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Overdraft fees can add up in a flash

Bank overdraft fees drive me crazy. It's just wasted money. Sure, overdraft protection is a good backup for the times you miscalculate, but sometimes the fees run into the hundreds of dollars a month and are the most burdensome on the people least able to afford them.

Well, the Consumer Financial Protection Bureau intends to do something about this. The bureau is investigating banks' overdraft practices and their effect on consumers' finances.

If you have overdraft protection, your financial institution will cover the transaction so your check won't bounce but will charge you a fee. The average overdraft fee ranged from $30 to $35 in 2011 and has increased by 17 percent over the past five years, according to CFPB.

The bureau wants to know whether financial institutions are employing various methods to increase the likelihood that its customers are accessed with an overdraft fee.

"We are concerned that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees," Richard Cordray, director of the CFPB, said during a town hall meeting in New York announcing the agency's plan to study overdraft protection.

Of particular concern to the watchdog agency is how certain customer transactions are processed. Some banks do not process transactions, including the checks you write, in the order in which you make them. Instead they collect the transactions from a specified period, such as a calendar day, and pay them from the highest amount to the lowest amount, Cordray said. Switching the order can mean certain bills such as a person's mortgage or student loan payment is paid. But this reordering can also increase the number of transactions that trigger overdraft fees.

In addition to looking at how transactions are processed, the agency will be focusing on how institutions are disclosing their overdraft terms and whether consumers are receiving misleading marketing materials about overdrafts.

Certainly people should be responsible with their checking accounts. But there is no shortage of horror stories. During the town hall meeting, Sarah Ludwig, founder and co-director of the New York-based Neighborhood Economic Development Advocacy Project, provided a case example of one low-income customer who felt the financial sting of overdraft fees.

Ludwig said her organization received a call from a single mother whose bank assessed her $1,390 in overdraft fees over a two-month period. The woman tried to close her checking account, which was being automatically debited by payday lenders. A payday loan, which is not legal in New York State, is a short-term loan of usually $100 to $500. Ludwig said the woman's bank refused to close the account and allowed the automatic debits to be processed even though the account was overdrawn from previous payday loan payments.

The customer was "caught in a spiral of payday loan debt, gouged by her bank's abusive overdraft practices and the victim of illegal debt collection practices," she said.

Bankers participating in the town hall meeting said overdraft protection is a service their customers want. But Andrew T. Rowe, a senior vice president at Bank of America, also said its customers "did not like to be surprised by being charged for spending money they don't have." To that end, the bank has launched alerts in which customers who sign up for mobile banking get an electronic notice when their account balance falls below $25. Rowe said last month Bank of America sent more than 20 million texts to 8 million customers alerting them about low balances.

As part of its study of overdraft practices, the CFPB is seeking public comment on a sample "penalty fee box." On your checking account statement would be a box highlighting all your overdraft-related fees for that particular period and fees paid year-to-date. The box would also include tips to lower or avoid future fees.

I love the penalty box proposal. It's a bold way to help people see how much overdrafts are costing them.

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