Fed Urged to Require Banks to Get Customers’ Permission First Before Enrolling Them in Expensive Overdraft Programs

For Immediate Release

Consumers Union
Contact: 

Lauren Zeichner Bowne or Michael McCauley: 415-431-6747

Fed Urged to Require Banks to Get Customers’ Permission First Before Enrolling Them in Expensive Overdraft Programs

Consumer Reports Poll: Many Consumers Don’t Realize ATM & Debit Transactions Can Trigger Overdrafts; Most Want Opt-In Choice for Costly Overdraft Programs

WASHINGTON - Banks shouldn't be allowed to automatically enroll their customers
in expensive overdraft loan programs, according to Consumers Union, the
nonprofit publisher of Consumer Reports. The group urged the Federal
Reserve Board in a letter today to require banks to get their
customers' permission first before signing them up for high fee
overdraft loan programs for overdrafts triggered by ATM and debit
transactions.

The Fed is currently considering whether consumers should be given
the right to opt-in before banks can enroll them in overdraft programs
covering ATM and debit transactions or simply a right to opt-out after
the bank has signed them up for overdraft coverage. The Fed is
accepting public comment on these two proposals through March 30. For a
copy of Consumers Union's letter to the Fed, see: http://www.consumersunion.org/pub/pdf/overdraft-comments-309.pdf

"Most banks automatically enroll their customers in so-called
‘overdraft protection' programs, which are really high-cost loans that
cost consumers billions of dollars every year," said Lauren Zeichner
Bowne, Staff Attorney for Consumers Union. "The Federal Reserve Board
should protect consumers from unfair overdraft loan programs by
stopping the fees unless the consumer makes the choice to opt-in to the
loan program."

Banks collect an estimated $7.8 billion in fees from overdrafts
triggered by debit and ATM transactions. These overdrafts could be
prevented with a simple warning or if the transaction was declined.
Instead, most banks let these transactions go through and charge
consumers a fee for each overdraft. The FDIC found that the median fee
for overdrafts is $27, even though the average overdraft is triggered
by transactions totaling $17.

A national poll by the Consumer Reports National Research Center
found that many consumers do not understand how overdraft programs
work. According to the poll, 39 percent of consumers thought that their
bank would either deny a debit transaction or allow it to proceed
without charging a fee if it would overdraw their account. Nearly half
of those polled (48 percent) thought their ATM card would not work if
they attempted to withdraw more money than was available in their
account.
- more -
Consumers Union released the poll results in comments filed in support
of the opt-in proposal with the Federal Reserve Board. The group
opposes the opt-out proposal because the evidence suggests that most
consumers will not change their status if banks automatically enroll
them in overdraft programs.

The vast majority of consumers have accounts at banks that
automatically enroll customers in programs that allow debit and ATM
transaction to trigger overdrafts. An FDIC study found that
"institutions that use automated programs to cover overdraft
obligations accounted for almost 73 percent of deposit dollars held in
the study population banks."

Automatic fee-based overdraft programs are the most expensive option
for consumers so banks don't have an incentive to sell lower cost
services, such as linked accounts or lines of credit. The FDIC has
concluded that the fees assessed for these other types of programs are
significantly lower than for automatic overdraft loan programs.

The Consumer Reports poll found that the overwhelming number of
consumers want a real choice when it comes to overdraft programs. The
poll found that two-thirds of consumers (66 percent) said they prefer
to expressly authorize overdraft coverage, so that there would be no
overdraft loan - or fee - until they opted in to the service.
Similarly, two thirds (65 percent) said that banks should deny a debit
or ATM transaction if the checking account balance is too low.

In its comments to the Federal Reserve Board, Consumers Union also
urged the Board to declare that fee-based overdraft loans are
extensions of credit that should be subject to the Truth in Lending Act
and Regulation Z requirements to disclose their cost in terms of an
annual percentage rate. For the average overdraft, the APR would equal
4,140 percent.

The FDIC has found that banks commonly process transactions from
largest to smallest, which increases the number of overdrafts.
Consumers Union urged the Fed to restrict this practice when it issues
its new overdraft regulations. In addition, the group called on the Fed
to prohibit banks from charging fees if the overdraft was triggered
because the bank placed a hold on a customer's deposit, and to cap the
daily and monthly totals for allowable overdraft fees.

"If banks believe that overdraft programs are truly beneficial, then
they should be required to persuade their customers to sign up before
they can charge them such high fees," said Zeichner Bowne. "The Fed
should end automatic enrollment in costly overdraft programs by giving
consumers the choice to opt-in. Consumers concerned about high cost
overdraft fees have until March 30 to support these important new
rules." Consumers can learn more and submit comments to the Fed at: http://cu.convio.net/OverDraft

The Consumer Reports National Research Center conducted a telephone
survey using a nationally representative probability sample of
telephone households. 679 interviews were completed among adults aged
18+ who reported having a checking account with an ATM card or a debit
card. Interviewing took place over February 5-8, 2009. The sampling
error is +/- 3.8% at a 95% confidence level.

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