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CRL Says New Overdraft Guidelines Protect Nobody But Banks

Friday, February 18, 2005

WASHINGTON, D.C. -- Borrowers who need protection from triple-digit interest rates when they overdraw their bank accounts won't get it from federal regulators, who are asking financial institutions to police themselves. Now it is up to the Federal Reserve Board to provide at least one important protection to borrowers by requiring banks and other financial institutions to disclose the annual percentage rate on these loans.

The nonprofit, nonpartisan Center for Responsible Lending called on the Fed to require banks to disclose interest rates on these loans and on regulators to replace the weak voluntary guidelines they released today with tough regulations to protect borrowers.

Borrowers could use the help. Some banks slide their customers into overdraft loan programs, sometimes called bounce protection, without even telling them. When customers overdraw their accounts, they find their bank has charged them a fee, usually $20 to $35 dollars. At those prices, the annual percentage rate on a fairly typical $80 overdraft can top 1,400 percent when a customer takes seven days to repay.

What's more, the low- and moderate-income customers some banks target for these loans can wind up getting hooked on them as an easy but hugely expensive way to borrow. A study in Washington State showed that a quarter of people using overdraft loans borrowed at least twice a month.

Some of the new, non-binding guidelines are good. For instance, the federal regulatory agencies (with the exception of the Office of Thrift Supervision) recommend banks report outstanding overdraft balances as loans, which would suggest borrowers should get the same protection as borrowers of other types of loans.

But these ineffectual guidelines also leave a big loophole: Federal regulators don't ask banks to bar people from borrowing repeatedly. In fact, some banks are pushing their customers into an abyss of debt from which some never climb out.

The Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the National Credit Union Association Friday released the guidelines after months of study. A debate over regulation is timely: The overdraft business has grown huge. Banks are charging customers billions of dollars worth of these fees a year.

"Banks used to offer lines of credit to customers to help them avoid overdraft fees. Now, some are taking a cue from the 'payday' lenders and structuring a small loan product designed to encourage repeated, high fee transactions," said Mark Pearce, president of the Center for Responsible Lending.

CRL urges regulators to make the market fair and transparent. For instance, CRL wants the Federal Reserve Board to require banks to disclose the annual percentage rates they are charging overdraft customers. So far, the Fed has declined.

Some banks and other financial institutions now encourage customers to write bad checks. In the worst cases, they even misrepresent customers' available balances to trick them into writing bad checks.

"Banks used to be leaders in providing short-term emergency loans to their customers, but now more seem bent on maximizing short-term fees at the expense of long-term customer service and their reputation," said Pearce.

Contact: Michael Flagg at 202-349-1862 or mike.flagg@responsiblelending.org