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If your bank offers "bounce protection" on your checking account, watch out. You may be hit with a stiff bounced-check fee you weren't expecting.

Traditionally, banks simply linked a checking account to a credit card or consumer line of credit to cover overdrafts. The customer would have to pay interest on the amount borrowed from the card or line of credit, but there probably wouldn't be additional fees.

But now many banks are simply covering the overdraft on checks, debit cards and ATM withdrawals - and then charging the customer a flat fee that's a lot higher than the interest would have been under the traditional arrangement. And the consumer must still repay the overdraft within 30 days. Other charges may also apply.

Banks say customers still benefit because they avoid the embarrassment of bouncing a check or having a transaction rejected. They also avoid being charged bounced-check fees by merchants.

"We kind of look at it like a service," said David Cutler, vice president and consumer lending manager at First Niagara Financial Group, which offers overdraft limits up to $700 and charges $25 per incident. "If we were to bounce the check, you would get an NSF (non-sufficient funds) fee from us plus one from the merchant."

But critics say that, by setting a limit, paying the overdraft and charging a fee, the banks are effectively advancing consumers money for a few days or weeks, at interest rates equaling several hundred percent a year.

They complain banks are taking advantage of consumer habits. And they criticize banks for touting the plans as a benefit and encouraging consumers to spend beyond their means.

The popularity of such plans has grown rapidly. A year ago, such plans were available locally mostly at smaller institutions, such as First Niagara, Evans National Bank, Wyoming County Bank, Greater Buffalo Savings Bank and Western Division Federal Credit Union. Larger banks stayed away.

But versions of such programs are now available here at big banks, including Bank of America and HSBC Bank USA, although both say it's different because they don't promote the programs.

Other area banks, such as M&T Bank Corp., KeyCorp, Citigroup and Citizens Financial Group's Charter One Bank, still offer only links to other accounts or a line of credit that customers must apply for. There may be an annual fee or small transaction fee, but otherwise customers pay just minimal interest.

Consumer advocates are worried about the new trend. "It means more consumers are being harmed by this product," said Chi-Chi Wu, staff attorney at the National Consumer Law Center in Boston. "We're definitely seeing complaints about it, especially when it comes to electronic transactions."

The growth comes despite criticism by lawmakers, denunciation by activists, and scrutiny by federal bank regulators over how plans are promoted. Five bank, thrift and credit union agencies approved new "guidance" in February that cautions institutions not to encourage routine overdrafts and to ensure customers aren't deceived.

Regulators are mostly worried about actively marketed plans, not cases where banks are just using long-standing discretion.

"This is one attempt by the agencies to try to address what is a very popular product that is being very actively marketed," said Tim Burniston, associate director of compliance policy at the Federal Deposit Insurance Corp. "The product also has some pitfalls and there's potential for the product to have some damaging effects on people's financial situations."

Even the American Bankers Association has expressed worry. "Before you offer a bounce protection product, decide if you'd want to defend the one you're considering in your local newspaper or to your regulator," Ken Fergeson, then chairman-elect, wrote in March 2003 to bank CEOs. "It could become your worst nightmare."

Overdraft plans are the latest example of banks' quest for new sources of fees to bolster their bottom line.

Banks like fees because they're more reliable than interest income from taking deposits and making loans.

For the last two years, banks reaped nearly $33 billion a year in service charges on deposit accounts, up from $20 billion in 1998, according to the FDIC.

Of those charges, total "insufficient funds" fees amounted to $12 billion to $14 billion. Two-thirds came from bounce protection, according to a report by analyst Howard K. Mason of Sanford C. Bernstein & Co.

"Banks are making tens of billions of dollars in fees, and a considerable portion of that is coming from the overdraft fees," said former U.S. Congressman John J. LaFalce, an attorney at Harris Beach in Buffalo. "Today's fees are not based on the cost of providing service to customers. They're based on the idea of maximizing profits."

Bounce protection plans were initially developed by consulting firms. Today, between 2,500 and 3,000 of the nation's 18,000 banks, thrifts and credit unions offer such programs, according to consultant John M. Floyd & Associates of Houston.

Typically, according to regulators, a bank will set a limit of several hundred dollars for overdrafts, depending on the account. Fees can range from $20 to $35 for each overdraft, plus daily fees of $2 to $5 at some banks until the debt is repaid, according to a report last year by the National Consumer Law Center and the Consumer Federation of America.

