Bank fees for overdrafts continue to climb

When consumers have an overdraft, banks loan money to them by paying or authorizing checks, debit card purchases, ATM withdrawals, and preauthorized electronic payments despite insufficient funds to cover the amount of the transaction.

Banks charge a fee for each overdraft and collect payment out of the next deposit into the account.

Consumers pay at least $17.5 billion a year for unauthorized overdraft loans, many triggered by small debit card purchases that in the past were denied for no fee.

The Consumer Federation of America believes that banks should have to get their customers’ affirmative consent before signing them up for their most expensive loans.

The federation surveyed the fee schedules and contracts of the top 10 banks in the United States. Here are the key findings:

• The average highest fee charged for overdrafts is $34.65, up 15 percent from the $30.30 average highest fee charged by the same 10 banks in 2005. The highest fee is $37.50 per overdraft at U.S. Bank after four overdrafts in a year.
• Half of the largest banks use a tiered overdraft fee structure, charging escalating fees for more than one overdraft over a rolling 13 month time period. For example, PNC Bank charges $31 for the first three overdrafts in a year, $34 for four to six loans, and $36 for seven or more overdrafts in a year. Bank of America charges $25 for the first overdraft, then $35 each. In 2005, only three large banks used tiered overdraft fees — Bank of America, National City Bank, and U.S. Bank.
• Sixty percent of the largest banks add a substantial overdraft fee if an overdraft is not repaid within a few days. These banks add $6 to $8 per day until the overdraft and fees are repaid or charge a flat fee. For example, Chase charges a flat $12.50 if an overdraft isn’t repaid after five days while SunTrust adds an additional $35 fee on the seventh day an overdraft is unpaid.
• The total cost of a single overdraft at the bank’s highest fee that is unpaid after seven days ranges from $70 at SunTrust to $30 at CitiBank. U.S. Bank’s combined fees total $69.50. National City charges $68 and Fifth Third Bank’s combined fees total $57.
• Only 30 percent of the largest banks set a maximum number of transactions that can trigger an overdraft fee in a single day. Bank of America permits up to seven in one day, up from five last year, for a maximum of $245 per day in fees. U.S. Bank limits customers to six paid overdrafts and six insufficient funds transactions in one day for a total of $450 per day in fees. WaMu limits overdrafts at five per day or a maximum of $170 per day in fees.
• The largest banks process the largest withdrawals first or disclose they pay withdrawals in any order the bank chooses. This results in additional fees when smaller transactions come in later that overdraw an account.

The federation and other consumer organizations filed comments this week to tell the Federal Reserve and other financial regulators that the proposed Federal Trade Commission Act rules on bank overdraft services fail to protect protect cash-strapped families from high cost and unfair loans.

I belong to a credit union. I pay $2 for an overdraft fee. Then the amount of the overdraft goes on my credit card.