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Fed takes aim at overdraft fees, credit card rates

Nickel and dimed

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If you're like many people, you've probably bounced a check once or twice. You paid a fee and learned to watch your cash a little more closely.

But for some people, the fees crept up in a manner they say was unfair. Tony Marshall, who runs a Raleigh software company, saw the darker side of overdraft fees when a dentist debited his account, a year after his visit and without notice, for a bill his health insurer was supposed to cover.

His bank allowed the charge and, as other bills came in, deducted the most costly from his account first. Within days and without notice, he'd racked up $320 in overdraft fees alone. "Obviously, I was upset for a number of reasons," said Marshall, 48.

It's stories like Marshall's that have consumer groups concerned. Now that consternation has reached the Federal Reserve Board, which is taking public comment until August on proposed rules that would require banks to let consumers opt out of overdraft programs -- meaning that, if customers say no, their uncovered purchases would simply be turned down at the cash register.

Carol Hammerstein, a spokeswoman for the Center for Responsible Lending, said that's what most consumers want anyway. The Durham-based advocacy group, which is affiliated with the Self-Help Credit Union, recently released a study that indicated as much as 80 percent of customers would rather suffer the embarrassment of a refused debit card than the misfortune of an overdraft fee that averages $34.

The Center has praised the Fed's proposal but said it doesn't go far enough. "What we want is for people to be given a choice and to be able to choose or not choose whether their accounts are automatically charged the fee," Hammerstein said.

The fees the Center and other advocacy groups object to aren't traditional bounced check fees or overdraft protection programs that are linked to another accounts, such as savings or a line of credit. "The practice that we see as a problem is the automatic, unauthorized overdraft fees," she said. "If [a customer] buys something with their debit card, even if it's only $5, like a sandwich, they can get a $34 charge. There's no warning or anything. If they're that much into the red, that can trigger a domino effect of additional fees."

But even overdraft protection programs that are linked to other accounts can be troublesome for some consumers. Charisma Jones Alexander, a certified credit counselor at United Family Services, has seen clients who max out the line of credit tied to their checking account. "I think a lot of them get so caught up in that cycle, and they use that cushion until they can't use it anymore," Alexander said.

She doesn't completely fault banks. "Nobody forces you to sign that paperwork," she said.

Rising prices of goods and gasoline have contributed to woes of consumers who either simply don't make enough money or lack solid money-management skills, she said: "Gradually, it's getting worse and worse," Alexander said.

But it's credit card abuses that most trouble Alexander and many observers. Among them is N.C. Commissioner of Banks Joe Smith, whose office hasn't taken a stand on the proposals before the Fed.

"I think we will wait and see how the action in Washington plays out," he said.

Smith said the state banking commission receives about 1,500 complaints each year, with the bulk of them concerning mortgages. About 77 complaints in 2007 were related to nonsufficient funds, or overdraft charges -- usually a complaint that the customer was correctly charged a fee or whether the fee was excessive.

"I've told our banks explicitly that the conduct of these programs [cannot be like] a loan," said Smith, whose agency regulates state-chartered banks such as BB&T and not national banks like Bank of America and Wachovia. "It's not an extension of credit. It's essentially a service fee for a service rendered to keep someone for overdrawing. And I have generally otherwise stayed out of it.

"What worries me to death is that we have a big chunk of our society now that is living on the edge," said Smith. "The reason we have this as a controversial issue is because a whole lot of people are tapped out. And that is a huge problem."

He thinks current federal proposals may help alleviate structural problems, but that won't be enough. People have to make sacrifices, he said: "Sometimes it's a question of not making enough to make ends meet. And sometimes it's a question of people needing to, frankly, control their desires until they have the dough to pay for stuff."

Marshall, the Raleigh software businessman, understands bank's need to charge fees, but he sees need for reform. "We obviously don't want to overregulate things," Marshall said. "But I think the fees that are being charged right now are a little bit over the top."

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