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Thanks to new federal regulations, banks can no longer automatically sign customers up for their overdraft protection programs. Additionally, banks were given until August 15 to get explicit consent from customers as to whether they wish to participate in these programs.

These regulations are intended to protect those struggling to make ends meet from the fees associated with overdrawing their checking account. However, a recent analysis by the Center for Responsible Lending (CRL), a non-profit research organization, found many banks and credit unions are using scare tactics and misinformation to push vulnerable customers into accepting overdraft coverage.

According to a report released by the CRL, many institutions are failing to emphasize to customers that they opt to have debit card transactions declined at no cost rather than incur the average overdraft fee of $34.

Additionally, many banks target customers who frequently overdraw their accounts.  For example, a credit union in Iowa (which the report doesn’t name) offered to pay incentives to employees who convince cardholders who often overdrew their accounts to opt in for debit card overdraft coverage.

The report also cites institutions that work with marketing consultants to prioritize marketing debit card overdraft coverage to these customers. One consultant suggested offering gifts or cash to customers with four or more overdrafts. MainStreet previously reported on such campaigns.

An earlier CRL study found accountholders with repeated overdrafts are more likely to be lower-income, single, non-Caucasian and renting their homes.
“This targeted marketing approach raises concerns on several fronts,” reads the report, as “those with frequently overdrawn accounts are among the most financially vulnerable.”

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According to Consumer Federation of America estimates, banks collect $24 billion a year in overdraft fees. According to the CRL,  a quarter of all bank accounts become overdrawn in a year, but about 5% of all accountholders overdraw 20 or more times per year, spending more than $1,600 annually in fees.

Customers generally opt for overdraft protection to prevent them from bouncing checks, which leads to fees from both the merchant and the financial institution. Bounced checks also do significant damage to a person’s credit.

According to the CRL, most overdraft fees aren’t triggered by something like a bounced rent check, but by small debit card purchases of $17 or less. This means the overdraft charge often costs more than the purchase a cardholder intended to make. In essence, what was originally supposed to be a small charge turns may end up costing an additional $51. And the charges may begin to pile up as banks will levy fees each timean overdraft occurs.  All of these fees could be avoided if the consumer’s card was declined at the outset.

The CRL’s analysis does indicate that some banks are engaging in better policy practices since the new regulations went into effect. Bank of America (Stock Quote: BAC) and CitiBank (Stock Quote: C), for example, don’t charge overdraft fees on debit card transactions and U.S. Bank has reduced the amount of its overdraft fees on small purchases less than $10.

Is overdraft protection right for you? Check out this MainStreet article to learn more about your options.

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