Banks find ways to boost fees; checking accounts latest target

The fees are "all based on the same bad business model," she says, in which consumers are promised one price and then later are loaded up with back-end fees.

Sen. Bernie Sanders, I-Vt., says efforts to reform credit card and bank practices don't go far enough.

"We need serious and major regulatory reform over these institutions or they will continue to rip off people in every way imaginable, with outrageous fees snuck in every single place," he says.

Chelsea Reyes, 25, got hit with almost $600 in fees for 17 overdrafts — five on small-dollar-amount transactions ranging from $2.67 to $7.09 — during three days in May. Reyes says she had sufficient funds in her Wells Fargo accounts. However, she mistakenly transferred money into savings, causing her to overdraw her checking account.

With three young boys, money is already tight, she says. But the overdraft fees cleaned out the savings she and her husband, J.C. Reyes, had been building up. Although the bank later refunded $227.50 in fees, Reyes says she was forced to borrow $500 from Wells Fargo's Direct Deposit Advance service to pay back the rest.

"If I didn't do the advance, I don't know how I'd buy formula for our son," says Reyes of Novato, Calif.

Reyes acknowledges making a mistake but says she doesn't understand why the bank would let her repeatedly overdraw her account without immediately notifying her.

Wells Fargo spokeswoman Richele Messick says overdraft fees are avoidable and that, like other banks, the bank provides balance alerts and online account access to help consumers track their money. Consumers also can sign up for less-expensive overdraft protection, she notes, linked to savings or a credit card.

Banks say overdraft fees compensate them for the transactions' cost and the risk that consumers won't pay them back. "Most people don't think of overdrafts as a loan, but they are a loan," Talbott says. "They're exactly like credit cards. There's no collateral for them."

The bottom line

Problem is, these loans are among the costliest types of credit available, some analysts say.

If consumers overspend by $20 — the median amount of a debit card overdraft — and get charged $27, their effective annual percentage rate would be 3,520%, assuming they paid the money back in two weeks, a 2008 report by the Federal Deposit Insurance Corp. found.

Overdraft coverage boosts banks' bottom line while taking a toll on consumers' wallets.

The FDIC study found that overdraft fees represented 74% of banks' service charges on deposit accounts.

Overall, the fees are likely to cost consumers $39 billion this year, up 6% from last year, Moebs Services estimates.

These fees, on top of banks' widespread rate increases on credit cards, threaten to "precipitate a downward debt spiral" for the most vulnerable consumers, says Chi Chi Wu of the National Consumer Law Center.

Some in Congress hope to address controversial overdraft practices, but others fear these efforts will be overshadowed by long-awaited credit card reform that Obama signed last week. Rep. Carolyn Maloney, D-N.Y., has sponsored a bill that would require banks to get consumers' consent to pay overdrafts. Banks also would be required to notify consumers at the cash register or ATM of insufficient funds and allow them to cancel the purchase.

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