The findings of an FDIC study of bank automatic overdraft programs — also called courtesy overdraft or bounce protection — are no surprise to consumer advocates. For years, studies by consumer groups of automatic overdraft programs have shown them to be short-term loans that cost consumers billions in fees, while often denying them the ability to make an informed choice.
The difference this time around is a federal banking regulator has arrived at statistics that paint the same picture — most customers aren’t informed of the overdraft until after the ATM or point-of-sale transaction has taken place, and high fees mean that someone who overdraws their account at the ATM by $20, and is charged the median overdraft fee of $27, would incur an annual percentage rate of 3520 percent if they repaid the loan in two weeks. Even payday lenders don’t charge that much.
Huge money for the banks
How much does all this add up to for banks? A 2007 study by the Center for Responsible Lending said consumers are paying fees of $17.5 billion annually — on automatic overdraft loans of $15.8 billion per year.
“This is a huge amount of money for the banks,” says Jean Ann Fox, director of financial services at Consumer Federation of America in Washington, D.C. “But aren’t we in trouble if the only way banks stay afloat is by sticking their most desperate customers with the highest priced credit that consumers have not applied for and don’t know they’re using?”
Best way to pay
There are several ways that bank customers can pay for accidentally overdrawing their checking account. Consumer advocates say the best method is the standard overdraft protection which is offered when the checking account is opened and involves a signed agreement between the bank and the customer.
The checking account can be linked to another account at the bank, such as a credit card or a savings account. When the checking account is overdrawn the linked account is tapped. The FDIC study says the most common fee associated with these accounts is a transfer fee and the median fee is $5.
Another contractual agreement can set up a line of credit where the bank agrees to lend the customer funds that will cover the overdraft. The main charge for this service, according to the FDIC survey is the interest charged on the funds advanced. The typical annual percentage rate charged is 18 percent.
A third method is the much-maligned automatic overdraft. Most checking account customers are accorded this service whether or not they realize it. There is no signed contract and there is no guarantee on the bank’s part that the overdraft will be paid. Most banks allow customers to opt out of the program but when your only notification is a mail insert there’s a decent chance you’ll toss the insert away without reading it.
Customers can incur an automatic overdraft by overdrawing their account by check, by ATM, or by debit card at the point-of-sale. The study found that overdraft fees ranged from $10 to $38, with a median fee of $27. In addition, one-quarter of the banks surveyed charged an additional fee as long as the account remained in arrears. Previous surveys have shown that these fees, sometimes as much as $5 or $10, often are charged on a daily basis.
Average fee of $29
A 2007 Bankrate study of overdraft fees found that the average fee charged by the five largest banks and the five largest thrifts in each of the top 10 metropolitan markets was $29.
Fox says that the typical overdraft fee is the same as the bank’s non-sufficient funds (NSF) fee.
“The reason that banks charge the same fee essentially for an overdraft as they do for an NSF transaction is because under the antiquated Federal Reserve rules that are still in effect the banks don’t have to comply with the Truth in Lending regulations if there’s no contract covering your overdraft and if they charge the same fee they would have charged to bounce it.”
FDIC spokesman Andrew Gray says the purpose of the study wasn’t to make any specific policy recommendations.
“The purpose was to inform the policymakers and people in the industry what’s going on in the industry — what the trends are and the findings. There’s a high level of industry interest on the regulatory side with the Fed moving forward on potential rules that govern UDAP (Unfair and Deceptive Acts and Practices). And there’s interest on the (Capitol) Hill too. So, we believe it will be an important tool and resource for policymakers to look at.”
Fox says she expects Rep. Carolyn Maloney’s (D-NY) bill, the Consumer Overdraft Protection Fair Practices Act to be reintroduced in Congress in 2009. The bill amends the Truth in Lending Act, the Electronic Funds Transfer Act, and the Expedited Funds Availability Act to beef up consumer protections when it comes to automatic overdrafts.