August 16, 2004
When you sign up for overdraft checking protection at your bank, you may not be aware of the exorbitant interest rate you pay when your account activates the overdraft. A coalition of consumer groups complaints that the bank, under proposed federal regulations, is under no obligation to tell you.
In comments filed with the Federal Reserve, the Consumer Federation of America, National Consumer Law Center, Consumers Union, National Association of Consumer Advocates and the Woodstock Institute charge the draft regulations allow banks to entice consumers to overdraw their accounts without a firm commitment to cover overdrafts and without clearly disclosing the cost of these loans.
All other lenders are required to fully disclose charges under the Truth in Lending Act.
"The Federal Reserve has failed to protect consumers from bank 'bounce' loans that force consumers to pay triple-digit interest rates," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.
"Bank bounce loans are payday loans without a contract or cost disclosure," she added.
CFA charges a growing number of banks and financial institutions have adopted software and marketing programs to boost their overdraft fee profits by encouraging consumers to overdraw their bank accounts by check, and by allowing overdrafts at ATMs for cash withdrawals and purchases using debit cards. The consumer group says banks charge high penalty fees for each overdraft, ranging from $20 to $35 per overdraft, plus a per-day fee of $2 to $5 until the account is brought back into balance. With "bounce loan" programs, banks pay themselves back the amount of the overdraft and fees out of the next deposit.
When you do the math, bounce loans are astronomically expensive. For example, a $100 overdraft with a $20 fee has an APR of 520% if the overdraft lasts two weeks. Very few consumers would agree to a loan at a rate of 520% if presented with all the facts, which is CFA's point.
"The Federal Reserve and other banking regulators have explicitly admitted that bounce loans are credit, yet the Fed has failed to protect consumers by regulating these loans under the key federal law that governs credit," said Chi Chi Wu, staff attorney at the National Consumer Law Center.
"Payday lenders, pawnshops, and finance companies have to comply with Truth in Lending. Why don't banks?" asked Gail Hillebrand, senior attorney for Consumers Union.
A survey of 50 financial institution Web sites by CFA found 41 institutions that advertise bounce loans, with over a third of the ads encouraging consumers to overdraw their accounts with statements such as "running a little thin right before payday?" The consumer group says bank ads and fine print leave consumers in the dark when it comes to the cost of overdraft programs.
