going forward."

What to watch out for

Consumers burned by these charges on a regular basis are unlikely to agree to continue the bank's "overdraft protection" once they have the choice, so bank revenue from these fees will probably drop sharply.

But banks still depend on fees to bolster profits and consumers should be aware of them. To make up for the loss of overdraft fees, these other fees might increase, and new fees might be added.

For example, when a credit card company offers you an attractive deal on a credit card if you will transfer balances from another card, keep in mind that transfer can come at a cost. Some banks charge up to five percent for a balance transfer, meaning the cost of moving $10,000 can cost $500.

The same is true for a cash advance. To take out a "loan" from your credit card, the bank will assess a fee, or surcharge, often between two and five percent. That can make a cash advance an expensive proposition -- something that shouldn't be considered except in a dire emergency.

Using the ATM can also come with fees, though most banks don't charge their customers for using the machines within the bank's network. But using a "foreign" ATM, or one outside the bank's network, can be expensive. Your bank will charge a fee, as will the "foreign" bank. A way to avoid these fees is to make a debit purchase at a store where you can get cash back. That transaction, in most cases, doesn't carry a fee.

Most banks also charge for checking services unless the customer meets certain conditions. For example, the fee might be assessed when the balance in the checking account falls below a certain level.

Usually, that minimum balance isn't all that high, so if a consumer has a savings account, it would be much better to keep the savings in a checking account, to maintain the minimum balance. Avoiding a monthly surcharge usually offsets the less than one percent interest usually paid on a passbook savings account.

Banks and credit unions collected nearly $24 billion in overdraft fees last year, an increase of 35 percent from just two years earlier, according to a new study by the Center for Responsible lending.

The explosion in overdraft charges has drained the wallet of as many as 51 million Americans whose accounts become overdrawn annually. It is particularly harmful to financially vulnerable families already hit hard by the recession.

"Banks and credit unions have become so sophisticated in driving up overdrafts that Americans now pay more in overdraft fees every year than they do for books, cereal, or fresh vegetables," said CRL senior researcher Leslie Parrish. "These billions of dollars drained from consumers each year represent lost opportunities for families to save for a rainy day or buy necessary goods and services that could help spark the economy."

The most common trigger of overdraft fees are small debit card transactions that could easily be denied for no fee. This is how things used to work, and according to a 2008 nationally representative survey, it's what the large majority of people prefer.

Thousands of bank and credit union customers have complained to federal regulators that overdraft policies are unfair. Customers typically haven't explicitly agreed to these high-cost overdraft loan programs but are automatically enrolled by their bank.

When consumers try to avoid these abusive fees, they often find themselves tripped up when, for example, institutions needlessly delay posting deposits or process purchases from largest to smallest to purposely generate multiple overdrafts.

• Jarrod A. of New York City tells ConsumerAffairs.com that he has been charged over $350 in overdraft charges In six days by Chase Bank. "I received $175 in refunds," he writes, "only to see it taken back by over $300 in overdraft fees the next day." Jarrod says he is a grad student "and this has made me miss class, late for work and unable to make my next tuition payment."

• Frank J. of Stoughton, Mass., says Bank of America charged him over $300.00 in overdraft fees. "What they did," he tells ConsumerAffairs.com, "was start charging by not clearing deposits quickly. They then placed my largest debit card expenses first, then the smaller ones. In this way, they compounded the overdrafts from one to multiple." Frank says he got no satisfaction when he took his complaint to bank representatives.

• Benjamin C. of Wilmington, N.C., says he's tired of being charged $35 for overdrafts and that he would prefer the transaction be denied if his account is overdrawn. "I never signed up for an overdraft protection program," he tells ConsumerAffairs.com. "They did it automatically I guess."

Because overdrawing an account by just a few dollars triggers a fee averaging $34, cash-strapped households -- particularly younger adults and seniors on fixed-incomes --often are thrust even further into debt by this overdraft "protection."

The changes to their overdraft programs several banks announced last month do not address some of the most abusive features of the programs and can easily be reversed once the spotlight shifts. CRL says reform of overdraft practices should be set into law -- and soon - and recommend that policymakers:

• Require that institutions deny debit card purchases and ATM withdrawals, without charge, if the funds aren't there. As a limited exception, an overdraft fee could be charged if the lender gives the customer a real-time warning and chance to decline.

• Require that overdraft fees bear some relationship to a lender's cost of covering a shortfall.

• Limit the number of fees that can be charged to a customer during a year before the institution must enroll the customer in a reasonably priced overdraft product, such as a line of credit, if it wants to keep charging for overdrafts.

• Consolidate and streamline existing federal consumer protection authority by housing it in one organization: the proposed Consumer Financial Protection Agency, which would focus solely on what's in the best interest of consumers.

Under pressure from Capitol Hill and consumers, Bank of America and JPMorgan Chase are easing up on overdaft charges and other fees.

