Overdraft fees -- a staple for banks and the bane of customers -- are on the rise again, despite new federal regulations and consumer lawsuits aimed at reining them in.
Consumers paid $400 million more in checking account overdraft fees at banks and credit unions last year than in 2011, according to a recent estimate by the Illinois-based economic research firm Moebs Services.
The increase -- to $32 billion nationwide, up from $31.6 billion -- follows two straight years of declines.
Moebs CEO Michael Moebs put the blame squarely on consumers, many of whom "are terrible at handling finances."
"It's a behavioral thing."
Others say banks have done a good job persuading people to sign up for overdraft protection when they would be better off without it.
"Banks have stepped up the marketing of such services and appear to be quite effective at convincing consumers they need this coverage," said Bill Hardekopf, CEO at the credit card comparison site Lowcards.com.
The bounce in overdraft fees last year -- which Moebs attributed to higher volume rather than an increase in individual fees -- came despite federal rules that took effect in mid-2010 requiring financial institutions to get customers' permission before enrolling them in so-called courtesy overdraft protection on ATM and debit card transactions. Previously, many banks automatically enrolled people in the programs.
Now, customers who don't opt in for coverage simply have their debit card purchases or ATM withdrawals denied if there isn't enough money in the account to cover them.
The regulations were designed to help people avoid being blindsided by a cascade of overdraft fees, especially while making small everyday purchases. Buying a $3 morning latte followed later by a bag of chips and candy bar before realizing an account was overdrawn could rack up three $35 overdraft fees, for example.
(The rules don't apply to paper checks or online bill payments, which banks can automatically cover for a fee or that trigger charges if they bounce.)
Despite the opt-in rule, a study last year by the Pew Charitable Trusts found that just over half of consumers hit with overdraft fees at the register or ATM said they didn't realize they had signed up for overdraft protection.
In essence, the survey indicated customers were being tricked into paying for a service they didn't want.
Besides being targeted by regulators and long-maligned by consumer groups, overdraft fees have been under attack in recent years in class-action lawsuits filed against a number of big banks, which were accused of improperly manipulating debit card transactions by processing them from highest amount to lowest. That practice tends to drain an account more quickly and trigger the most overdraft fees.
So far, a number of banks have settled, agreeing to pay millions of dollars to compensate customers and to switch to processing transactions in the order they come in.
Locally, market leader PNC Bank last year agreed to pay $90 million in a class-action settlement and in December began processing debit card transactions and checks chronologically instead of from high to low.
Still, the full effects of the settlements have yet to kick in.
For example, although the Pittsburgh region's No. 2 bank, Citizens, also settled the overdraft case last year -- agreeing to pay $137.5 million and to stop re-sequencing debit card transactions from high to low -- it has yet to implement the fix.
"We are working on making this change," Citizens spokeswoman Sylvia Bronner said in an email last week. She declined to say whether the change would extend to checks.
No. 3 First National Bank of Pennsylvania has said it would continue re-ordering transactions from high to low despite agreeing to pay $3 million and to improve disclosures as part of a separate overdraft settlement that won preliminary court approval in February.
With overdraft fees apparently on the upturn, U.S. Reps. Carolyn Maloney, D-N.Y., and Maxine Waters, D-Calif., introduced a bill last month targeting "unfair" overdraft charges by mandating additional restrictions. A similar bill failed last year.
The bill, which the banking industry opposes as intrusive and potentially limiting to consumer choice, would extend the opt-in requirement to paper checks and recurring monthly payments and ban the "manipulation" of transactions in a way that maximizes fee income, such as high-to-low posting.
The bill also would stop financial institutions from charging more than one overdraft fee per month or more than six per year and require the fees to be "reasonable and proportional" to the amount of the overdraft.
It also would prohibit fees if the overdraft resulted solely from a debit hold placed on an account that exceeded the amount of the transaction, such as the typical $100 hold some gas stations impose on debit card purchases no matter how much gas gets pumped.
"In 2010, regulators slowed the flood of bank revenue from unfair overdraft schemes," said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group in Washington, D.C.
"But Congress needs to step in to finish the job so consumers won't have their wallets emptied by bank tricks and traps."
Patricia Sabatini: email@example.com or 412-263-3066.