In a system enormously out of balance, fees for abusive overdraft loans have reach $17.5 billion per year, more than the loans themselves, which now amount to $15.8 billion per year.
CRL's report, "Out of Balance," finds that abusive overdraft loans, once the exception, are now the rule in a system where not-sufficient funds (NSF) fees–historically used to discourage overdrafts—have shrunk to 31 percent of overdraft-related fees. Abusive overdraft loan fees now account for 69 percent of those fees.
These small, high-cost loans are made by a bank or credit union to an account holder who is "in the red," often without the account holder's consent. The bank recoups the loan amount, plus a fee averaging $34 from the account holder's next deposit. Often marketed inappropriately as "bounce protection," the abusive fee-based overdraft loan should not be confused with cheaper sources of back-up funds for checking accounts. These loans can make a small purchase, even a sandwich or doughnut, cost the unsuspecting bank customer over $30, and they can trigger a domino effect of debits that leaves the customer struggling to climb out of a negative balance.
Common banking practices increase the number of overdrafts, practices like clearing high-dollar debits before subtracting smaller debit amounts, holding deposits longer than necessary, and failing to decline overdrafts or warn customers at the checkout or ATM if they have insufficient funds. Most banks gave these warnings in the past, and customers want them and would most often decline transactions that were not covered if given proper warning, according to a CRL survey.
CRL supports HR 946, which would make abusive overdraft loans subject to Truth-in-Lending Act interest rate disclosures, as well as requiring written consent from account holders before banks could enroll them in these systems. It would also prohibit manipulations designed to increase overdrafts, and would require banks and credit unions to warn their customers before authorizing an electronic overdraft.
Read full report (PDF).
Read the executive summary (PDF).
Read the press release.
Read Eric Halperin's testimony (PDF) before the House Financial Services Committee's Financial Institutions Subcommittee.
Learn more about HR 946, "The Consumer Overdraft Protection Fair Practices Act."
Listen to a streaming audio replay of the July 11 news teleconference.