Plastic-happy consumers who exceed their bank accounts face stiff overdraft fees that generate a windfall for financial institutions.

In 2006, Americans paid $17.5 billion in bank and credit union overdraft fees, up from $10.3 billion in 2004, often without the consent or knowledge they were enrolled in an overdraft loan program, according to a report released Wednesday by the Center for Responsible Lending, a nonprofit that works to eliminate abusive financial practices.

Such fees more than covered the estimated $15.8 billion that financial institutions needed to handle overdraft expenses in 2006, the report states.

With bank debit cards increasingly replacing checks and cash as a standard payment method, especially among young people, more overdrafts than ever are for small purchases.

A lot of people are in debt because of the overdraft protection fees, said Jordan Schild-crout, a counselor with Consumer Credit Counseling Service of Santa Clara and Ventura County.

Someone could end up paying 500 percent to 1,000 percent interest on an item, he said. For example, a $2.50 cup of coffee could end up costing $36.50 if a bank tacks on the average overdraft fee of $34.

The bottom line is that people need to know how much is in their bank accounts, Schildcrout said. People should pay attention to how much they will be charged for an overdraft, and if there's an interest rate on what the bank is covering.

The Center for Responsible Lending asserts that today's most common overdraft systems are designed to generate more in penalty fees than what it actually costs to handle such problems, resulting in enormous revenue for banks and credit unions.

Banks help drive up the number of overdrafts by clearing high-dollar debits before smaller ones, which is a standard industry practice, Congresswoman Carolyn Maloney, D-N.Y., said during a teleconference Wednesday.

Institutions are also holding deposits longer than necessary. They are allowed to hold deposits for as long as 11 days, even if the deposit clears before that, according to the report.

And most banks do not warn customers at the checkout or ATM if they have insufficient funds — once a routine practice — said Eric Halperin, a co-author of the report and director of the Center for Responsible Lending in Washington, D.C.

Maloney has introduced legislation intended to stop abusive overdraft practices.

If passed, the HR946 bill would require written consent from customers before they are enrolled in any overdraft programs. It also would prohibit financial institutions from changing the order of check clearing or delaying deposits.

The legislation would require financial institutions to warn customers when a transaction will trigger a fee, which would give customers the opportunity to cancel the purchase, Maloney said.

The bill would further call for financial institutions to report interest rates that apply to short-term, small-dollar loans to the Federal Reserve Board under an amendment to the Truth and Lending Act.

How penalties are assessed

The study found that "abusive overdraft loan fees" comprise 69 percent of all fees collected when customers exceed their balance, while not- sufficient funds fees make up 31 percent. This is in contrast to a few years ago, when the vast majority of financial institutions did not offer overdraft programs.

Many institutions now automatically cover purchases by basically loaning money to consumers through overdraft programs, but charge customers a penalty fee for every incident, Halperin said.

Under the not-sufficient funds system, purchases are denied when an account falls into the negative.

Halperin advises people to find a bank that does not use overdraft programs or allows customers to opt out.

If customers decide to have overdraft protection, they should link their checking accounts to a savings account or line of credit to avoid overdraft loans, he said.

Santa Clara Valley Bank in Santa Paula doesn't have any "fancy overdraft fee generating programs," said Michael D. Hause, president and chief executive.

He's been told that the bank could boost revenue if it implements some of these programs that charge a higher interest rate and other fees.

"That's not what we're about," Hause said. "We don't want to use the poor people that may bounce a check once in awhile."

In many cases, the small community bank calls customers to let them know there isn't money in their account so overdrafts don't continue to accumulate. The bank's overdraft fee recently increased from $20 to $25.

It basically is a transaction fee because such cases have to be handled manually, which takes a lot of man- hours, Hause said. Each Santa Clara Valley Bank branch spends about four hours daily managing bounced checks.

A small percentage of the bank's customers apply for an overdraft line.

There isn't a fee for this protection, but the bank charges 18 percent for the amount it has to cover — a little on the high side, but it's intended to be used for only a day at a time — Hause said.

Consumers need to be aware

The Ventura County Federal Credit Union provides a Courtesy Pay program, which processes checks and ATM transactions that might cause an account to reach a negative balance. If it does, the credit union notifies members by sending a letter the same day. The credit union also will call the person to inform him or her an account is in the red if it's a first occurrence. The bounced check fee is $25.

Other banks are going high-tech. Wells Fargo Bank customers can sign up for account alerts that can be sent by text messages to cell phones or by e-mail to let them know when a withdrawal is made or when account balances get below a specified amount.

Pattie Braga, community development officer at the Ventura County Federal Credit Union, said overdrawing is a major problem.

But Union Bank of California, based in San Francisco, has seen a dramatic drop in overdraft fees, spokeswoman Sharon Woodson-Bryant said.

Consumers are evidently doing a much better job in managing their accounts, possibly because more people are regularly monitoring their accounts online, so they know when they don't have money to cover checks, she said.

At Thousand Oaks-based California Oaks State Bank, overdraft protection fees are a revenue generator, but any time pre-approved limits are provided there is risk involved for the consumer, said Jerry Smith, the bank's chief financial officer.

It's a matter of convenience for customers, so they don't get penalized by merchants that might charge anywhere from $25 to $50, and possibly not take future checks from the consumer, Smith said.

On the Net:

http://www.responsiblelending.org