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When banks turn evil: why bounce fees must be capped

Mar 26, 2009 | | Comments Comments Off

The Federal Reserve wants to hear from you about your experiences with bounced-check fees, but your opportunity to influence future regulation is closing fast. The Fed’s comment period closes Monday.180px-natcubank

Here’s what I wrote about a couple years ago about the relatively new phenomenon of “courtesy overdraft”:

A few years ago, banks would typically decline an ATM, debit card or check transaction if there wasn’t enough money in the customer’s account.

Today, however, many banks and credit unions routinely allow these transactions to go through and then slam their customers with overdraft fees. A single $5 transaction can trigger a $30 to $35 overdraft fee, while a series of overdraft transactions in a single day can rack up hundreds of dollars in fees, usually without warning to the customer.

These policies, often marketed as “courtesy overdraft” or “bounce protection,” have caught on like wildfire: The number of financial institutions employing fee-based overdraft services grew 80% between 2003 and 2005 to 3,500, according to the Center for Responsible Lending, and the fees charged now top $17.5 billion a year.

Some might say, “So what? Keep enough money in your account, and you won’t overdraw it.”

True enough. But few of us are perfect, and the penalty for even a single lapse can be ridiculous. The Wall Street Journal today quoted one man who paid over $500 in bounce penalties for a series of small transactions, and he’s far from alone.

What’s more, people don’t sign up for courtesy overdraft. It’s imposed upon them. The first time they learn they have it is typically after they’ve wracked up significant fees.

And some banks even encourage you to overdraw your account by adding the total amount of your “courtesy overdraft protection” when you check your account balance at an ATM. So you may think you have $300 in your account, but $200 of that is courtesy overdraft. Spend more than $100, and you’ll get slapped with fees.

This is punitive and unfair. It’s time banks were forced to come clean about how bounce fees work and give you the option of opting out.

If you agree, you can send your opinion to the Fed by using a form at DefendYourDollars.org, a Web site run by Consumers Union, publisher of Consumer Reports. CLICK HERE to access the form.

To protect yourself in the meantime, call your bank and opt out of courtesy overdraft, if you can. Try to sign up for true overdraft protection, which links your checking account to a savings account or line of credit.

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