Banks make billions of dollars per year in revenue from overdraft charges, in many cases levying them on customers who didn't even know they had -- and had never asked for -- overdraft protection. But with Congress considering proposals to impose reforms, banks are trying to get in front of the problem with reduced fees and more lenient terms.

BofA

Bank of America said that, beginning Oct. 19, it will:

• Not charge Overdraft item fees when a customer's account is overdrawn by a total amount less than $10 for one day
• Not charge overdraft fees on more than four items per day;
• Improve the process for customers to opt out of overdraft capability;
• Offer customers a "Clarity Commitment" that spells out in clear, unambiguous terms what customers can expect from their deposit relationship with Bank of America.

Effective June 2010, the bank will:

• Introduce an annual limit on the number of times customers can overdraw their accounts at the point-of-sale when they do not have sufficient funds to cover their transactions
• Contact customers who are nearing the annual limit to provide education and tools to help them better manage their finances
• Limit overdraft capability, and therefore fees, for customers who reach the annual limit
• Provide new customers the choice to opt into overdraft capability at account opening.

Chase

Chase said its new policies, when fully effective, mean that customers "won't pay big fees for small mistakes." The changes will apply to all current and new customers and will include:

• Eliminating overdrafts for debit cards unless the customer opts in to overdraft services;
• Modifying posting order to recognize debit-card transactions and ATM withdrawals as they occur;
• Eliminating overdraft fees if a customer's account is $5 or less overdrawn'
• Reducing the maximum number of overdraft fees per day to 3 from 6.

"Customers will be given the opportunity to decide whether they want to participate in Chase's debit-card overdraft services," said Charlie Scharf, head of Retail Financial Services at JPMorgan Chase. "We believe it's important to give all 25 million existing debit card customers, as well as new customers, the ability to decide whether to opt in. We expect many of our customers will continue to find these services very useful."

Chase will continue its current policy of not allowing customers to withdraw more cash from an ATM than they have available in their account.

Chase will update customer accounts and balances for debit-card purchases and ATM withdrawals as they occur. "The new posting order will be more logical for customers, and they will incur fewer fees," Scharf said.

In addition, Chase said it will continue to offer overdraft protection for customers who link their checking account to a savings account, credit card or home equity line of credit. Millions of customers use this for peace of mind in case they forget to record a transaction, make a subtraction error in their checkbook or lose track of the dates of direct deposits or automatic debits.

Chase said it expects to implement these changes in the first quarter of 2010.

Angry bankers

Not all bankers are taking consumer restlessness to heart. Dan D. Graham, president of Flora Bank & Trust, Flora, Ill., responded angrily to an earlier story, Bulls Eye on Bank Overdraft Charges.

"I find it amusing that no banker, or bank association, was contacted for information, and certainly not a community banker. Your article was misleading on many fronts, and down right (sic) biased and disingenuous for the most part. Here are the facts as they relate to our bank, and for the most part the industry as a whole," Graham wrote.

Graham listed these "facts:"

1. You assert that banks let customers overdraw their accounts without their knowledge. BULL! First and foremost it is the customers responsibility to manage their checking account. Who else is going to know if they have money in their account besides them when they write a check? Once again though we are taking personal responsibility out of the individuals hands, blaming someone else, and asking the government to control our lives. Can you get Senator Dodd to remind me to go to the bathroom; Im not smart enough to do it myself?

2. There is a cost involved to the bank, and a charge will apply even if the check is returned. In a lot of cases if the check is returned the merchant charges a fee that is often higher than the banks. When are you going to go after them? By paying the item and charging a fee, we in a lot of cases end up saving the consumer money.

3. I guess its ok for the Check Cashers, who would replace this service to charge enormous amounts of interest.

4. We notify our customers before they get the service, and give them the opportunity to opt out; in fact, they can opt out at any time. The fees associated with an overdraft are also disclosed to customers at account opening and again annually. We have had very few customers opt out, or complain. In fact we have a far greater number of customers thank us for the service.

5. You make it sound like American families are getting deeper into debt due to overdraft fees. Fact is, our overdraft fees are down considerably this year as people tighten their belts, and manage their finances better. Point: People can manage their finances and avoid fees, they simply choose not to.

Clock is ticking

Graham's assertions aside, Congress is hardly known for its antipathy towards the banking industry, but lawmakers have been getting an earful from constituents and fear for their political lives if they are seen as not doing anything to protect consumers. Senate Banking Committee Chairman Christopher Dodd (D-CT) has already announced that he is working on legislation.

"Overdraft protection programs" let customers overdraw their accounts, without their knowledge, when they use checks, electronic transfers, debit card purchases, and ATM withdrawals. Account holders are often enrolled in the programs without their consent and many banks will slap customers with fees of upwards of $30 for this "courtesy" even if their account is only overdrawn by a few cents.

