Comments filed by the nation’s leading consumer organizations today called on the Federal Reserve Board to act quickly to stop banks from offering extremely expensive, deceptively advertised “bounce protection” to low and moderate-income consumers. Preliminary estimates indicate that over 1000 banks nationwide are earning tens of millions of dollars annually for bounce protection, which can cost consumers as much as $2000 a year.
“Overdraft protection products are a deliberate, systemic attempt to hook consumers onto overdrafts as a form of high cost credit,” said Chi Chi Wu, Staff Attorney for National Consumer Law Center. “There is no question that these products are loans at outrageously high prices.”
A comment letter sent late Monday by the National Consumer Law Center (NCLC), the Consumer Federation of America (CFA) and several other national organizations called on the Federal Reserve to immediately implement a number of reforms to prevent banks from marketing bounce protection without receiving consumers’ consent or spelling out the product’s true costs.
With bounce protection plans, banks advertise to consumers that they will cover overdrafts up to a set dollar limit. The banks then charge the usual bounced check fee, ranging from about $20 to $35 for each transaction that overdraws the account. Some banks also charge a per day fee of $2 to $5 until the consumer’s account has a positive balance. In addition to writing checks, customers can borrow against their bounce protection limit using their debit cards and by making ATM withdrawals.
Bounce protection is extremely costly for consumers. A $100 advance for 30 days would typically carry at least a 243% APR. Over 14 days, the APR would be 541%. Even higher APRs of over 1000% have been charged. Some banks that promote bounce protection don’t inform consumers in the promotional materials that there are significant additional charges for this product. Moreover, by claiming that they can decide to pay overdrafts at their discretion, banks that promote bounce protection are skirting the Truth in Lending Law’s requirement that they disclose loan costs in the form of an Annual Percentage Rate.
A report accompanying the groups’ comment letter described how banks aggressively and deceptively market bounce protection as credit, with ads such as:
“Access your Paycheck Before you have it! Sound too good to be true? Well it isn’t, you can now start writing checks before you get paid without the worry of returned checks. Have you ever been shopping on the weekend and find a must-have item, but don’t have the money in your checking account to cover your check? Have you ever had unplanned expenses between paydays? There is no need to worry! With [bounce protection], you will be covered without the embarrassment of a returned check.”
“Banks are encouraging consumers to overdraw their accounts, then charging penalty fees when they do,” according to Jean Ann Fox, CFA’s Director of Consumer Protection, “Bounce Protection is payday lending without the middleman,” she said.
The consumer groups also noted that banks target low- and moderate-income consumers almost exclusively when marketing bounce protection. A small group of consumers appears to pay the bulk of bounce protection fees, with about 4% of bank customers paying about half the fees, as much as $2,000 per customer annually.
The consumer groups’ petition made a number of recommendations to the Federal Reserve, including:
- Require Truth in Lending credit disclosures for bounce protection, including the finance charge and Annual Percentage Rate.
- Prohibit banks from claiming that bounce protection is “discretionary” when they promote it as credit. Banks should not be allowed to encourage their customers to write checks without making a firm commitment to pay the overdraft.
- Prohibit banks from imposing bounce protection plans on consumers without their consent.
- Require banks to inform consumers about more reasonable alternatives, such as overdraft lines of credit and transfers from savings accounts.
- Prohibit banks from seizing Social Security, SSI and veteran’s benefits to repay bounce protection loans.
The consumer groups’ comment letter also highlighted the need for the Federal Reserve to take action on issues related to credit card fees and high cost mortgages. Joining NCLC and CFA on the comment letter were Consumers Union, the National Association of Consumer Advocates, U. S. Public Interest Research Group, and the National Senior Citizens Law Center. The comments to the Federal Reserve and an attached report on Bounce Protection are posted at www.consumerfed.org and at www.consumer.law.org.
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CFA is a non-profit association of almost 300 pro-consumer groups, which, since 1968, has sought to advance the consumer interest through advocacy and education.
NCLC is a non-profit organization specializing in consumer issues on behalf of low-income people. NCLC works with thousands of legal services, government and private attorneys, as well as organizations, who represent low-income and elderly individuals on consumer issues. NCLC filed the comment letter and report on behalf of its low-income consumers.