But it's how the program is marketed and administered that has caused the most concern. Instead of having to sign up voluntarily, the new bounce protection is automatically included with a checking account, regardless of credit history. Banks may require customers to actively say no if they don't want to be included.

Banks have also extended the service from checks to ATM withdrawals, debit card purchases, automatic debits, transfers by phone and online banking. But not all banks inform consumers of this, nor do they warn customers when they are about to overdraw their account, regulators say. Some banks have even included an overdraft line in a customer's available balance, they said.

Some banks have marketed the program in a way that regulators say implies it's a line of credit. They've also advertised it with accounts marketed as "free," possibly misleading customers to think there are no fees for bounce protection, regulators have said. Some institutions have even encouraged customers to use it as a backup source of quick cash.

"Some are handling it very responsibly, but there are far too many that are engaged in questionable behavior," LaFalce said. "There are far too many concerned with bulking up the bottom line."

And the high overdraft charge can be triggered for even a small amount of money. One person even wrote to Wu complaining of a $32 fee for a $1.79 cup of coffee.

"Bounce loans are an extremely expensive and deceptive form of credit that entraps consumers into repetitious and unaffordable transactions," the National Consumer Law Center and the Consumer Federation of America wrote in joint comments last year to federal bank regulators who were considering new rules.

Bank of America, which acquired FleetBoston Financial Corp., has provided a "discretionary accommodation" to customers since 2000 as part of all checking accounts. It's now available in former Fleet markets like Western New York.

The bank will let customers make debit card purchases that exceed their balance, but not ATM transactions or checks.

"We have provided customers greater access to their funds," said spokeswoman Alexandra Liftman. "They are able to make their purchases and it saves them the embarrassment of a decline at the register."

The bank charges $25 for each overdraft. But customers only pay if they don't have enough money in their account at the end of the day.

Customers can "opt out," and the bank will refund the first fee or set of fees if new customers didn't know about it.

HSBC recently sent a letter to customers informing them that it can now cover ATM or debit overdrafts as well as checks. The fee is $28 each time.

Bank officials insist it isn't "bounce protection" because they don't market it as an account feature. But the fact that the program covers more than checks, imposes the full bounced-check fee, and is automatic unless you decline is identical to bounce plans.

"We recognize that there is some similarity, but we also think that there are distinguishing features," said Karin O'Neill, first vice president of consumer compliance.

Regulators have taken notice of the issues. One agency, the Office of the Comptroller of the Currency, even "threw ice cold water" on one vendor's product in 2001, according to a regulator, citing numerous problems that could violate federal laws.

In February, the five government agencies approved final guidance and "best practices" on bounce protection after considering 320 public comments on a 2004 proposal. They warned financial institutions not to encourage intentional overdrafts, not to confuse consumers by promoting "free" accounts and overdraft protection in the same ad, and not to include overdraft limits in available balances.

They also suggested banks should:

Tell consumers of alternatives

Make it clear that payment of overdrafts is not guaranteed by the bank

Clearly disclose fees and that they count toward the overdraft limit

Explain that transactions may not be processed in the order they are received

Disclose that bounce protection may cover more than checks

Obtain consent or provide a way to "opt out"

Alert consumers, if possible, before a transaction overdraws their account or warn them that it could

Notify consumers when bounce protection is used.

Sanford Bernstein's Mason said in his report that the changes could cost banks just over $2 billion in fees.

The agencies say it's too soon to say how institutions are reacting, but believe the guidance will help. They said it should apply to all overdraft plans.

"We have seen some changes," said FDIC's Burniston. "Maybe not major things, but we certainly have seen differences in how these programs are marketed."

But there's still disagreement between regulators and banks over how to interpret the instructions. For example, advertisements by First Niagara in the last month have touted overdraft protection as part of the thrift's free Value Checking Package - even though that may contradict the guidance. Cutler said the program was reviewed by regulators.

Regulators said their authority to do more was limited without separate action by the Federal Reserve. The Fed has a proposal pending but consumer advocates were still critical. "There's no question the regulators are dropping the ball," LaFalce said. "The regulators are not cracking down on it anywhere near as hard as they should."