It is a service most customers do not know they have and may not want. According the Center for Responsible Lending (CRL), 80 percent of consumers would rather have their transaction denied than have it covered in exchange for a fee.

A recent survey released by the Consumer Federation of America found the median overdraft fee is $35. The highest is $39, charged by Citizens Bank for the third overdraft in a year. Fourteen of the sixteen largest banks charge $35 or more per overdraft, either initially or after a few overdrafts in a year.

Nine of the largest banks surveyed charge tiered overdraft fees, escalating the cost of more than one or two overdrafts over a year. For example, Regions Bank charges $25 for the first overdraft, $33 each for the second and third, and $35 each for four or more.

The Financial Times reported that banks stand to collect a record $38.5 billion in fees for customer overdrafts this year. The most cash-strapped customers are the hardest hit, with 90 per cent of overdraft fees coming from ten percent of checking account holders. According to CRL, banks collect nearly $1 billion per year in overdraft fees from young adults and $4.5 billion from senior citizens.

ConsumerAffairs.com has received thousands of complaints about overdraft charges. Among them:

• Vesta of Sacramento, California, who writes, "Provident extended me $500.00 courtesy pay on my checking account for being a long time customer. So, if I have an overdraft, the courtesy pay will cover it. But, the problem is, every time I have an overdraft and courtesy pay pays it, they charge me $23.00 fee. If I'm one cent overdraft, courtesy pay will pay it and charge me $23.00 fee."

• Reginald of Washington, DC, tells ConsumerAffairs.com that he has been charged two overdraft fees of $35.00 each by Chevy Chase Bank. "The two charges," he says, "were for amounts of $3.08, and for $1.05. These charges were made prior to a $4.94 purchase at McDonalds. If there was an overdraft, it should have been only one and that should have been for the $4.94 purchase since it was the last purchase." Reginald says a representative of the bank with whom he spoke, "was of absolutely no help whatsoever."

"Excessive, automatic overdraft fees are forcing many American families deeper into debt at a time when they are already struggling to make ends meet," said Dodd. "I am working on a bill to protect consumers from these fees."

Dodd's bill will require customers to "opt-in" to these programs, prohibiting banks from charging consumers overdraft fees without their consent.

CRL President Michael Calhoun expressed his organization's support for President Obama's call for the creation of a new agency to bring oversight to the financial services industry.

"The regulators responsible for making our financial system work have failed," said Calhoun. "We urge Congress to act quickly to create the Consumer Financial Protection Agency so that individual Americans, who account for nearly $7 out of every $10 spent in the economy, can put the money that financial institutions unfairly siphon off to more productive purposes, like buying beneficial goods and services and saving for the future."

Momentum is building for a way to protect Americans from excessive checking account overdraft fees.

Senate Banking Committee Chairman Christopher Dodd (D-CT) has already announced that he is working on legislation.

"Overdraft protection programs" let customers overdraw their accounts, without their knowledge, when they use checks, electronic transfers, debit card purchases, and ATM withdrawals. Account holders are often enrolled in the programs without their consent and many banks will slap customers with fees of upwards of $30 for this "courtesy" even if their account is only overdrawn by a few cents.

It is a service most customers do not know they have and may not want. According the Center for Responsible Lending (CRL), 80 percent of consumers would rather have their transaction denied than have it covered in exchange for a fee.

A recent survey released by the Consumer Federation of America found the median overdraft fee is $35. The highest is $39, charged by Citizens Bank for the third overdraft in a year. Fourteen of the sixteen largest banks charge $35 or more per overdraft, either initially or after a few overdrafts in a year.

Nine of the largest banks surveyed charge tiered overdraft fees, escalating the cost of more than one or two overdrafts over a year. For example, Regions Bank charges $25 for the first overdraft, $33 each for the second and third, and $35 each for four or more.

The Financial Times reported that banks stand to collect a record $38.5 billion in fees for customer overdrafts this year. The most cash-strapped customers are the hardest hit, with 90 per cent of overdraft fees coming from ten percent of checking account holders. According to CRL, banks collect nearly $1 billion per year in overdraft fees from young adults and $4.5 billion from senior citizens.

ConsumerAffairs.com has received thousands of complaints about overdraft charges. Among them:

• Vesta of Sacramento, California, who writes, "Provident extended me $500.00 courtesy pay on my checking account for being a long time customer. So, if I have an overdraft, the courtesy pay will cover it. But, the problem is, every time I have an overdraft and courtesy pay pays it, they charge me $23.00 fee. If I'm one cent overdraft, courtesy pay will pay it and charge me $23.00 fee."

• Reginald of Washington, DC, tells ConsumerAffairs.com that he has been charged two overdraft fees of $35.00 each by Chevy Chase Bank. "The two charges," he says, "were for amounts of $3.08, and for $1.05. These charges were made prior to a $4.94 purchase at McDonalds. If there was an overdraft, it should have been only one and that should have been for the $4.94 purchase since it was the last purchase." Reginald says a representative of the bank with whom he spoke, "was of absolutely no help whatsoever."

