When fees masquerade as privileges

Late last year, I received an offer my credit union didn't want me to refuse.

To reward me for being a good customer for about 20 years, it wanted “to give me one less thing to worry about.”

Immediately, I began to worry. The more I read, the more red flags I saw.

The credit union, which is in Dallas, automatically enrolled me in something called “Overdraft Privilege.” Red Flag No. 1: Beware banks offering privileges for which you didn't ask.

Overdraft protection is a banking euphemism for a fee grab, and it's becoming common practice. As the recession has eroded banks' lending profits, they've sought to make up the difference by increasing fees on everything from ATM transactions to credit cards. But overdraft exploitation is becoming their most lucrative as well as their most egregious and predatory practice.

My credit union's program was pretty typical. I could overdraw my account by as much as $800, yet be spared “the embarrassment of having an item returned unpaid, additional merchant penalty fees and the inconvenience that comes with bouncing a check.”

Red Flag No. 2: I've never bounced a check, and I have a savings account linked to my checking account to cover such a problem if I ever do. Why would I want this service?

Well, if I didn't want it, I had to call and have it removed.

Red Flag No. 3: The opt-out clause — the favored ploy of phone companies, credit card issuers and other masters of customer abuse. It's their way of saying, “We don't believe you would actually buy this service, so we won't give you choice.”

I put the notice under the electron microscope and read the fine print, which set off Red Flags No. 4, 5, and 6.

“Overdraft Privilege” was actually a line of credit. Every time I overdrafted, I received the privilege of paying a $33 service fee. The fee could be increased at the credit union's discretion, and, of course, all disputes would be resolved through arbitration.

The letter also contained a halfhearted disclaimer: Overdraft Privilege was designed “to cover you in the event of a haphazard mistake — not to encourage careless spending.”

Red Flag No. 7: the bold-faced lie from the marketing department.

Careless spending is, of course, exactly what it encourages. It wasn't protection, it was the seeds of a debt spiral in which fee would stack upon fee. The more careless I was, the more money the credit union would collect.

I called the next day and opted out.

Many depositors, though, apparently don't. Fees for insufficient funds and overdraft protection generated about $35 billion for banks last year, according to a study by Bretton Woods, a management advisory firm that's studied the issue for a decade. Texas institutions alone collected $3.2 billion, more than most other states.

Overdraft fees run as high as $38, with the median being $27 per transaction, according to a report by the Federal Deposit Insurance Corp. released in November. The report found that not only were the fees among the most common, they tended to occur on the smallest transactions — the median dollar value among the nation's largest banks was a mere $20.

In other words, the banks are charging more in fees than the overdraft itself. On an annualized basis, the interest rate for a $27 fee on a $20 transaction would be more than 3,500 percent.

And of course the fees fall hardest on those with the least financial literacy, affecting low-income customers and young adults the most, the report found.

More than three-fourths of banks have such a program and, like my credit union, enroll customers automatically, according to the FDIC.

All of which means overdraft protection isn't a privilege or a convenience. It's a racket — protection only in the way that Tony Soprano would use the word.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at blogs.chron.com/lorensteffy.