Good morning, I'm Eric Halperin, director of the Center for Responsible Lending's Washington office. I appreciate Congresswoman Maloney's invitation to join her this morning as CRL releases new findings in our ongoing investigation of overdraft lending.
Our new report, "Billion Dollar Deal," finds that abusive overdraft loans are draining the checking accounts of young adults to the tune of nearly $1 billion per year. Colleges and universities are contributing to this problem by making deals that give a single bank exclusive access to their students without insisting on protections that shield their students from abusive overdraft lending. Many colleges are now issuing combination student ID and debit cards, a problem if the bank engages in abusive overdraft lending.
In a series of reports based on our analysis of a large, commercially-available database of personal bank account transactions, CRL has found that high-cost overdraft loans are being imposed on checking account holders by most of our nation's biggest banks.
In January, we reported that banks and credit unions now routinely allow most debit card transactions to go through when their account holders have a negative balance, advancing the funds to cover typically small shortfalls of less than $20 and charging the account holder an average fee of $34 for each overdraft. Consumers are not given an adequate chance to prevent these fees, which are hugely out of proportion to the loans themselves.
In a report released in July, we found that Americans overall are paying $17.5 billion in fees for abusive overdraft loans, and that the rapid growth in fees has been fueled by debit card overdrafts and bank manipulations that increase the number of overdrafts.
As an example, when banks reconcile a customer's transactions for the day, they often deduct funds in order of the largest payment to the smallest, regardless of the order the transactions were made. By manipulating the order, the bank still covers the same number of payments, even when the account balance goes into the negative. But they can count more of them as overdrafts—and collect more fees in the process—if they deduct the largest debit first. A spokesperson for a major bank told the press this re-ordering was a standard industry practice.*
Today's report, "Billion Dollar Deal," focuses on the impact of abusive overdraft lending on 18- to 24-year-olds.
Young adults have been dubbed "Generation Plastic" because of their reliance on debit and credit cards. Because they use them often for small purchases, the average amount the bank advances to cover overdrafts for this age group is very low, meaning the fee they pay is proportionally even higher for young adults than it is for the general population. Adults in general pay $2 for every dollar the bank advances to cover debit overdrafts, already a figure absurdly out of balance. Young adults pay even more—$3.25 in fees for every dollar borrowed—for debit overdrafts.
In total, we find that $963 million per year comes out of the checking accounts of 18- to 24-year-olds to pay the fees for abusive overdraft loans.
This is how it works: since banks enroll customers automatically and allow overdrafts to go through routinely and without warning, a small purchase, say a $5 hamburger, can easily cause a cascade of overdraft charges. The first small overdraft, which in our example will increase the cost of the hamburger to nearly $40 when the overdraft fee is included, puts the customer more than 30 dollars deeper into the negative, making the next small purchase trigger another overdraft fee—and the cycle goes on.
One student mentioned in our report had just this experience in April of this year. Over four days, he was charged $245 in fees for overdrafting his account with small purchases that amounted to only $13 in overdrafts.
We need policies that protect both students and adults. We need policies that protect the low- and middle income working people who pay the bulk of the fees and who may not have the resources to take on the big banks and win back their hard-earned dollars.
Congresswoman Maloney's bill, HR 946, the Consumer Overdraft Protection Fair Practices Act, will address many of these abuses in powerful ways, putting the "protection" back in overdraft policy.
Under HR 946, banks will have to come clean about overdraft loans, disclosing the interest rate so consumers can compare the cost of this credit option to others. They will also need a consent form signed by the account holder before enrolling them in such a system.
These protections—the opt-in requirement and the disclosure requirement—will ensure that consumers are given the right information and the right to choose whether or not to enroll in the most expensive credit program their bank offers. As our release today shows, even our most vulnerable and inexperienced group—young, new bank customers—are not being shielded from these abusive practices. Instead of protecting their financial well-being, these overdraft loans are robbing young people of a secure and solid start in their adult lives.
I would like to thank the authors of our report, CRL researchers Leslie Parrish and Peter Smith, and to offer my assistance in answering any questions you might have.
* From press report July 4, 2007, article posted on Cincinnati.com by troubleshooter Howard Ain: "Fifth Third Bank officials declined to be interviewed but said they are following industry standards, which is to process the largest items first. They say they do that, not because it generates the most revenue for them, but because those larger checks are generally for mortgages, rents and car payments. Fifth Third says this policy helps prevent those important items from being returned unpaid."
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