By Elvina Nawaguna
WASHINGTON, July 31 (Reuters) - Consumers who opt in for bank overdraft protection end up paying more than double for small purchases, a U.S. consumer watchdog warned on Thursday, giving banks a fee bonanza when checking accounts are short of funds.
A study by the Consumer Financial Protection Bureau showed that debit card overdraft fees average about $34, and are mostly incurred on transactions of $24 or less. Consumers therefore end up paying the equivalent of more than 17,000 percent in annual interest rate for a loan, the CFPB said.
Overdraft fees, which are usually paid within three days, are giving U.S. banks and credit unions more than half of their consumer checking income, the agency said.
About one in five consumers who opt in will likely overdraw an account more than 10 times a year, and pay about $260 per year in overdraft and non-sufficient funds fees, CFPB Director Richard Cordray told reporters on a conference call.
"Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error," Cordray said in a statement. "Overdraft fees should not be 'gotchas' when people use their debit cards."
A 2010 rule prohibits banks from charging overdraft fees on ATM withdrawals or debit card transactions unless a customer opts for it.
The CFPB first sounded the alarm about such fees last year, saying that some customers could not anticipate or avoid them, and were therefore more likely to have their bank accounts closed for negative balances.
"For as long as banks have been around, consumers have occasionally run into trouble in trying to spend more money than they have available in their accounts," Cordray said.
Now that consumers use more debit cards than cash or checks to make small or impulsive purchases, banks and credit unions cover more of those transactions while charging fees for doing so.
The CFPB is mulling further regulations on bank overdraft programs to protect consumers.
In a statement, the Consumer Bankers Association urged lawmakers to be "cautious," noting that the overdraft service helps customers cover expenses without resorting to unregulated sources of money.
(Reporting by Elvina Nawaguna; Editing by Richard Chang)