Nashville Dr. Maurice Kuttab paid $300 in penalties when his college-age daughter managed to overdraw her SunTrust checking account several times last year.
Kuttab said he would have preferred the bank just deny his daughter's purchases rather than allow them to clear her account and then charge $32 for each occurrence.
"They said they didn't want to embarrass my daughter by turning her down,'' he said. "I said please embarrass her. This is costing me."
Now bank regulators are tinkering with the idea of reform to let customers opt out of costly overdraft protection packages. The alternative would be to have some purchases blocked by banks on the spot when there's not enough money in an account. Some legislators, including U.S. Rep. Carolyn Maloney, D-N.Y., have been calling for change. The Federal Deposit Insurance Corp. is in the midst of an inquiry into overdraft fees and that study could be published later this year.
The mysteries of bank overdraft policies, including the way fees are calculated and the rising cost, have drawn closer scrutiny from federal regulators lately as banks increasingly rely on such fees to generate more income.
Consumer advocates say banks are taking advantage of the nation's reliance on debit cards to make more money from shoppers' mistakes. When most customers used checkbooks, they could easily write down each purchase in a ledger provided by the bank and subtract that amount from their account balances.
But the widespread use of debit cards makes it harder to keep up with purchases as consumers use plastic for so many small purchases from a $2 cup of coffee to fill-ups at the gas pump. Mistakes or failing to keep up with a dwindling account balance can mean overdraft fees of $30 or more for each overdraft item.
Banks rarely reject purchases that would overdraw an account. Instead, they normally cover the purchases and then charge the customer an insufficient funds fee. In Kuttab's case, SunTrust rearranged his daughter Amy's purchases so the largest amount an Amtrak ticket home to Nashville from Oregon cleared first and took most of the money out of her account, Kuttab said.
Then, other pending purchases that were much smaller each nabbed another $32 overdraft fee, he said.
SunTrust spokesman Hugh Suhr said he couldn't talk about individual customer accounts, but said "a client can avoid insufficient and unavailable balance penalties by keeping up to date on the balance in their account and with overdraft coverage."Fees add up to billions
The average bank overdraft fee was $23.13 last year, up 11 percent since 2000, according to a Government Accountability Office report.
In 2007, banks collected a record $45.6 billion in overdraft fees from consumers, up 50 percent from 2001, according to Moebs Services, a bank consultant in Lake Bluff, Ill., whose data on bank fees was used by the GAO.
Banks are watching their profit margins get squeezed on interest-related income, "so they have to make it up in fees,'' said Mike Moebs, chairman and chief executive of the company, which sells overdraft plans to banks.
Moebs says on his Web site that his "no-bounce" product can boost bank fee income by 200 percent in a year.
Banks have argued that overdraft charges protect customers from embarrassment. (Try wooing business clients over a dinner and watch faces turn red when the host runs short of cash.) Plus, customers avoid the additional expense of bad check charges from merchants, bankers say.
"There are instances where it's appropriate," said Jim Schmitz, Nashville area executive for Regions Bank.
But even Schmitz thinks overdraft fees are inappropriate for some people, namely his own son. Schmitz said Regions allows customers to opt out of overdraft fees, an option his college-age son took when he overdrew his account. Now the bank rejects his son's purchases when he tries to use his debit card without enough money.
Regions reduced its fees last year as part of its merger with AmSouth. Now overdrafts are free on the first instance and cost $33 on the second and third occurrences. (AmSouth charged a flat $36 fee).
Other banks are increasing their fees, though.
Bank of America recently increased its overdraft fee for the first occurrence from $20 to $25. Subsequent overdrafts cost the same $35 each time. Plus, the bank is now processing all debit transactions immediately, where consumers previously could make a purchase and later that same day make a deposit to cover it.
Bank of America spokesman Jim Pierpoint said the bank's new policy benefits consumers by making transactions clearer.
"There were customers that were actively using that float, and they would incur the overdraft," Pierpoint said. "They said they didn't realize it."
Vivian Smith, a 58-year-old Nashville resident and at-home caregiver for the elderly, said she made roughly a $640 deposit of a Social Security check on Monday in her U.S. Bank account, but the deposit didn't clear until the end of the next day.
In the meantime, she paid a $300 car note and bought $15 worth of gas on Tuesday, each purchase earning her a $35 insufficient funds fee.
"The amount of money they charge is outrageous,'' she said, adding that she thought her deposit should have cleared quicker because a Social Security check is backed by the U.S. government.
A spokeswoman for U.S. Bank said she couldn't talk about the specifics of Smith's purchases, but said the bank has refunded the woman's overdraft fees because "she seemed confused about our funds availability policy."
The spokeswoman also said customers can reduce fees by using overdraft protection linking their checking accounts with a savings or money market account.
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