"Excessive, automatic overdraft fees are forcing many American families deeper into debt at a time when they are already struggling to make ends meet," said Dodd. "I am working on a bill to protect consumers from these fees."

Dodd's bill will require customers to "opt-in" to these programs, prohibiting banks from charging consumers overdraft fees without their consent.

CRL President Michael Calhoun expressed his organization's support for President Obama's call for the creation of a new agency to bring oversight to the financial services industry.

"The regulators responsible for making our financial system work have failed," said Calhoun. "We urge Congress to act quickly to create the Consumer Financial Protection Agency so that individual Americans, who account for nearly $7 out of every $10 spent in the economy, can put the money that financial institutions unfairly siphon off to more productive purposes, like buying beneficial goods and services and saving for the future."

A new survey of overdraft fees charged by the nation's largest banks reveals bankers are hiking fees, adding new fees, and shortening time limits to trigger fees when banks pay overdrafts and extend credit to families struggling to make ends meet.

According to the Consumer Federation of America (CFA), the Federal Reserve has failed to protect consumers from unauthorized bank overdraft loans and, as a result of this inaction, fees for these extremely expensive loans are escalating and multiplying.

Testifying before Congress recently in support of President Obama's proposed Consumer Financial Protection Agency, the CFA noted that regulatory inaction in just this one area is costing hard-pressed consumers over $17.5 billion during the worst economic downturn since the Depression.

In a typical overdraft loan program, banks unilaterally lend money to consumers without the consumer's knowledge or consent by paying or authorizing checks, debit card purchases, ATM withdrawals and preauthorized electronic payments when there is insufficient money in the account to cover the transaction.

Banks charge a flat fee per overdraft, taking funds directly from the next deposit into a consumer's bank account to repay the overdraft and cover the fee. A growing number of large banks charge additional fees when consumers are unable to repay the overdraft and fees within just a few days, diverting funds from consumers to their banks.

"For years, consumer advocates have complained about these anti-consumer practices and urged the Federal Reserve to force banks to comply with the Truth in Lending Act and get their customers' consent to use this extremely expensive form of credit, but the agency has turned a deaf ear to those requests," stated Jean Ann Fox, CFA's director of financial services. "Instead, the agency has continued to allow banks to collect billions of dollars in overdraft loan fees for credit extended without the customers' consent, and without providing either information on the cost to borrow or affordable repayment schedules."

CFA, along with many consumer and community groups, has voiced support for creation of the Consumer Financial Protection Agency to make consumer protection the top priority for an independent federal agency. The group also supports Rep. Carolyn Maloney's bill (H.R. 1456) to give consumers control over overdraft loans, and Sen. Dick Durbin and Rep. Jackie Speier's bills (S. 500, H.R. 1608) to extend the 36 percent annual rate cap on credit set by Congress to protect Service members to all Americans.

In July CFA updated its findings from a survey of the largest banks for comments to the Federal Reserve in March 2009. All of the largest banks unilaterally authorize payment of overdrafts at the bank's discretion and charge per-overdraft fees without advance consent or on-the-spot warning to customers. They also process withdrawals largest first, or retain the right to do so, a practice that optimizes the number of transactions that will trigger an overdraft fee when consumers live paycheck to paycheck -- maximizing the cost to consumers and the income to banks.

Key findings from the survey of the top sixteen banks' fee schedules and practices:

• The median overdraft fee is $35. The highest overdraft fee is $39, charged by Citizens Bank for the third overdraft in a year. Fourteen of the sixteen largest banks charge $35 or more per overdraft, either initially or after a few overdrafts in a year.

• For example, Regions Bank in Tennessee charges $26 for the first overdraft, $35 for the second, and $37 each for three or more. Fifth Third Bank switched to tiered fees and now charges $25 for the first, $33 for the second to fourth, and $37 for five or more overdrafts in a year. In February, Bank of America dropped its initial $25 fee and now charges $35 for every overdraft over $5 total overdrawn in one day (those tiny less-than-$5 total overdrafts still cost a $10 fee).

• Over 60 percent of the largest banks charge "sustained overdraft" fees when consumers are unable to repay the overdraft and fee in a few days. As of August 1, BB&T will impose its $30 extra fee after only five days, down from seven days. In June, Bank of America started charging a $35 sustained overdraft fee when its customers are unable to repay within five business days. Citizens Bank charges two sustained overdraft fees if its customers are unable to repay the overdraft and fees within ten days.

• The total cost of a single overdraft at the banks' highest fee if unpaid after seven days ranges from $74 at Citizens, $72 at SunTrust, and $70 at Bank of America to $34 at CitiBank and WaMu, neither of which charges a sustained or tiered overdraft fee. If unpaid after ten days, Citizens Bank charges $109 for a single overdraft.

