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'Bounce protection' can be costly for consumers

Posted: Friday, June 18, 2004

NEW YORK (AP) With so many things to juggle these days, it's easy for consumers to make a mistake and overdraw their checking accounts.

A growing number of banks and credit unions are telling their customers not to worry, that they'll cover the overdraft and even make good on excess withdrawals from ATM machines. But these new overdraft protection plans can come at a high cost, consumer experts warn.

Under these plans, financial institutions usually charge a fee equal to the amount they'd require for a bad check, generally $25 to $35 per item. While the consumers are spared the additional $25 or $35 a merchant might charge for that same bounced check, they generally face additional bank fees or interest on a daily basis until the overdraft is cleared.

These new programs are different from traditional overdraft plans that banks have offered for years. Under traditional plans, consumers signed up for the service and their checking accounts are linked to savings accounts or credit cards so that if they write too big a check, the overdraft is covered by their own funds. Generally, a small service fee of $5 to $10 is charged.

They are also different from preapproved overdraft lines of credit. Under this system, when a consumer writes a check bigger than the account balance, funds are transferred from the line of credit and interest charges accumulate.

Consumer advocates contend that the new service which they call bounced check loans can result in fees equivalent to an annual interest rate of 240 percent or more. They've called for federal regulation of the practice.

Earlier this month, national bank regulators said financial institutions could continue offering the new programs. But the regulators also issued guidelines that would require banks and credit unions to do a better job informing consumers about the risks and costs. The public has 60 days to comment before the guidelines are adopted.

Jean Ann Fox, director for consumer protection at the Consumer Federation of America in Washington, D.C., says the guidelines don't do enough to protect the unwary and she urges consumers to be extremely cautious about triggering overdraft protection plans.

''Banks and credit unions charge a flat fee for an overdraft, regardless of how much money you've borrowed,'' Fox said. ''Say you overdraw your bank account by $100, and the bank charges a $20 fee. If you pay it back after 30 days, that works out to an annual percentage rate of 243 percent. That's usury in some states.''

Fox is also concerned that the bounced check protection can kick in if consumers overdraw accounts using their debit cards or taking cash from automated teller machines. In fact, some ATMs show not only what the consumer has on deposit but also the permitted overdraft of $300 or $400, ''which actually encourages some people to go for it,'' Fox said.

Part of the problem is that many consumers don't even know they have overdraft protection until they trigger it, she said.

That's what happened to a woman who sought help from attorney Bren Pomponio at Mountain State Justice, a public interest law firm in Charleston, W. Va.

Pomponio said the woman, who lived on a pension, apparently forgot to write down a utility payment and overdrew her checking account at a bank she had dealt with for decades. When she got her statement, she found the bank had covered the check, but she had been hit with a $30 fee plus a $5 charge for each day the account ran a balance a total of $75.

''She was barely making it on her income of about $550 a month, so that $75 was a lot of money to her,'' Pomponio. She filed suit, and eventually reached a settlement with the bank in the case, he said.

Pomponio said he is not opposed to overdraft protection and, in fact, has coverage through his own bank.

But at his bank, ''you have to sign up for it, and it's clear from the start that for the protection, there's a $5 transaction fee plus a small amount of interest,'' he said. ''It's voluntary, and you know the cost up front.''

Nessa Feddis, senior federal counsel for the American Bankers Association, an industry group in Washington, D.C., said the federal regulators' guidelines were ''going in the right direction.''

The guidelines call for ''clear disclosures and explanations to consumers.'' They also advise financial institutions not to market the program in ways that would encourage overdrafts, to inform consumers of alternative overdraft services, to let them ''opt out'' of overdraft programs and to ''clearly disclose the dollar amount of the overdraft protection fees ... or other fees that may apply.''

Feddis compares the new overdraft protection plans not to the traditional ones but to the informal arrangements through which some banks would discreetly cover overdrafts for good customers they knew well ''as a courtesy.''

On the Net:

Guidelines in Federal Register: www.gpoaccess.gov/fr/index.html

www.consumerfed.org

www.aba.com



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