Delinquent

Even as regulators crack down on abusive mortgage and credit card practices, another type of lending threatens to mire consumers in a credit trap.It’s called “courtesy overdraft” and has long been used by banks to automatically pay transactions that account holders don’t have the money to cover — and then charge them a steep fee. For years, banks have made it easier for customers to overdraw their checking accounts, aided by a cottage industry of consultants who make big money by helping to wring fees out of consumers, a USA TODAY analysis finds.

But what began as a customer service has often become an important revenue driver for banks at the expense of the most vulnerable consumers, according to bank memos reviewed by USA TODAY and interviews with industry insiders.

“This practice has gone awry and needs to be fixed,” says Alex Sheshunoff, a key consultant who once advised banks to pay, not return, overdrawn transactions. “This is something everyone should be trying to find a solution to, not fighting.”

Today, each of the nation’s 10 largest banks allows consumers to overdraw with checks, debit cards or at ATMs, a 2009 USA TODAY survey reveals. Large banks also reserve the right to process large transactions first, triggering more overdraft fees by emptying the account more quickly. Some even charge consumers before they overdraw by deducting a purchase when it’s made, rather than when it clears, pushing the account into the red sooner.

President Obama signed legislation in May limiting certain credit card practices — such as rate increases on existing debt — that have pushed consumers deeper into distress in a sliding economy. The government also wants to create a consumer protection agency to supervise loans. Meanwhile, the Federal Reserve is examining the fairness of certain overdraft practices.

It’s unclear whether those efforts will be enough to rein in overdrafts, now the single-largest driver of consumer fee income for banks. In 2009, banks are expected to reap a record $38.5 billion from overdraft fees, nearly twice the $20.5 billion they stand to collect from credit card penalties such as late and over-limit fees.

Banks say consumers can avoid overdrafts by keeping track of their money. Consumers contend, though, that banks’ policies make it challenging to avoid fees.

Faith Gordon, 48, recently sued BB&T bank for allegedly “delaying and rearranging” transactions to maximize overdraft fees. Gordon, of Atlanta, says banks should change their practices and “be fair to us customers.”

BB&T spokesman Bob Denham says the lawsuit “lacks merit.” The bank “categorically (denies) delaying the posting of items to create overdrafts,” he adds.

Eric Halperin of the Center for Responsible Lending says regulators should examine bank overdraft rules because they “parallel” much-criticized card policies. Banks are raising fees and imposing similar policies on checking accounts and credit cards, such as charging more for multiple transgressions. The Federal Deposit Insurance Corp. says if banks cover a $20 purchase and charge a $27 fee, the loan has a 3,520% annual percentage rate (APR) if paid back in two weeks.

Senate Banking Committee Chairman Chris Dodd, D-Conn., said if the Fed doesn’t curb overdraft abuses, he’ll “pursue legislative action.” Rep. Carolyn Maloney, D-N.Y., has sponsored legislation requiring banks to get consumers’ permission to cover overdrafts, disclose APRs and pay transactions in a way that doesn’t increase fees.

Banks are lobbying heavily against restrictions. Why? “Overdraft fees are the mother lode of (deposit) fees,” says Michael Moebs of Moebs Services, an economic research firm. “If it weren’t for overdraft fees, 45% of banks and credit unions wouldn’t have made money in 2008.”

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