Overdraft fees hit unsuspecting consumers

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(MoneyWatch) Despite two-year-old regulatory reforms that demanded that consumers affirmatively opt-in to costly overdraft programs for debit transactions, more than half of the consumers who incurred an overdraft fee over the past year were surprised to find out that they had overdraft coverage, according to a new report by the Pew Charitable Trust.

Indeed, over one third of those surveyed were unaware that their bank even offered overdraft coverage until they incurred a penalty. Young and low-income consumers are the hardest hit, with consumers under the age of 44 and those with less than $30,000 in income twice as likely as older and wealthier consumers to incur overdraft fees, according to the report.

"I think there is a lot of confusion about opting in for overdraft coverage overall," says Susan Weinstock, author of the report, who recommends a food-label-style disclosure that would lay out consumer options and costs for overdrafts at the time of opening an account.

A spokeswoman for the American Bankers Association said she was surprised that consumers said they were surprised by the overdraft fees. Bank notices that explain overdraft policies are clear, says ABA spokeswoman Nessa Feddis.

However, these overdraft "opt-in" rules only affect day-to-day debit transactions, such as when you try to get money out of the ATM or swipe your debit card to get a cup of coffee or gasoline when there isn't enough money in your account to cover the transaction.

Banks commonly automatically cover overdrafts - and levy a fee - when consumers overdraw their accounts by writing a check or making an automatic payment (even when the automatic payment is made with a debit card).

Could that be the source of confusion? Feddis doesn't think so. Other studies have found that consumers want important payments paid, regardless of their checking account balances, she says. Consumers have said in these other surveys that they're willing to pay for that. That they do pay for that service, even without affirmatively opting into coverage, should not come as a surprise, she said.

Weinstock, who heads Pew's safe checking project, says that differences in how different types of overdrafts are handled could confuse consumers. However, their study only considered overdrafts caused by debit transactions covered by the new law, so consumers are also confused about the fees charged on overdrafts that demanded their advance permission to be levied. Indeed, she says Pew focus group research has found that consumers are sometimes so befuddled by the opt-in process that some have opted in, thinking that by signing the form they had actually opted-out.

"They don't understand that by doing nothing, they cannot be charged," she says. "We've had people say, 'I signed the form so that they can't charge me,' when that's how they opt into the most costly overdraft plans."

Other findings of the Pew survey:

- 90% of overdrafts are unintentional, but about 10% of those who have overdrawn their checking accounts did it on purpose at least part of the time.

- 75% of consumers said they would much prefer a transaction be declined when they had insufficient funds than paid at a cost.

- 54% of those who had paid an overdraft fee in the past year believed they declined overdraft coverage; just 37% of those paying the fee knew they had opted in; another 8% said they didn't know whether they'd opted into coverage or not.

- 35% of those surveyed had closed an account as the result of overdrafts.

- 26% of those who learned they'd been charged an overdraft fee found out only through a monthly checking account statement, while about 21% credited some form of communication initiated by the bank through either e-mail, a phone call or a text message.

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