Banks Making Billions in Overdraft Loan Fees

But many inside and outside the banking business say the programs, while extremely profitable for the banks, are a bad deal for consumers. The new "overdraft protection" programs are more expensive and restrictive than the overdraft lines of credit that banks have offered for decades to favored clients who have big balances or other accounts. Unlike those lines of credit, which typically charge annual interest of up to 20 percent, the new programs charge flat fees for each overdraft that translate into an annual rate of 1,000 percent or more.

Unlike traditional lines of credit, which allow repayment whenever the customer chooses, these programs require customers to bring their accounts back into balance in only a few days.

While traditional lines of credit have limits of several thousand dollars, the new programs have limits of $100 to $300. After that, banks again start bouncing checks. The programs are used disproportionately by low-income and moderate-income people, according to industry consultants who help banks create the programs in return for a share of the fees they generate.

The rapid spread of the programs has turned overdrafts, and the fees that come with them, into one of the largest sources of profit for banks, according to consultants and statistics compiled by government bank regulators. Washington Mutual, the nation's seventh-largest financial institution and the largest to promote overdraft protection, charged customers more than an estimated $1 billion in overdraft fees last year.

But regulators, consumer groups and some bankers and industry analysts say the overdraft programs, which come with fees of up to $35 per overdraft, are essentially high-interest loans aimed at working-class customers. And because the programs work automatically with debit cards, customers often do not realize they have overdrawn their accounts until they receive a letter from the bank.

"Some banks are looking at the fact that some consumers barely make it from payday to payday and have a very low balance, and instead of offering them a beneficial service, they are charging their customers bounced-check fees to take advantage of the situation," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Overdraft charges are the largest part of a long-term move by banks to depend more on fees and less on interest from loans, regulators and consultants say. A study by the Federal Reserve last year found that banks raised their overdraft fees 24 percent from 1997 to 2001, to an average of $20.42. Overall, banks will charge $30 billion in ATM, bounced-check and overdraft fees this year, according to the Federal Deposit Insurance Corp., up 14 percent from 2001.

BY ALEX BERENSON THE NEW YORK TIMES

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