U.S. banks and credit unions are using abusive overdraft loans to generate $17.5 billion in fees each year, according to a major new study, entitled "Out of Balance," from the nonprofit Center for Responsible Lending (CRL). The study finds that financial institutions are deliberately using overdraft systems that are designed to generate more overdrafts from customers, resulting in enormous fees for banks and credit unions.
"Some of our largest financial institutions are hiding behind a smokescreen of misleading terms and murky practices that encourage costly overdrafts," said Eric Halperin, director of the CRL Washington, D.C. office. "Banks should protect customers' funds, not plunder them with high fees and harmful practices."
As the report explains: "In a system enormously out of balance, consumers pay $17.5 billion in fees for $15.8 billion in abusive overdraft loans." In addition, the report finds that debit card overdrafts are now the single largest source of overdraft fees.
The $17.5 billion in fees is an increase over CRL's 2005 estimate of $10.3 billion in overdraft fees. The new fee figure is based on an analysis of a large, commercially-available database of personal banking account transactions documenting more than 8,500 overdrafts, as well as publicly reported data on fee income for banks and credit unions.
Rep. Carolyn B. Maloney, chair of the Financial Institutions Subcommittee, said: "This report shows that flawed banking practices are bilking American consumers to the tune of billions of dollars a year. I've always said that banks have the right to make money for what can be a valuable service, but consumers also have a right to information they need to make an informed decision. Fairness is an essential component to a safe and sound banking system. Common sense legislation I introduced earlier this year (H.R. 946) would equip bank customers with more control over and information about overdraft protection fees, and alert them if they are on the verge of overdrawing."
Unfair bank practices identified in the CRL report include: (1) posting charges against a checking account quickly while intentionally delaying the posting of deposits, (2) lowering account balances by re-ordering debits to clear higher-dollar items first, and (3) failing to warn a customer during debit card point-of-sale or ATM transactions if they are about to overdraw their account so that they may cancel the transaction if they choose.
CRL is asking Congress to pass HR 946, sponsored by Rep. Carolyn Maloney (D-NY) and Barney Frank (D-MA). The bill would make abusive overdraft loans subject to Truth-in-Lending Act interest rate disclosures, as well as requiring written consent from account holders before banks could enroll them in these systems. It would also prohibit manipulations designed to increase overdrafts, and would require banks and credit unions to warn their customers before authorizing an overdraft.
Halperin will testify at a hearing on HR 946 held by Rep. Maloney on Capitol Hill today at 2 pm EST.
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