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Some overuse bank overdraft programs

June 26, 2006 - Wichita, Kansas

Editor's Note: This story has been included because its "A cushion of cash" section has a good comparison between payday loan costs and bank overdraft fees.

Fidelity Bank billboards across Wichita advertise the bank's personal overdraft protection program as "Your checkbook's best friend."

And people who occasionally bounce a check may appreciate it. The program, like those at other banks, covers an overdrawn check instead of returning it to the merchant.

Banks call the programs a courtesy to customers. But the Center for Responsible Lending calls them high-dollar loans.

Using the service occasionally is fine. But the center, a consumer advocacy group, worries that some people are becoming too reliant on overdraft programs.

Consumers spend $10.3 billion a year in overdraft protection fees, the bulk of that by repeat users who are continually overdrawn, a recent study by the center says.

"For repeat users of overdraft," said Eric Halperin, senior policy counsel for the center, "this is a credit source that in the long run is going to cause more harm than good."

Al Sanchez, a spokesman for Fidelity Bank, said the service is a "purely discretionary courtesy or privilege that the bank may provide to our customers from time to time... It is that simple."

A cushion of cash

The programs work this way: Qualified users essentially get a cushion, usually $300 to $500. If the customer makes a purchase that would overdraw his account, the bank uses that cushion and pays the amount instead of rejecting it. Then, the bank charges the customer a fee -- $29 for each overdraft at Fidelity.

That is the same fee charged when Fidelity returns an item unpaid.

Intrust Bank's program, called Bounce Blocker, also charges $29 per overdraft.

"If you're someone who already has trouble getting an account or keeping an account, you probably wouldn't qualify for Bounce Blocker," said Intrust spokeswoman Diane Iseman. "It really is kind of a safety net for customers who qualify, kind of an 'Oops' thing."

Banks that offer overdraft programs stress that they still have the right to return an item, which would result in an overdraft fee and a fee to the merchant.

The local fees for overdraft protection programs are similar to the national average of $27, Halperin said.

The problem, he said, is that the bulk of the fees are being paid by repeat users.

The center's study found that 16 percent of overdraft program users pay for 71 percent of the fees banks and other financial institutions collect. In some cases, the flat fee would be more than a payday loan fee.

For example, a $100 overdraft, with an automatic overdraft program, would cost a consumer about $27. In Kansas, the most a payday lender can charge is 15 percent, so a $100 loan would cost $15.

"These are very small-dollar-amount loans. Most of the dollar amounts are certainly below $100 and, with debit cards, certainly lower than that," Halperin said.

The center would like to see banks give consumers a choice about how they want to protect their accounts from overdrafts instead of automatically enrolling them in such programs, he said.

But banks don't "offer it as a courtesy, they put it on automatically," Halperin said.

Consumers would be better off with line-of-credit programs, even with interest rates as high as 19 percent, he said.

Some banks offer overdraft protection tied to a line of credit, which is a loan arrangement that allows the customer to borrow up to a pre-specified amount.

The rate for Intrust's line-of-credit program currently is 10.9 percent plus prime, which is at 8 percent.

Intrust also offers overdraft protection tied to a credit card or another account.

Bank of America does not offer a program similar to P.O.P. or Bounce Blocker. It does offer overdraft protection tied to a savings account, credit card or home equity line of credit.

Fidelity Bank does not offer an overdraft line of credit tied to a personal checking account. It does offer a full line of loans tied to various forms of collateral, Sanchez said.

Fidelity customers can have personal overdraft protection removed from their account at any time, he said.

Intrust customers can opt out of Bounce Blocker, Iseman said.

"Typically, customers are encouraged to apply for a credit card to use as overdraft protection to ensure a better rate," she said.

The ATM temptation

Because of technology, consumers have more ways than ever to overdraw their accounts, including at an ATM or during a debit-card transaction.

Some banks with automatic overdraft programs allow consumers to take out money from an ATM even if the consumer doesn't have enough money in his account.

Intrust recently started flashing a new ATM message to customers warning them whenever a withdrawal would overdraw their account.

For example, it used to be if you had $5, "the system would think you had $305," because of your $300 overdraft cushion, and let you take out $20, Iseman said.

Technology to warn customers making debit-card transactions is not yet available, Iseman said. But that's probably next.

News Source

Wichita Eagle, Deb Gruver, Staff Writer

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