FDIC Urges Stronger Debit Card and Overdraft Oversight; Other Bank Regulators Should Take Action

Statement of Michael D. Calhoun, President, CRL


Center for Responsible Lending
August 11, 2010

"American families, especially those most vulnerable financially, could save millions of dollars a year in costly overdraft fees if guidelines the FDIC proposed today are adopted. The guidelines would encourage the banks the FDIC oversees to offer customers lower-cost overdraft alternatives rather than charge unlimited high-cost overdraft fees—as many banks do, even on small debit card transactions.

Under the proposal, a bank would contact a customer who incurs six overdraft fees within 12 months and offer—and explain—less costly options. The bank would be encouraged to provide the customer with a reasonable opportunity to choose one of them. Banks the FDIC oversees also would be discouraged from re-ordering transactions to maximize overdraft fees.

Banks and credit unions frequently promote their most expensive form of overdraft coverage, which typically imposes a $34 fee per overdraft—twice the amount of the typical debit card purchase that triggers an overdraft—rather than reasonably priced options like a low-interest line of credit or an affordable small-dollar loan. Financial institutions earn $24 billion annually from these high-cost programs.

The proposal comes just days before new Federal Reserve's August 15th rules take effect requiring banks and credit unions to obtain a customer's signature before enrolling them in a costly overdraft program for debit cards.  But many banks don't give consumers real choices among alternatives; instead, they steer customers into the highest cost overdraft coverage they offer.  The FDIC's proposed guidance indicates the Fed's rule is not sufficient to stop unfair and abusive overdraft practices by lenders:  The Fed addresses neither the size of the fees nor how many can be charged.

A decade ago, most banks declined debit card transactions, and at no charge, when a customer's account lacked sufficient funds. Citibank has never charged overdraft fees on debit cards, and Bank of America is stopping the practice.  But another big bank, Wells Fargo, continues to charge over a billion dollars a year in debit card overdraft fees. Wells also continues to market a cash advance product that, like payday lending, carries triple-digit annual interest rates.

To comprehensively address abusive short-term loan products, including unfair overdraft practices, the Federal Reserve and the Office of the Comptroller of the Currency must join the FDIC's efforts and explicitly limit overdraft fees to no more than six per year.  In addition, all regulators should require that the size of the overdraft fee reflect a lender's cost and risk, and they should ban the manipulation of transaction postings."

For CRL's research on banks' overdraft marketing efforts, see http://www.responsiblelending.org/overdraft-loans/research-analysis/banks-target-mislead-consumers-as-overdraft-deadline-nears.html.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.