business

Bouncing a check just isn't what it used to be.

Not so long ago, if you didn't have money in your account, the bank would slap you with a fee, but still not cover the check, except as an occasional courtesy. These days, banks and credit unions routinely cover overdrafts, and, in turn, collect hefty fees. So even if you don't have enough cash in your account, your debit card will keep working and the ATM still will spit out cash.

It could be days before you discover a cascade of charges, averaging $34 each.

Bankers say overdraft protection is a valued service that helps customers avoid embarrassment and merchant charges for insufficient funds. But a scathing report issued Wednesday by the Center for Responsible Lending accuses banks and credit unions of turning overdraft loan fees into profit centers by manipulating the process so that customers get caught paying more fees than necessary, without any warning.

"A single surprise overdraft can trigger a domino effect that plunges account holders deep into the red," said Eric Halperin, director of the nonpartisan research group's Washington office. Halperin said the practices were so abusive that they "now must be counted among the insidious predatory lending practices that take money from American families."

Using a database of 8,500 overdrafts from banks and credit unions as well as reports filed with federal financial institutions, the group found that customers paid a record $17.5 billion in overdraft loan fees in 2006. That accounts for nearly 40 percent of income banks and credit unions collected from fees, up from 27 percent in 2004.

Common banking practices, such as processing the largest check or debit card transaction first and holding deposits for as many as 11 days, unfairly stack the deck, the report charged.

Combined with the exponential growth in the use of debit cards, which typically are used to make frequent small purchases, banks have even more chances to cash in on customer mistakes in assessing their balances, according to the center. An earlier study by the group found that debit cards trigger 43 percent of overdrafts, compared with 27 percent for checks.

The report offers an example of a woman who has $750 in her checking account. Before realizing she isn't covered, she pays some bills and makes some small purchases that put her $143 in the red. Had her payments been processed in the order received, she would have paid $34 in fees, according to this example, because she would have bounced a single check. But by withdrawing from the highest to the lowest amount, she was charged $272.

It's a story that rings true for John Anderson, a father of two and a longtime U.S. Bank customer. He's a big fan of online banking and uses his debit card for nearly every transaction. That's occasionally gotten him in trouble.

"I'm all for profit, but you have to have some business ethics," said Anderson, 37, of Minneapolis. "It's not ethical to allow someone to overdraft for a $1.92 cup of coffee and know that and then charge them $35. You can quickly ring up three or four overdrafts by lunchtime and not even know it. Well, then set up my card so if I don't have the money, don't approve the transaction!"

Christine Hobrough, U.S. Bank's retail marketing manager in Minnesota, defended the bank's practices of processing transactions from highest to lowest, saying they are aimed at helping consumers, not building profit.

She said the fees are necessary to pay for increased labor costs and a higher volume of accounts.

"Our research several years ago found that the highest checks tend to be the most important things in life -- the mortgage or rent, their car payment or taxes. Critical things that need to be paid," she said. "Consumers want assurance that those things are going to be taken care of as opposed to the person who mowed the lawn."

Wells Fargo also takes the highest check first, for similar reasons, a spokeswoman said.

While the report also was critical of credit unions, its goals as a non-profit, member cooperative can be different.

Hiway Federal Credit Union president Jeff Schwalen said his credit union charges $28 for an overdraft, after seeing if there is money in a savings account or line of credit. Moving funds from those accounts does not incur a charge, as it might at many banks. ATM machines don't disperse money if there isn't enough in the account to cover the withdrawal.

And when it comes to checks: Schwalen said Hiway Federal "clears them as we get them," he said. "If we clear in a batch, we clear the smallest first."