The Center for Responsible Lending recently released a report (pdf file) that found credit unions and banks charged customers $17.5 billion in fees for $15.8 billion in abusive overdraft loans.
Rep. Carolyn Maloney (D-NY) introduced H.R.946, the "Consumer Overdraft Protection Fair Practices Act," that will:
(1) Amend the Truth in Lending Act to set forth restrictions on:
• overdraft protection programs or services for consumers; and
• representations or statements with respect to such a program or service in any advertisement or promotion.
(2) Amend the Electronic Fund Transfer Act and the Expedited Funds Availability Act to set forth restrictions on overdraft protection programs or services for consumers.
More on how credit unions and banks are turning overdraft fees into profits by abusing the process of "overdraft protection" below the fold.
The Center for Responsible Lending report (pdf file) details how overdraft systems generate enormous revenues using mechanisms that "makes small, unsolicited loans to checking account holders whose balances are in the negative, collecting high fees for each transaction and often sinking them even deeper into the red."
The unethical, but legal, practices have the greatest impact on those who can least afford to have money taken from their already stressed finances. These practices, described in the report, include:
• posting charges against a checking account quickly while intentionally delaying the posting of deposits,
• lowering account balances by re-ordering debits to clear higher-dollar items first
• failing to warn a customer during debit card point-of-sale or ATM transactions if they are about to overdraw their account, so that they may cancel the transaction if they choose.
An earlier report by the Center for Responsible Lending concluded that the abusive overdraft practices produced an estimated $10.3 billion in fees paid for abusive overdraft loans. Results from the new report indicate that:
• Banks and credit unions use abusive overdraft loans to generate $17.5 billion in fee income each year.
• Abusive overdraft loan fees now make up 69 percent of all fees collected when customers overdraw their accounts, vastly outweighing traditional not-sufficient funds (NSF) fees.
• In a system enormously out of balance, consumers pay $17.5 billion in fees for $15.8 billion in abusive overdraft loans.
The adverse impacts are compounded by the fact that many banks and credit unions enroll customers in abusive overdraft loan systems by default when they open checking accounts. Because the Federal Reserve Board has exempted "overdraft protection" loans from the Truth-in-Lending Act (TILA), many customers don't know that they have agreed to this preditory practice, or that they may have other options. Banks and credit unions like this "overdraft protection" because it generates nearly $2 in fees for every dollar issued in the short term "overdraft protection" loans.
The Center for Responsible Lending report offered these recommendations for policymakers to address this predatory practice:
• Prohibit banks and credit unions from manipulating the order of check clearing or delaying the posting of deposits if doing so results in overdrafts;
• Require banks and credit unions to obtain written consent from customers in order to enroll them in high-cost overdraft loan programs;
• Require banks and credit unions to comply with the Truth-in-Lending Act for high-cost overdraft loans by disclosing their cost in terms of annual percentage rate;
• Limit the number of high-cost overdraft loans a bank or credit union can make to a customer per year to prevent the customer from falling into a cycle of debt;
• Require banks and credit unions to warn customers whenever an ATM withdrawal or debit card point-of-sale (POS) transaction will overdraw their accounts and give them a choice of whether to proceed or to cancel the transaction; and
• Allow banks and credit unions to cover ATM and debit card POS overdrafts without warning only if the customer has elected, in writing, to participate in a lower-cost protection program that pays overdrafts from a linked savings account or line of credit.
The House Financial Services Committee is considering a bill (HR 946) that would require banks and credit unions to inform customers of the "overdraft protection" details and get signed consent before thay are enrolled in the programs. The bill would amend the "Truth in Lending Act," the "Electronic Fund Transfer Act," and the "Expedited Funds Availability Act" to address some of these problems.
The "Consumer Overdraft Protection Fair Practices Act" (HR 946) currently has 23 cosponsors and was referred to the Subcommittee on Financial Institutions and Consumer Credit on April 12, 2007. The Subcommittee on Financial Institutions and Consumer Credit held a Hearing on "Overdraft Protection: Fair Practices for Consumers," July 11, 2007.
Even though many of us at DKos are not affected by "overdraft protection" scams, it is a real problem for those people who find themselves in a situation where banks are charging them "more of what they know they ain't got," to paraphrase Leo "Sledge-O-Matic" Gallagher.
I have called my representative, who is not a member of the House Financial Services Committee, and urged him to cosponsor this bill. I encourage others to read the legistation (HR 946), and to consider asking their representative to cosponsor this bill.
Telephone numbers for members of the House Financial Services Committee can be found here.