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Debit & ATM overdrafts

Thursday, January 25, 2007

WASHINGTON, DC – Banks across the nation are taking advantage of the upward trend in debit card use to make high-cost overdraft loans more common and still costlier, according to a study released by the Center for Responsible Lending (CRL) today.

"What banks are calling 'bounce protection' is starting to look more like a 'protection racket,'" said Eric Halperin, director of CRL's Washington office and a co-author of the report. "Banks are raking in fees from unwitting customers who would not overdraft if given a choice."

The report, "Debit Card Danger," analyzed the checking accounts of more than 5,000 customers of the nation's 15 largest banks and found that debit card purchases and ATM withdrawals trigger 46 percent of high-cost overdraft loans. Written checks, on the other hand, are responsible for just over one quarter.

Making an in-store debit card purchase is by far the most expensive way to overdraft, costing $2.17 for every dollar borrowed. By comparison, check-triggered overdraft loans cost $0.86 per dollar borrowed. These findings refute the contention commonly made by banks and credit unions, many of which also have fee-based overdraft programs, that they are protecting consumers by sparing them the expense of bounced checks.

Banks could prevent debit card overdrafts at checkouts and ATMs by denying the transaction or warning the customer, though doing so would eliminate the opportunity to charge an average $34 fee. Yet a survey of account holders conducted in conjunction with the analysis of checking account transactions showed that people want the chance to avoid spending into the red. Some 61 percent of the 2,400 surveyed preferred that their debit card purchase be denied at the checkout if it would otherwise overdraw their account and incur a fee. Nearly all responded that they would cancel their ATM withdrawal to avoid a fee.

In the last Congress, Rep. Carolyn Maloney (D-NY) introduced a bill that required banks to report the APR on overdraft loans, get written consent before putting customers in "bounce" protection programs, give overdraft warnings at the ATM and stop manipulating debit and credit processing in order to generate more fees. Rep. Maloney plans to introduce similar legislation this year.

Research conducted by CRL last year found that low-income households were hardest hit by bank overdraft practices and took the longest to climb back out of debt. The magnitude of the problem revealed by these new findings makes it imperative that policymakers act soon to protect consumers' rights to informed choice and control over their finances. Specifically, CRL recommends the following measures in addition to the proposals offered by Rep. Maloney:

  • Require banks to warn customers whenever an ATM/debit card transaction will overdraw their account, tell them the cost of the loan, and give the choice of whether to proceed or cancel the transaction.

· Allow banks to cover ATM/debit card point-of-sale overdrafts without warning, only if the customer has consented in writing to a lower-cost protection program.

For more information: Sharon Reuss, (919) 313-8527 or sharon.reuss@responsiblelending.org.