By Jackie Jones

Bad lending practices by banks are increasingly eating up disposable income, not only hurting individual consumers, but also affecting the nation’s overall economic health by diverting funds that could be spent on consumer products to servicing debt.

And the people hit hardest by these practices are lower-income and minority people, according to the Center for Responsible Lending.

“It’s not an accident,” said Kathleen Day, a Center spokeswoman. “If you look over the treetops at the economy, there’s always been an overrepresentation of black and Hispanic people.”

Everything from subprime mortgages, to payday loans, to bank overdrafts hurt people of color in a disproportionate way, Day said.

One of the ways banks really stick it to customers is through its overdraft policies.

On the surface, it sounds like a good idea. Your math is off and you write a check or use your debit card to purchase something and there isn’t enough money in your account to cover it. With overdraft protection, rather than reject the purchase, the bank covers the payment and charges you a penalty.

So far, so good.

But often the penalty is at least double the size of your shortfall, and if you fail to correct the situation within a few days, the bank can charge you an additional fee until you can repay.

It gets more insidious, however. The banks also are allowed to change the order in which the charges come in, so you’re more likely to have more than one overdraft, meaning you’re paying multiple fees.

For example, suppose you have $100 in the bank and you make three purchases of $25, $5 and $80, in that order. The bank, however, changes the order of the deductions, so the $80 goes through fine, but you are now overdrawn for the $25 and $5 purchases and get dinged twice for insufficient funds. In addition to having to cover the $30 shortfall, you also owe two fees.

“The average overdraft is $17 and the average fee is $34,” Day said.

That means, you’re paying overdraft fees of at least $78 for being $30 short. Then there’s the additional fee if you don’t deposit money to cover the shortfall in a couple of days.

“The Federal Reserve Board has allowed the banking industry to call overdraft charges a fee and if it is a fee then you don’t have to disclose it as an annualized percentage rate,” Day said.

What that means is the bank is giving you a short-term loan and charging you interest on it, but calling it something else. That allows the bank to raise fees as it sees fit, making you pay exorbitant interest on the transaction.

A study by the Center determined that banks and credit unions collected nearly $24 billion in overdraft fees in 2008, up 35 percent from two years earlier, affecting as many as 51 million Americans a year.

“We have found both in data sets and in surveys conducted for this study that lower income people are more affected and in the survey nonwhite people are more likely to be affected” by the process, said Leslie Parrish, a senior researcher for the Center.

“A lot of people place blame on themselves and some people do take responsibility, but a lot of people are busy working and don’t have the time to call the banks and meet with an officer to straighten this out, and the burden should be on the banks to help them manage their accounts better than to stack the deck against them,” Parrish said.

Federal regulations will go into effect this summer to allow consumers to opt-in to their banks’ overdraft plans rather than be automatically enrolled. Some banks have adjusted their overdraft policies, but the Center says those changes are not enough and could be reversed once the focus on the issue diminishes.

The Center for Responsible Lending’s position is that banks should be required to deny debit card purchases and ATM withdrawals, without penalty, if the funds are not there or be allowed to charge an overdraft fee if the customer is given a warning and a chance to decline the overdraft payment; put fees on a sliding scale that bear a more accurate relationship to the cost of covering a shortfall and limit the number of fees that can be charged to a customer during a year before being enrolled in an overdraft plan or given a line of credit.

Parrish said consumers could find ways to take matters into their own hands, in the meantime, by telling the bank to remove them from overdraft plans and do a little more homework in selecting a financial institution.

“The No. 1 recourse is to both call the bank and ask about their overdraft practices. People shop around for banks and ask a lot of questions about locations of branches and free checking, but people don’t shop around asking about overdraft policies because they are being optimistic and hope they won’t have to deal with that. And they also should be calling their congressional representatives and tell them they need to go farther and get more practical about lending practices,” Parrish said.

She said there are two bills pending in Congress (H.R. 3904 and S. 1799) that would address a variety of consumer financial protection issues, including the regulation of overdraft fees.

“The other thing I think is of concern in communities of color,” she said, “is the FDIC has put out a report that African Americans have higher rates of being unbanked. Basically, that means not having a relationship with banks at all. Some of that is fear of overdraft fees.”

The Federal Deposit Insurance Corporation is the organization that guarantees assets of up to $100,000 per person in the event a bank fails. The FDIC, as it’s more commonly known, also looks at how various communities use or gain access to banking services.

For those who are unbanked, Parrish said, “They are more likely to go to check cashing places,” which are more often found in communities of color and have been criticized for charging high fees for the service.

Further, Parrish said, not having a bank account hurts consumers in the long term.

“Having an account is the first step on the path toward asset building,” Parrish said, but the fear of being penalized so severely for a minor financial misstep has driven “people to make decisions that are not the greatest.”

Still, the Center for Responsible Lending contends more pressure should be brought to bear on the banking industry for creating the situations that have made it difficult for keeping people financially solvent.

“Even the most conservative economists are saying if you take an increasing portion of people’s disposable income and have it going toward servicing the debt…it’s not good for anybody,” Day said.

Parrish and Day also said consumers also should press Congress to approve the creation of the Consumer Financial Protection Agency, which would take existing regulatory powers spread throughout several government agencies and centralize them in one agency that would advocate for consumers.

Jackie Jones is a freelance writer as well as a career and fitness coach for those who want to get their lives in shape.