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Overdraft Loan Survey Finds Problems For Consumers

Consumers Pay $10 Billion in Overdraft Fees Yearly

April 24, 2006

Overdrafts • Consumers Bilked of $17.5 Billion in Overdraft Loans • Overdraft Loan Survey Finds Problems For Consumers • New Banking Regulation Tightens Overdraft Fee Disclosure Rules • Banks Levy Big Overdraft Loan Fees Without Permission, Study Finds • Consumer Groups Want Full Disclosure of Bounce Loan Costs • Bank Regulators May Limit "Overdraft Protection" Plans

A nationwide survey finds that low-income people, single people and people of color are increasingly turning to borrowing money from financial institutions by overdrawing their checking accounts, racking up interest rates that can exceed 1,000 percent.

A telephone survey of 3,310 households done for the Center for Responsible Lending shows that a mere 16 percent of bank customers account for nearly three-quarters of all overdraft loans.

"A service created as a favor for customers has morphed into a harmful practice that traps vulnerable customers in debt," said Eric Halperin, a senior policy counsel at the Center. "Some banks now realize that trapping borrowers and charging them a $25 fee for a $20 overdraft loan is a pretty good scam."

Financial institutions are increasingly turning to fees to increase their income. Of the estimated $10.3 billion in overdraft fees Americans pay each year, the survey indicates that $7.3 billion comes from repeat borrowers.

The Center for Responsible Lending calls on the Federal Reserve and other regulators to:

• Require disclosure of the interest rates on overdraft loans.

• Require borrowers' explicit consent before signing them up for these programs.

• Require warnings when ATM and debit-card transactions will trigger fees and allow customers to opt out of the transactions.

• Require institutions to report the numbers on their overdraft loans, which would show the impact of these programs on borrowers.

• Prohibit repeated overdraft loan charges within a quarter.

It's Predatory

Overdraft fees aren't generally included in discussions of predatory lending, which drains more than $25 billion from low-wealth families in the U.S. each year, but the CRL says they should be.

"Though predatory mortgage loans and payday loans receive the lion’s share of attention as predatory practices, overdraft loan fees comprise about a third of that $25 billion," the organization said.

Earlier CRL research estimates that checking account customers pay more than $10.3 billion in overdraft loan fees every year. Approximately, three quarters of that, $7.3 billion, is collected from repeat borrowers, rather than one-time users.

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