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Courtesy Overdraft Protection Consumer Fraud

July 28, 2004

Consumers may be enrolled in a new bounced-check protection plan without realizing it could be a very costly mistake. Referred to as courtesy overdraft, the plan greatly differs from traditional overdraft protection, which allows a consumer to draw on a savings account, line of credit or credit card to avoid rubber checks.

The courtesy overdraft or bounced-check protection plan instead uses the bank's money to cover the checks that are in excess of the consumer's balance up to a certain limit. Some banks will add a daily fee until the checks are made good, which is typically required to occur within two to four weeks or risk facing collections. The daily fee is in addition to the per check fee that can cost on average $25 per check, with some banks going as high as $40 per check.

Unlike a traditional overdraft plan that has specific guidelines that a consumer agrees and signs a contract to, bounced-check protection plans allow the bank to use its own discretion on whether the check will be covered or not. By processing checks by the largest amounts first the banks are able to increase the likelihood of bouncing a check. In some instances, the bounced-check protection limit is added to the amount of the consumer's account, so if checking the balance online or after using the ATM the consumer is led to believe there is a higher balance than the actual amount.

The banks aren't required to disclose annual percentage rates for the bounced-check protection, which consumer advocates are trying to force banks to do. According to R.K. Hammer Investment Bankers, additional fees such as bounced-check and ATM charges have become considerable sources of profit for banks, generating over half of total bank income. Consumer groups think the banks offering the bounced-check protection are preying on low-income and unsophisticated consumers with its heavy promotions and undisclosed costs. Initially, consumers using the plan see it as a crutch until realizing how quickly the fees add up and end up in a much worse financial state than before.

Over 1,600 financial institutions are offering plans similar to the courtesy overdraft plan, most being smaller community banks and credit unions. Consumers should make sure their banks have not automatically enrolled them into its bounced-check protection plan. Signing up for a real overdraft protection plan will protect consumers at a lower cost and disclosed fees.

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