Abusive Fee Based Bank Overdraft Charges: Consumers Beware
Consumers should be aware of the differences between fee-based bank overdraft programs and the traditional lines of credit that cover overdrafts among banks' wealthier customers. Bounced-check fees, often disguised in marketing campaigns as "free checking" accounts, in fact encourage people to bounce checks, and their true cost is not disclosed to bank customers.
In joining with 53 other groups to urge action from the Federal Reserve Board (see press release), the Center for Responsible Lending cited "bounced check" warning signs from the Consumer Federation of America:
- High fees, charged to the account every time a check bounces. By contrast, lines of credit offered to more established bank customers charge an annual fee of around $20 and an 18 percent interest rate on usage of the line of credit. The effective interest on a bounced check can be as high of 1,000 percent or more when calculated on an annual basis.
- Services that the bank says are provided as a "courtesy" without consent by the account holder. This is where fees are often hidden. With a line of credit that includes overdraft protection, customers must apply and sign a contract.
- No Truth In Lending Act disclosures of the service's annual percentage rate (APR). Banks will describe the bounced-check fee as a customer convenience specifically to avoid this disclosure. Banks must disclose the APR when customers sign up for overdraft protection in a traditional line of credit account.
- Accounts that require the customer to repay the bounced-check fees and restore the account balance in a short period of time (such as a week). Responsible overdraft protection through disclosed lines of credit normally allow months to repay the balance, and customers can repay in installments.
- Accounts that pay larger checks first, draining the account more quickly and making it more likely that the customer will face a large number of fee-based overdraft fees.