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Key protections in H.R. 1456 - Consumer Overdraft Protection Fair Practices Act

March 30, 2009
Overdraft Loans

Consumers are being hit with fees amounting to triple-digit interest rates on loans they did not ask for—and in many cases cannot afford—when they overdraw their bank accounts through checks, electronic transfers, debit card purchases, and ATM withdrawals.

This is possible because the Federal Reserve Board has refused to close a loophole in the rules implementing the Truth in Lending Act that exempts overdraft loans from disclosure requirements.

By bringing overdraft loans within the scope of the Truth in Lending Act, H.R. 1456 would provide the same basic consumer protections to checking account holders as to other users of consumer credit.

H.R. 1456 would make the law reflect what account holders prefer:

  • 88 percent say they want a choice about whether overdraft is included on their account, but today, they are usually high-cost overdraft programs without their consent;
  • 80 percent say they would prefer to have their debit card denied at the point-ofsale than covered in exchange for an overdraft fee, but today, debit transactions are routinely covered at a cost of $34 per transaction.

H.R. 1456 provides these key protections:

  • Requires consumer consent before banks or credit unions can permit overdraft loans for a fee. Institutions will be required to obtain written consent for covering overdrafts for a fee, disclosing to consumers the amount of any fee, the types of transactions that will overdraw the account, and the time period for repayment of the extension of credit.
  • Clarifies that overdraft fees are finance charges under the Truth in Lending Act, so consumers can compare the cost of borrowing the bank's funds through an overdraft with other sources of cash advances.
  • Prohibits banks from manipulating the order in which checks and other debits are posted if it causes more overdrafts and maximizes fees.
  • Requires banks to warn the customer that an electronic transaction may trigger an overdraft loan fee and allow the customer to cancel the transaction after receiving this warning.