• Ten of the largest banks set no limits on the number of overdraft fees charged per day. And the banks that set limits provide little relief for cash strapped customers. This year Bank of America doubled its limit to ten overdraft fees per day, the same that Wells Fargo Bank sets. Both TD Bank and US Bank charge up to six overdraft and six insufficient funds fees per day.

• In the last year, overdraft fees have gone up at half the surveyed banks. Citibank's fee jumped from $30 to $34. Fifth Third Bank dropped its flat $33 fee and now charges tiered fees up to $37. PNC increased its sustained overdraft fee by a dollar to $7 per day and SunTrust upped its fees from $35 to $36 for both an initial and sustained overdraft.

Since March, Regions Bank added a dollar or two to each tiered fee while TD Bank added a $20 sustained fee after an overdraft is unpaid nine days.

• The cost to borrow $100 via overdraft for seven days, if computed as a closed-end one week payday loan, ranges from 1,768 percent APR at CitiBank and WaMu to 3,848 percent APR at Citizens Bank. A Bank of America $100 overdraft repaid in one week costs $70 or 3,640 percent APR.

"Inaction by bank regulators to protect struggling consumers against astronomically expensive unauthorized overdraft loans illustrates why American consumers need the Consumer Financial Protection Agency to put consumer protection first," Fox stated. "Even now, after banks that brought the global economy to the brink of collapse have received billions in taxpayer bailouts, bank regulators appear to care more about protecting bankers' bottom lines than they do about protecting consumers' checking accounts and family budgets."

It's hard to believe the nation's banks could be in such rocky financial condition, considering the amount of money they collect from their customers in the form of fees.

Charles, of Cary, North Carolina, says he's been a customer of a local bank for five years, and claims to have spent more than $3,000 per year on overdraft fees.

"My last overdraft, which I ran 29 cents over in the account, cost me $200," Charles told ConsumerAffairs.com. This is highway robbery and they know it and I know it. It's a shame no one has not put a stop to this."

If someone were to put a stop to it, banks might be even less profitable since they clearly count on customers overdrawing their accounts and triggering overdraft fees. And those $35 fees can add up to some pretty sizable sums.

In fact, data from the federal government estimates that U.S. banks will collect more than $38 billion in fees this year from consumers who overdraw their checking accounts. Banks will collect billions more from other account penalties, including credit card late fees.

Moebs Services, which collected the information, reports that the average overdraft fee has risen to $27.50 this year, up from $25 last year. A 2008 study from the Federal Deposit Insurance Corp. found that insufficient funds and overdraft fees account for 74 percent of consumer bank service charges.

A 2008 study from Bankrate.com showed an increase of 2.5 percent in bounced check fees from the year before, up to nearly $30. Consumers also pay more at the ATM machine, with the average ATM fee now nearly $2, an increase of more than 10 percent in one year.

With all of these changes, consumers are feeling the pinch and the Federal Reserve is looking at additional regulations and Congress is considering new legislation. The Center for Economic and Entrepreneurial Literacy reminds consumers that financial forethought can help lessen the sting.

"Economic illiteracy is at the heart of our current economic crisis," said James Bowers, managing director for CEEL. "As banks continue to raise account and overdraft fees, it is more important than ever to read the fine print, create and stick to a family budget and learn all the facts before taking on new financial burdens, like opening a credit card account or purchasing a car. Unfortunately, CEEL's recent survey shows that many Americans don't understand basic facts about economics and many don't have the tools to manage their personal finances."

A December 2008 study from CEEL highlights the need for increased education on personal finance and economic issues. The national survey showed what the group calls a disturbing number of Americans are unable to answer simple questions about borrowing, interest rates and even basic math. Many respondents also admitted to making poor decisions with their own finances.

Highlights from the survey include:

• 54 percent of respondents could not identify what a subprime mortgage was.

• 56 percent of respondents could not identify FICO score as the most important factor in getting a loan.

• 65 percent of respondents could not identify what would remain if you subtracted 25 percent from 8. One in three respondents could not identify what 1 percent of 50,000 was.

• 75 percent did not know that when in need of short-term emergency cash, bouncing a check costs more than wire transfers, credit card advances, and short-term payday loans.

• Half of respondents have overdrafted their checking account at one time, while a third of respondents have paid a bill late in the past year.

"It is clear that we need to increase personal finance education at all ages so we have better informed employees, borrowers, and voters," Bowers said.

Now that Congress has passed legislation cracking down on credit card abuses, three Congressional Democrats are asking the Fed to to strengthen its proposed regulation of bank overdraft fees.

Reps. Carolyn B. Maloney (D-NY), Barney Frank (D-MA), and Luis Gutierrez (D-IL) want consumers to opt-in to overdraft programs, rather than have banks sign them up automatically. They also want rules that would prohibit the posting of transactions in a sequence which maximizes overdraft fees.

