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Regulators can't stop banks from increasing overdraft fees, reports show

Checking account overdraft fees have jumped over the past two years, despite an effort by regulators to rein in aggressive practices by banks, according to reports by two nonprofit groups.

Although the basic overdraft fee of $35 hasn't changed in two years, banks have imposed other harsh penalties on consumers for minor lapses, the reports said.

The Pew Health Group, a research organization, called for the new Consumer Financial Protection Bureau to press banks to be more upfront about these "still risky" fees in a paper published Friday.

Another report, released Thursday by the Consumer Federation of America, an advocacy group, expressed similar concerns and urged consumers to inform the CFPB of high overdraft fees.

Although the Federal Reserve in 2009 required banks to tell customers about overdraft penalties, the disclosure statements were often difficult for consumers to follow, the two reports said. The Fed in 2010 also prohibited banks from imposing overdraft charges unless a customer had signed up for the service. Another regulator set limits on the number of times customers can be charged overdraft fees.

Nessa Feddis, vice president of the American Bankers Association, said the findings painted only half of the picture of overdraft practices.

The increases were caused by federal legislation last year that reduced bank income from debit card transactions, she said.

At the same time, a 2010 survey by the association found that 77 percent of customers did not pay overdraft fees. That figure rose to 84 percent in 2011, Feddis said. A majority of the consumers that did pay the fees say it was worth the protection they received for overdrawing.

Most banks offer two kinds of overdraft plans. While neither is required of customers, the reports from Pew and the CFA said banks encourage them to sign up.

In an overdraft penalty plan, the bank pays the amount that was overdrawn by the customer in exchange for a fee. In an overdraft transfer plan, the customer can link to another account that will transfer the money, also for a fee. Most banks also specify a minimum overdraft amount before they impose the penalties.

If overdraft amounts are not repaid within a certain time frame, banks can charge extended overdraft penalty fees. The Pew report said there has been a 32 percent increase in this type of fee since 2010.

"Bank overdraft loans are a form of payday lending," said Jean Ann Fox, CFA's director of financial services. "Banks are charging staggeringly high rates for short-term borrowing when fees are computed the same way payday loans are calculated."

Regulators can't stop banks from increasing overdraft fees, reports show 06/08/12 [Last modified: Friday, June 8, 2012 9:54pm]
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