Americans 55 and over pay $4.5 billion in fees annually for overdraft loans they haven't asked for and typically don't want, a new study by the Center for Responsible Lending finds. Of that, nearly $1 billion is stripped from people heavily dependent on Social Security income.
The new report "Shredded Security: Overdraft practices drain fees from older Americans," shows that overdrafts triggered by debit card use hit people at or approaching retirement age hard even though they use plastic less than younger debt-card holders. The cost – $1.65 in fees for every $1 advanced – reinforces CRL's previous research, which found that overdraft fees are disproportionate to the amount advanced to cover a purchase: Unauthorized overdrafts cost Americans $17.5 billion in fees for $15.8 billion advanced.
The findings come as the Federal Reserve and federal policymakers are considering changes to rules governing overdraft loans.
"Our research found that 84 percent of Americans 55 and over – many of whom have successfully managed checking accounts their entire adult lives – would prefer to choose whether they have overdraft coverage," says Leslie Parrish, senior researcher, who co-authored the report with Peter Smith. "The Fed must address these excessive bank fees and end this abuse of long-time and loyal customers, many on fixed incomes."
The report is the latest in a series of CRL studies examining overdraft fees and how they erode financial well-being.
A featured case study in the new report illustrates how overdraft fees erode "Mary's" monthly Social Security check to a meager sum. In early 2006, Mary paid $448 in overdraft fees in return for receiving $210.25 in credit from her bank, forcing her to live on $20 from a Social Security check of nearly $1,000. If her bank had given Mary an 18 percent line of credit to cover her overdrafts, Mary would have paid only about $1 in total fees.
"AARP is fighting hard to protect the long-standing institution of Social Security for older Americans," said Bob Jackson, executive director of AARP's North Carolina office. "We are concerned that this essential safety net is under a back-door threat from financial institutions that charge unfair fees for unauthorized overdrafts. Banking policies should not allow for Social Security income to be paid unwittingly by beneficiaries."
Banks use a number of practices to maximize their overdraft fee income: automatically putting customers into overdraft systems by default, routinely reordering daily transactions to subtract highest-dollar amounts first, and holding deposits longer than necessary. All of these practices put customers deeper into the red when they overdraw their account.
Rules recently proposed by the Federal Reserve Board and other bank regulators don't go far enough: They would require only that banks let customers opt out of these expensive systems. That puts the burden of "unsubscribing" on the customer instead of requiring banks to get explicit consent before signing people up for these high-cost loans. The Fed, which is accepting public comments on the issue until August 4, should require banks to seek customer approval to opt in.
Listen to report author Leslie Parrish, a Senior Researcher with Center for Responsible Lending as she describes the report and its findings.
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