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Daylight for overdraft fees.

Byline: The Register-Guard

Just five years ago, 80 percent of banks would not allow people who didn't have money in their checking accounts to withdraw cash from an ATM or make a debit-card purchase at a store. Today, nearly all banks are happy to advance the money or cover the charge - and they're even happier to collect a $35 fee for the service. The service can be a valuable one to bank customers, but people who are about to overdraw their accounts should always be aware of the fees they will incur, and they should be given a chance to decline to complete a transaction that will incur a fee.

The idea of overdraft protection isn't new - banks have long been willing to cover not-sufficient-funds checks for their best customers, or make an automatic transfer from a savings account to avoid a checking overdraft. In the past half-decade, however, banks have extended overdraft protection to customers who may not even know they have it, or might not want it. Overdraft fees have become a major revenue stream for the banking industry, generating $17.5 billion in fees to cover $15.8 billion in overdrafts last year.

A bank's willingness to cover an overdraft can allow a customer to get cash in an emergency, or avoid the embarrassment of having a debit card rejected. In many cases, however, customers aren't even aware that they're about to overdraw their accounts, and end up having to pay a $35 fee for a purchase that could easily have been delayed. What's missing is information: Card users need to be made aware that they're about to overdraw their accounts, and they should be informed of the consequences.

Legislation pending in Congress would require that consumers sign up for overdraft protection, rather than being enrolled in such programs automatically. Those who decline to sign up would have their cards rejected if they don't have enough money in their accounts to cover a purchase - but they'd also never be stuck with a $35 overdraft fee.

Congress ought to go further. Transactions resulting in overdrafts should be flagged so that even people who have signed up for overdraft protection would be warned that they are about to incur a fee. Those who wish to proceed would do so knowing that they'd soon pay a price, while those who prefer to avoid the fee could cancel the transaction.

Banks that cover overdrafts are essentially making short-term loans. A $35 fee on a small transaction can result in an astronomical rate of interest - more than 3,500 percent, according to a 2008 study by the Federal Deposit Insurance Corp. People aged 18 to 25, who are more likely to use debit cards for small purchases, pay $3 in fees for every $1 borrowed to cover overdrafts, according to the Center for Responsible Lending.

Fairness in lending requires that both parties be fully informed of the terms. Under current rules for overdraft protection, people are often unaware that they're borrowing money - they assume, because the transaction went through or the ATM spit out some cash, that their bank balance is in the black. An opt-in requirement and on-the-spot overdraft disclosure would give card-users the information they need, and might spur banks to compete by offering overdraft protection plans that are more favorable to consumers. If a $10 overdraft is going to result in a $35 fee, people should at least be able to see it coming.
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Title Annotation:Editorials
Publication:The Register-Guard (Eugene, OR)
Article Type:Editorial
Date:Sep 23, 2009
Previous Article:Gambling takes a recess.

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