Overdraft fees huge but hushed

Consumers are paying huge fees on short-term loans that cover them when they overdraw their checking accounts, under programs that banks and credit unions often enroll customers in without their knowledge, a new study says.

Fees to cover overdrafts are taking advantage of Americans’ rising use of debit cards to make even small purchases, the Center for Responsible Lending said in the study released on Wednesday. Debit cards typically draw directly on consumers’ checking accounts.

Consumers may be caught unaware that they are overdrawing their accounts, because they may assume that debit transactions simply wouldn’t go through if their accounts lacked sufficient funds, the center said.

The study, released hours before a House hearing on a bill that would require clear disclosure of overdraft charges, estimated that the programs cost consumers $17.5 billion in fees last year, up sharply from $10.3 billion two years earlier.

The average charge for an overdraft loan: $34.

The fees now exceed the $15.8 billion a year that banks temporarily lend customers via the overdraft programs, according to CRL, a nonprofit consumer advocacy group.

“At many banks and credit unions, customers are enrolled in abusive overdraft loan systems by default when they open checking accounts, often without their express consent,” the study said.

At the hearing held by a subcommittee of the House Financial Services Committee, Rep. Carolyn B. Maloney (D-N.Y.) said the “now dominant practice of overdraft charges is anything but fair and transparent” for consumers.

But bankers who testified at the hearing said it wasn’t difficult for customers to avoid getting dinged.

“Knowing how much is in their accounts is certainly something that consumers are in control of,” said John Hall, a spokesman for the American Bankers Assn. “They know what checks they have written, the automatic payments they have authorized. Overdraft fees can clearly be avoided.”

The increasing automation of overdraft programs has allowed a larger swath of Americans to receive an arguably valuable service, bankers said. They also said that although consumers might not have to sign a specific agreement acknowledging that they have the service, they are told of the services their checking accounts provide, and what they cost, when their accounts are opened.

Elizabeth Warren, a Harvard professor who has written extensively on “tricks and traps” in financial-services products, said the automatic overdraft plans were “about exploiting consumer weakness.”

“Many of us do not keep our checking accounts balanced to the penny every time. Many of us do not account for the number of days that the bank will keep a hold on a deposit. We can make a 50 cent mistake and be charged $30 for it.”

Logan Scott, a data security worker in Cleveland, said he was hit by four overdraft fees in one day. Thinking he had $11 in his account, he bought several small items, including $4 in sodas from a convenience store. That triggered a total of $140 in fees, he said.

When he complained to the bank, he said his banker told him to keep better track of his money.

The Center for Responsible Lending’s study said fees can be triggered by the order in which banks choose to clear checks and other charges to customers’ accounts. By clearing larger transactions first, a bank can push an account into the red faster than if it first cleared smaller transactions, the study said.

It said banks “reserve the right to [clear] in the order they choose, and not necessarily in the order in which payments are made.”

Maloney said her bill would require banks to warn consumers at a point of purchase that a debit card transaction would trigger an overdraft fee, much as they warn a consumer who is about to be charged to use an automated teller machine. That would allow a consumer to cancel the purchase and avoid a fee.

But Nessa Feddis, senior federal counsel for the American Bankers Assn., said that warning customers when a debit transaction would trigger an overdraft would be “cost-prohibitive” for banks.

There are ways to set up your accounts to reduce fees, bankers said. Consumers can specifically sign up for an overdraft protection service that automatically advances funds from a linked savings account, credit card or other line of credit when a customer has insufficient funds. The fee for this service can be as low as $10 per money transfer.

By contrast, Bank of America would normally charge $20 per overdraft on the first day and $35 per item each additional day the overdraft isn’t covered by added funds, said Diana Wagner, a spokeswoman.

At Wells Fargo & Co., customers also have the option of enrolling in the bank’s overdraft protection service, which offers significantly lower fees for overdraft transactions.

Without linking to another account, a Wells Fargo customer in California with insufficient funds in his or her checking account would be charged $23 per item on the first occasion and $34 per item each time thereafter, based on the number of overdrafts in the preceding 12-month period, said spokeswoman Mary Trigg.

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kathy.kristof@latimes.com

andrea.chang@latimes.com