Industry defends service, opposes proposal by Fed to let customers opt out of automatic systems..

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In Jeffrey Laylon’s estimation, he’s racked up thousands of dollars in overdraft fees from his bank over the years, triggered when the balance in his personal or business checking accounts wasn’t enough to cover his obligations.

“I keep very little money in my personal account. You can be at Starbucks and buy a $2.50 cup of coffee [using a debit card]. They [the bank] will put it through and charge you a $35 overdraft fee,” said Laylon, who owns a pet store in Hoboken, N.J. “They make it look like they’re doing you a favor, and they’re not.”

Each year, consumers pay at least $17.5 billion in bank-overdraft charges, according to the Center for Responsible Lending. A survey of the 10 largest banks by the Consumer Federation of America found the average highest fee charged for overdrafts was $34.65, a 15 percent increase from 2005.

But things could change. Earlier this year, the Federal Reserve and Office of Thrift Supervision proposed rule modifications that would require banks to allow customers to opt out of a financial institution’s automatic-overdraft system.

Consumer-rights groups say the government should go even further, requiring banks to obtain customer consent before assigning automatic overdraft “protection” to their accounts.

“The bottom line is, you’re on your own,” said Jean Ann Fox, director of financial services at the Consumer Federation of America. “So far, Congress and federal bank agencies have not protected consumers from outrageous loans and unfair practices.”

The federation also wants the Fed to prohibit banks from “manipulating” the order in which it processes customers’ transactions, which the group charges leads to more fees. Most of the largest banks either pay the largest transaction first or in any order they choose, citing the importance of paying large debits such as mortgage or car payments ahead of others.

Consumer advocates, however, say that method often triggers more overdrafts and more fees.

The banking industry, alternatively, argues that banks provide a valuable and appreciated service that prevents consumers from being embarrassed by having their purchases declined.

In addition, Bank of America noted in a July comment letter it submitted to the Fed, requiring such a system would increase costs to consumers and the economy “that far outweigh the benefits.”

Nessa Feddis, senior counsel for the American Bankers Association, said the industry is concerned about the Fed’s determination that overdraft fees without opt-out provisions are “unfair” — a conclusion she said could lead to the argument any banking fee is potentially unfair.

“People want them paid,” Feddis said about banks covering overdrafts.

The Fed has indicated it will make a decision by the end of the year. Meanwhile, here are some tips to avoid paying costly overdraft fees:

• Keep track of your balance and what’s going in or out of your checking account. Remember to include noncheck transactions, such as ATM withdrawals, debit-card purchases and automatic bill payments. The industry stresses it’s the customers’ responsibility to know how much money they have in their accounts.

However, consumer advocates point out that for people living paycheck to paycheck, it’s often difficult to know specifically how much is in an account.

Rebecca Borne, policy counsel with the Center for Responsible Lending, said some banks include in account balances the amount they will cover in case of an overdraft.

In addition, banks can hold deposits from nonlocal checks for up to 11 business days, Borne said, so don’t assume a deposit has been credited to your account.

• Link your checking account to a savings account or your credit card, or apply for an overdraft line of credit, which will automatically cover any withdrawals that exceed the amount in your checking account. Banks still charge a fee to transfer from savings, but it’s more like $10, instead of about $35 for an overdraft.

Fox suggested a variation of this: Keep a buffer amount in your checking account to allow for a margin of error.