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It is a product many people never asked for, don't want, and can't afford. Yet they wind up with it anyway.
It's the overdraft loans that banks and other financial institutions make -- sometimes at interest rates well over 1,000% -- when customers overdraw their accounts. Some customers aren't even told when they're charged the fees, unwittingly racking up charges that exceed the amounts they borrowed.
The nonprofit, nonpartisan Center for Responsible Lending estimates people pay more than $10 billion a year in fees for these loans.
Today CRL issues a study on this deceptive practice, "High Cost and Hidden From View: The $10 Billion Overdraft Loan Market."
CRL got its estimate by reviewing government figures and analysts' estimates. Making conservative assumptions about overdraft loans' share of financial institutions' fee income, CRL estimated that the total fees customers pay has reached $10.3 billion a year.
And overdraft loan fees will only continue to increase unless federal regulators step in to protect bank customers.
However, the Federal Reserve announced last week that banks don't have to disclose the interest they charge for these loans, as they would for any other type of loan, leaving customers in the dark.
The federal Truth In Lending Act requires banks to provide information to borrowers about the cost of loans and provides other protections. According to the Fed, though, the Truth In Lending Act does not apply to the booming business of overdraft loans.
Here's how the business works: A financial institution will cover a check, ATM withdrawal or debit card transaction even when the customer's account is empty. When the customer's next deposit hits the account, the bank will grab the overdraft amount plus a fee, typically $20 to $35.
Evidence suggests financial institutions target low- and moderate-income customers for these loans. As stated in CRL's report, "low-income account holders who cannot keep up with overdraft loan fees may see their accounts closed and may join the ranks of the unbanked."
Overdraft loans are rife with abuses:
- Borrowers can be enrolled in an overdraft loan program without their affirmative consent.
- Borrowers who overdraw their account with an ATM card or debit card can be charged fees without warning them first and without providing them the opportunity to cancel the transaction.
- Most overdraft loan programs can also refuse to pay an overdraft, leaving borrowers unprotected.
"The Fed's failure to require disclosure of the interest rate on these loans allows financial institutions to hide the loan's true cost," said Eric Halperin, Policy Counsel at the Center for Responsible Lending. "Federal regulators should do more to protect bank customers from abusive overdraft loan products."
CRL calls on federal regulators to:
- Require disclosure of the interest rates on overdraft loans.
- Require borrowers' explicit consent before signing them up.
- Require warnings when ATM and debit-card transactions will trigger fees and allow customers to opt out of the transactions.
- Require institutions to report data on their overdraft loan programs, which would show the impact of these programs on borrowers.
- Prohibit repeated overdraft loan charges within a quarter.
The Federal Reserve has said it will revisit the issue if abuses continue. However, it isn't even collecting information on overdraft loans.
This "don't ask, don't tell" approach is a green light to financial institutions that may have thought that overdraft loan programs were risky business with their regulators.
Now, the risk is all on the bank's customers.
Contact: Michael Flagg at 202-349-1862 or email@example.com