"Overdraft fees...often take consumers completely by surprise...and {are} usually vastly disproportionate to the amount of the overdraft itself," the lawmakers said in a letter to Federal Reserve Chair Ben S. Bernanke. "It is only fair, then, that institutions be required to obtain consumers' affirmative consent before enrolling them in fee-based overdraft programs."

In releasing the letter, Maloney praised the Fed's effort to explore overdraft remedies but said, consumers simply shouldn't be enrolled in overdraft programs without their consent.

"Since Congress just required an affirmative opt-in to over-the-limit fees in my credit card reform law, regulations should similarly require an opt-in to overdraft fees," she said. "Whenever banks step over the line of reasonable business practices into abuse of consumers' trust and understanding, government needs to act."

Consumer have long complained about overdraft fees, saying they would prefer to have their purchase declined by the merchant if it would overdraw their account. Instead, the bank covers the overdraft but charges a fee.

"When overdraft fees are $30 or more, a $5 treat at Starbucks becomes a $35 shock after the overdraft fee is applied," Maloney said. "And when multiple purchases in a day are posted in a sequence that only benefits the bankincurring multiple feesthen something is broken in the system and must be fixed."

Consumers are paying $17.5 billion per year in high-cost, unsolicited loans to cover overdrafts that big banks and credit unions promote, according to a report released today by the Center for Responsible Lending (CRL).

"In a system enormously out of balance, these fees amount to more than the loans themselves, which have reached $15.8 billion per year," the report said.

Abusive overdraft loans, once the exception, are now the rule in a system where not-sufficient funds (NSF) fees historically used to discourage overdrafts have shrunk to 31 percent of overdraft-related fees. Abusive overdraft loan fees now account for 69 percent of those fees, CRL said.

These small, high-cost loans are made by a bank or credit union to an account holder who is "in the red," often without the account holder's consent. The bank recoups the loan amount, plus a fee averaging $34 from the account holder's next deposit.

Often marketed as "bounce protection," the fee-based overdraft loan protects only the banks' fees, and should not be confused with cheaper sources of back-up funds for checking accounts, the report said.

These loans can make a small purchase, even a sandwich or doughnut, cost the unsuspecting bank customer over $30, and they can trigger a domino effect of debits that leaves the customer struggling to climb out of a negative balance.

Common banking practices, such as clearing high-dollar debits before subtracting smaller debit amounts, holding deposits longer than necessary, and failing to decline overdrafts or warn customers at the checkout or ATM if they have insufficient funds, increase the number of overdrafts suffered by consumers, CRL warned.

Reps. Carolyn Maloney (D-NY) and Barney Frank (D-MA) have sponsored a bill that would put the protection back in overdraft policy, and are holding a hearing on the bill on Capitol Hill today.

HR 946 would make abusive overdraft loans subject to Truth-in-Lending Act interest rate disclosures, as well as requiring written consent from account holders before banks could enroll them in these systems. It would also prohibit manipulations designed to increase overdrafts, and would require banks and credit unions to warn their customers before authorizing an electronic overdraft.

CRL said consumers should consider linking their checking account to a savings account or line of credit to protect themselves from the high fees of abusive overdraft loans.

If you're noticing extra money being drained from your account every time you use an ATM, it's not an illusion. The fees banks charge for using ATMs, and for many other commonplace transactions, are indeed on the rise.

Bankrate.com released its "Fall Checking Account Pricing Study" on Oct. 30th. The principal findings of the study included a spike in ATM fees to an average of $1.64 per transaction, an increase from $1.60 in the spring of 2006, and $1.54 in fall 2005.

Fees for bounced checks, or what the industry calls "non-sufficient funds (NSF)," also hit an all-time high. Bouncing a check can cost a customer an average of $27.40 per failed transaction, an increase of 36 cents from the survey conducted in the spring of 2006.

Bouncing more than a few checks can not only get a customer's bank account closed, but they can be reported to the ChexSystems database clearinghouse for NSF activity.

Once a customer is reported to ChexSystems, it becomes nearly impossible to open new credit or bank accounts, and it takes as long as five years to remove oneself from the database.

The news is grim even if you're not wasting money with bank fees. The average balance required to maintain an interest-bearing checking account rose to $2,600, but the actual interest earned averaged only 0.34 percent a year.

Big Bucks

Banks are making huge money off fees, with profits expected to top $55 billion this year alone.

Although banks are imposing fees on all manner of transactions, the largest slice of the pie still comes from credit card fees, which provided banks $24 billion in income this year alone.

Part of banks' increasing reliance on punitive fees comes from the slowdown in investing that has been accompanying the steady hike in interest lending rates.

As consumers and homeowners grow more gun-shy about taking out expensive new loans, banks lose money and need to recoup.

