DURHAM, NC. -- Calling fee-based overdraft programs now being used by 1,000 banks and other financial institutions "a hidden and unfair tax on the most vulnerable depositors," 54 national advocacy groups -- including the Center for Responsible Lending (CRL), National Community Reinvestment Coalition, National Consumer Law Center and ACORN -- are calling on the Federal Reserve Board to implement minimum disclosure and consumer protections for fee-based overdraft charges and "free checking" accounts. The Center for Responsible Lending also issued a consumer warning alerting consumers to the differences between abusive fee-based overdraft programs and legitimate overdraft protection. "We urge the Federal Reserve Board to recognize these fee-based overdraft programs for what they are - predatory consumer lending," said the 54-group letter. "We are concerned that banks may be steering low and moderate income customers to this high-cost credit, rather than to the much more affordable credit alternatives offered to wealthier customers."
Groups call for Truth in Lending regulation on overdraft charges
More than 1,000 banks and other financial institutions now offer programs that charge fees to cover check or ATM overdrafts, but they are not required to disclose their true cost as loans to consumers. The new programs pay overdrafted checks and charge a flat fee (typically $20 to $35) for each overdraft, equivalent to 1,000 percent interest or more on an annualized basis, instead of the annual 6 to 18 percent interest typically charged by banks on lines of credit to more established customers. "It's very simple: these are very high-cost loans, and should be disclosed as loans," said CRL spokesman Eric Stein. "If you have $80 in the bank and go to an ATM asking for $100, many banks will give you the $100 without mentioning that you're overdrafting your account. By the time you pay the $21 overdraft fee and re-pay the $20 balance a week later, you've paid a 5,475 rate of interest, and this fact was never disclosed." Stein added: "We've asked the Fed to revise its regulations to require financial institutions to treat fee-based overdrafts as loans under the Truth in Lending Act - then at least consumers would know what they're signing up for."
"Outdated" Fed regulations hide consumer costs
Banks induce consumers to open accounts with these high-cost fee-based overdraft programs through offering "free" checking, but the advocacy groups questioned how "free" the service is. "These are linked services," said the CRL's Stein. "By marketing with the promise of 'free checking,' banks can find customers most likely to be susceptible to overdrafting their account, without being required to disclose the fee-based overdrafts as loans. These lenders take advantage of an inadvertent loophole in the Fed's regulations, since a checking account can be called 'free' so long as there is no minimum balance, even though the account may be structured with the purpose of repeatedly charging large fees." The letter also requests the Fed to clamp down on banks that intentionally put accounts into overdraft by paying larger checks first. "Banks say overdraft protections aren't loans, but a consumer convenience," said Stein. "If it were, the banks would pay smaller checks first, and then pay a small number of larger checks as an overdraft - this would save consumers money. But they don't, and consumers are caught paying overdraft fees for many more checks." "We often hear about the policy advantages of serving the unbanked in our society," Stein said. "But abusive bounced-check and 'free checking' programs aren't providing real banking services for low-income consumers - they're taking advantage of their lack of sophistication to drive up banks' fee income."
Contact: Christine Kraly for CRL at 703-276-3258 or cKraly@hastingsgroup.com