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Report questions banking overdraft practices, says fees too high

Banks and credit unions are charging “abusive” overdraft fees averaging $35 per transaction despite efforts by federal regulators to reform fee practices, according to a report released Tuesday that calls for the fees to be prohibited.

In its report, the Center for Responsible Lending suggests financial institutions decline debit card and ATM transactions if there aren’t enough funds in a customer’s account to pay for them.

Another option is to steer more consumers away from high-cost overdraft programs to lower cost credit programs such as automatically transferring money from savings or credit card accounts, the center said.

Overdraft fees cost consumers $16.7 billion during 2011, according to the center. It’s estimated more than 36 million Americans in 2011 overdrew their checking accounts, and almost 8 million account holders incur more than six overdraft fees a year, the center said.

A banking industry spokesman said the overdraft charges are proper.

“Any customer assessed an overdraft fee has agreed to be charged an overdraft fee, which is federal law,” said James Thurston, spokesman for industry trade group Ohio Bankers League.

The cost of overdraft fees to U.S. customers has dropped since new rules went in effect in 2010, according to the center’s estimates.

The center is based in Durham, N.C., and describes itself as a non-political, nonprofit organization focused on research of financial issues.

Account holders who frequently overdraw are more likely to be lower income, non-white, single and renters compared to the general population, the center said.

The average overdraft charge is $35. And the average debit card transaction that leads to an overdraft charge is $20, highlighting the “disproportionate” cost of fees to the amount the customer overspends, said Rebecca Borne, senior policy council for the center and co-author of the report.

Banks don’t have incentives to assess the borrower’s ability to repay an overdraft charge because the bank or other financial institution puts itself first in line to be repaid, Borne said.

“Overdraft fees sort of have all the hallmark characteristics of a bad loan,” Borne said. “They are extremely high cost; they have extremely short loan terms averaging two to three days; they are balloon repayments so the entire payment gets repaid in full along with the fees; and they give the lender control over the account.”

The Federal Reserve Board of Governors made a rule change in 2010 governing the way banks could charge overdraft fees. The rules took effect in July 2010.

Under the new rules, banks are no longer allowed to charge fees to cover a debit or account overdraft without the customer’s expressed contractual consent.

The center contends the fees are a high-cost form of credit that precipitates more fees.

Overdrafts happen when a customer’s checking account does not have enough funds to cover a transaction, but the financial institution lends the money to the account holder and pays the transaction anyway. A fee is charged for each transaction. The bank repays itself the overdraft amount and fees from the customer’s next deposit.

Debit cards are notorious for triggering overdraft fees on small, frequent transactions, Borne said.

There is not a fee if a debit card transaction is declined at check-out for insufficient funds, a common misperception.

The first full year the opt-in requirement was in place, overdraft fees cost $16.7 billion in 2011.

Previously, estimates were that overdraft fees reached $23.7 billion in 2008, and were $10.3 billion in 2004, Borne said.

Over the course of the last decade, the trajectory of overdraft fees is pointing up, she said. However, she said overdraft fees were not meant to be regularly administered.

“The big shift versus 10 years ago is that banks started routinely charging overdraft fees on debit cards, when before then, they would just decline the transaction if there wasn’t enough funds,” she said. “Even following the changes from 2010, another key finding from our study is debit card and ATM withdrawals trigger 35 percent of all overdraft fees.”

“There’s this enormous volume of overdraft fee revenue being generated from debit cards,” she said.

The findings by the center follow a report released in June by the Consumer Financial Protection Bureau that also raised concerns about overdraft practices. The CFPB is a federal agency formed in 2010 in the aftermath of the 2007-2008 economic downturn as a consumer watchdog.

In its report, the CFPB found consumers who opt-in for overdraft coverage end up with more costs and more involuntary account closures than customers that don’t.

“Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that overdraft programs at some banks may be increasing consumer costs,” CFPB Director Richard Cordray said in a statement. “What is often marketed as overdraft protection may actually be putting consumers at greater risk of harm.”

In recent years, most banks have adopted automated systems for making decisions about overdraft charges, according to the government agency. The CFPB also said it estimates that overdraft and non-sufficient fund fees represent 60 percent or more of consumer checking account fee income.

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