The Government Accountability Office (GAO) recently published a study that found punitive fees for credit cards were at an all-time high, and the disclosures explaining them to consumers were often poorly written and hard to decipher.

What You Can Do

Whether it's getting jerked with surprise credit card fees or just watching your money be siphoned away through ATM surcharges, you have options on how to get the most bang for your buck.

• Shop for a better deal. Banks are frantically pursuing new customers, and even the most cursory Internet search can yield comparisons on what checking account lets you keep the most of your money. Negotiate with your bank to see if they'll cut you a deal, and don't hesitate to take another bank's offer if yours isn't willing to keep your business.

• Consider credit unions. Credit unions generally offer better banking terms, including low or no ATM surcharges, reimbursement for ATM fees outside your network, better lending rates for credit cards, and higher rates for interest-bearing accounts. The National Credit Union Association can help you find a credit union you're qualified to join.

• Make your money grow. Rather than waste money with an expensive interest checking account, set up a simple free checking account and divert your extra money to a high-yield savings account or money market account. Many banks will find ways to charge users of free checking accounts for check images or online bill paying, so research carefully to avoid any pitfalls.

A nationwide survey finds that low-income people, single people and people of color are increasingly turning to borrowing money from financial institutions by overdrawing their checking accounts, racking up interest rates that can exceed 1,000 percent.

A telephone survey of 3,310 households done for the Center for Responsible Lending shows that a mere 16 percent of bank customers account for nearly three-quarters of all overdraft loans.

"A service created as a favor for customers has morphed into a harmful practice that traps vulnerable customers in debt," said Eric Halperin, a senior policy counsel at the Center. "Some banks now realize that trapping borrowers and charging them a $25 fee for a $20 overdraft loan is a pretty good scam."

Financial institutions are increasingly turning to fees to increase their income. Of the estimated $10.3 billion in overdraft fees Americans pay each year, the survey indicates that $7.3 billion comes from repeat borrowers.

The Center for Responsible Lending calls on the Federal Reserve and other regulators to:

• Require disclosure of the interest rates on overdraft loans.

• Require borrowers' explicit consent before signing them up for these programs.

• Require warnings when ATM and debit-card transactions will trigger fees and allow customers to opt out of the transactions.

• Require institutions to report the numbers on their overdraft loans, which would show the impact of these programs on borrowers.

• Prohibit repeated overdraft loan charges within a quarter.

It's Predatory

Overdraft fees aren't generally included in discussions of predatory lending, which drains more than $25 billion from low-wealth families in the U.S. each year, but the CRL says they should be.

"Though predatory mortgage loans and payday loans receive the lions share of attention as predatory practices, overdraft loan fees comprise about a third of that $25 billion," the organization said.

Earlier CRL research estimates that checking account customers pay more than $10.3 billion in overdraft loan fees every year. Approximately, three quarters of that, $7.3 billion, is collected from repeat borrowers, rather than one-time users.

New federal rules that become effective July 1 require banks to more clearly disclose the charges they impose for "bounced-check protection" and "courtesy overdraft protection" services.

The rules adopted by the Board of Governors of the Federal Reserve System require banks to disclose information about overdraft fees on periodic statements and account-opening disclosures, and to include certain disclosures in advertisements for overdraft services. The principal changes made by the amendments include:

However, the new rules apply only to national banks, which tend to be smaller local and regional banks. A recent study by the Consumer Federation of America (CFA) found that 80 percent of the nation's large banks also charge consumers high overdraft fees without their knowledge or consent.

While the new federal rule singles out smaller banks that promote "courtesy" overdraft loans, the nation's largest banks have also included identical provisions in their checking accounts but do not advertise them, the CFA said.

Meanwhile, the acting Comptroller of the Currency, Julie L. Williams, testified before a Congressional committee that efforts to streamline massive consumer disclosure requirements present an opportunity both to reduce the "regulatory burden" on banks and improve the quality of information provided to consumers.

Today our system imposes massive disclosure requirements -- and massive costs -- on financial institutions, Ms. Williams said. But do these requirements effectively inform consumers?

Williams, who is responsible for supervising national banks, said her agency has "broken new ground" by employing consumer testing as part of its effort to simplify privacy notices.

Details of the new disclosure rule:

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Previous rules "advertisement" in a manner that generally excluded communications with existing customers about existing accounts. The new rule expands this definition, in certain cases, to include communications with existing customers.

Under the new rule, "advertisements" include communications that are misleading or inaccurate, or misrepresent the deposit contract. Second, "advertisements" include any communications about overdraft services.

Advertisements that promote the payment of overdrafts must include certain disclosures about the service. In particular, banks must clearly and conspicuously disclose:

• the applicable fees for the payment of overdrafts,
• the categories of transactions for which an overdraft fee may be imposed,
• the time period consumers have to repay or cover an overdraft, and
• the circumstances under which the bank will not pay an overdraft.

