A year after the Federal Reserve enacted new rules to rein in abusive bank overdraft practices, fees remain high and some institutions actually have slapped on additional penalties, according to a new survey of the nation's 14 largest banks by the Consumer Federation of America.

Last year, the Fed prohibited banks from enrolling consumers in overdraft protection programs unless they choose to "opt-in." Previously, most banks automatically covered payments that exceeded the account balance, charging a fee for each offense, along with additional fees if customers didn't quickly repay the loan quickly. While the rules have helped, major issues remain, consumer advocates say.

"The Fed's rule cut the number of people who participated in these programs, but for the people who do opt in, there's no limit on the size of fees or the number of overdraft fees (banks) can charge," says Ed Mierzwinski, consumer program director with U.S. PIRG, the federation of state public interest research groups.

The median overdraft fee is $35, unchanged from last year, and customers can incur anywhere from three -- at JPMorgan Chase (JPM) -- to 10 -- at Fifth Third Bank (FITB) -- of these fees in a single day, according to the study. In the last year, BB&T (BBT) doubled the number of overdraft fees it charges per day to eight, while Regions Financial (RF) raised its daily limit from four to six per day, the survey found. Only TD Bank (TD) reduced the number of fees per day from six to five.

How Some Banks Milk Overdrafts

In addition, the Fed rules don't prevent "reordering," in which banks pay the largest checks and debits first in order to trigger additional fees. The practice remains widespread, the survey found. Here's how it works: A consumer thinks she has $1,200 in her checking, but only has $1,100. She conducts five debit transactions totaling $200 and then pays her rent with a check for $1,000. She has overdrawn the account by $100. Two weeks later, when the consumer deposits her paycheck, the bank gets its money back.

When all six transactions arrive at the bank, the bank processes the rent payment first, followed by the biggest debit transaction of $100. Four smaller debits bounce, resulting in four separate fees for $35 each, or $140. Had the rent been paid last, the customer would only have been on the hook for $35.

Three banks changed their procedures, the survey found. Citibank (C) now processes checks smallest to largest and will begin processing debit payments in the same way in October. Fifth Third and Wells Fargo (WFC) also made changed the order in which some transactions are paid, which should lessen the number of overdraft fees their customers pay too.

Bank of America (BAC) recently settled a class-action lawsuit related to the way it processed transactions, setting up a $410 million fund to reimburse customers.

Either way, if it takes two weeks to repay the overdraft loan -- such as in our example above -- customers get hammered with more fees. Two-thirds of the largest institutions layer on additional fees if consumers don't settle up in just a few days, the survey found. SunTrust (STI) charges a second $36 fee after seven days, for example, while JPMorgan Chase adds $15 after each five-day period an overdraft remains unpaid. RBS Citizens (RBS) charges $6.99 per day on the fourth through thirteenth day an overdraft is not repaid.

The Bottom Line for Consumers

All together, our example consumer would end up paying the equivalent of an 884% annual percentage rate in fees at Citibank, and a whopping 2,779% APR in fees at RBS Citizens Bank. (The Fed has ruled that overdraft fees are not considered finance charges that must be disclosed.) All 14 banks offer cheaper alternatives to overdraft protection, such as transfers from savings or credit cards and overdraft lines of credit.

Mierzwinski hopes the new Consumer Financial Protection Bureau (CFPB), which has regulatory authority over banks with more than $10 billion in assets, will step in to address the harmful practices that the Fed's rules don't cover.

"As of last month, the CFPB can supervise these banks, and supervision is a powerful tool," Mierzwinski says. That's the best hope for protecting consumers in the financial marketplace." As for new rules, "don't expect anything in less than a year," he says. The CFPB didn't return calls seeking comment.


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