However, banks do not need to provide these additional disclosures, in certain educational materials; on an ATM receipt; on television, radio, or billboard advertisements; or in response to a consumer-initiated inquiry.

Periodic Statement Disclosures

Banking regulations generally require that if an institution mails or delivers a periodic statement, the institution must disclose fees imposed in connection with the account during the statement period.

Under the new rule, if a bank promotes the payment of overdrafts in an advertisement, the bank must separately disclose on each periodic statement the total dollar amount of fees imposed:

• On the deposit account for paying overdrafts and
• For returning items unpaid.

These disclosures must be provided both for the statement period and for the calendar year to date. Banks that do not promote the payment of overdraft services would not be required to provide the new periodic statement disclosures.

Account Opening Disclosures

Banking regulations generally require that banks disclose the amount of any fee that may be imposed in connection with the account and the conditions under which a fee may be imposed.

The new rule states that banks must specify the categories of transactions for which an overdraft fee may be imposed. An exhaustive list of such transactions is not required. It is sufficient for an institution to disclose that a fee may be imposed for covering overdrafts "created by check, in-person withdrawal, ATM withdrawal, or other electronic means," as applicable.

Simply disclosing a fee "for overdraft items would not be sufficient." This account-opening disclosure requirement applies to all banks, including those that do not promote overdraft services in an advertisement.

The new rules apply to national banks supervised by the Office of the Comptroller of the Currency.

Over eighty percent of the nation's largest banks charge consumers high overdraft fees without their permission, according to a new study by the Consumer Federation of America. Consumers are only informed of these charges in the fine print of their account agreements, which can cause them to inadvertently overdraw their accounts when making an ATM or debit card transaction.

"Large banks are increasingly allowing consumers to unwittingly overdraw their accounts and then hit them with hidden fees," said Jean Ann Fox, director of consumer protection for Consumer Federation of America (CFA). "A loophole in Federal rules actually permits this deceptive and abusive practice."

While recent regulatory action by the Federal Reserve singles out smaller depository institutions that promote "courtesy" overdraft loans, the nation's largest banks have also included identical provisions in their checking accounts but do not advertise them.

"The Federal Reserve missed an opportunity to require banks to give customers information about the true cost of overdraft loans. As a result, banks can continue to hide the cost of these products," said Eric Halperin, policy counsel at the Center for Responsible Lending. "Federal regulators must do more to protect consumers from these abusive loans."

CFA's study, "Overdrawn: Consumers Face Hidden Overdraft Charges From Nation's Largest Banks," documents that the nation's biggest banks charge fees for discretionary overdrafts without consumer consent and that the overdraft fees charged by these banks exceed industry averages. CFA surveyed large banks controlling over half of all assets held in consumer deposit accounts.

The fees at the banks CFA surveyed average $28.57, five percent higher than average overdraft fees at two hundred bank accounts surveyed by BankRate.com in May 2005.

Banks that offer this discretionary "courtesy" overdraft coverage in their account agreement disclosures also state they are not bound to pay transactions that overdraw depositors' accounts. If consumers who receive "courtesy" overdraft loans do not repay the overdraft quickly enough, many banks tack on an additional sustained overdraft surcharge.

Penalty fees for insufficient funds checks and overdrafts are a huge and growing burden for accountholders. Consumers pay at least $10 billion per year and as much as $22.7 billion just for overdraft loans, according to estimates by the Center for Responsible Lending. These estimates are based on reports by industry analysts and publicly disclosed checking account service fee revenue.

"These days, consumers are having a much harder time managing their bank accounts to avoid unwanted overdraft fees," said Fox.

Increasing overdraft fees are the result of changes in the marketplace and in federal law and the broader use of overdraft fees for transactions other than those involving paper checks, including ATM withdrawals and debt card purchases. Money moves out of consumers' bank accounts faster than ever due to electronic processing allowed under the Federal "Check 21" act, while deposits can be held up for days before consumers are allowed access to their funds.

Big banks permit consumers to overdraw their accounts without warning them on more types of transactions. Many larger banks are also increasing the chances that consumers will overdraw their accounts by processing the largest checks ahead of smaller checks, whether or not they bank received the larger checks first. This can cause a larger number of smaller transactions to bounce for consumers with low account balances and increase fee revenue for banks.

The new generation of overdraft loans are more expensive than traditional overdraft protection, which requires that consumers agree ahead of time to pay for an overdraft from a linked savings accounts, credit card or revolving line of credit.

CFA's study found that most of the largest banks offered these contractual overdraft protection policies and these options would be cheaper for consumers than "courtesy" overdraft.

"Big banks should encourage consumers to use lower cost services that are already available. Responsible overdraft protection involves a guarantee that overdrafts will be paid, reasonable fees that are clearly disclosed and affordable repayment terms," Fox stated.