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Consumers Bilked of $17.5 Billion in Overdraft Loans

System "Enormously Out of Balance," Report Finds

July 11, 2007

"In a system enormously out of balance, these fees amount to more than the loans themselves, which have reached $15.8 billion per year," the report said.

Abusive overdraft loans, once the exception, are now the rule in a system where not-sufficient funds (NSF) fees — historically used to discourage overdrafts — have shrunk to 31 percent of overdraft-related fees. Abusive overdraft loan fees now account for 69 percent of those fees, CRL said.

These small, high-cost loans are made by a bank or credit union to an account holder who is "in the red," often without the account holder's consent. The bank recoups the loan amount, plus a fee averaging $34 from the account holder's next deposit.

Often marketed as "bounce protection," the fee-based overdraft loan protects only the banks' fees, and should not be confused with cheaper sources of back-up funds for checking accounts, the report said.

These loans can make a small purchase, even a sandwich or doughnut, cost the unsuspecting bank customer over $30, and they can trigger a domino effect of debits that leaves the customer struggling to climb out of a negative balance.

Common banking practices, such as clearing high-dollar debits before subtracting smaller debit amounts, holding deposits longer than necessary, and failing to decline overdrafts or warn customers at the checkout or ATM if they have insufficient funds, increase the number of overdrafts suffered by consumers, CRL warned.

Reps. Carolyn Maloney (D-NY) and Barney Frank (D-MA) have sponsored a bill that would put the protection back in overdraft policy, and are holding a hearing on the bill on Capitol Hill today.

HR 946 would make abusive overdraft loans subject to Truth-in-Lending Act interest rate disclosures, as well as requiring written consent from account holders before banks could enroll them in these systems. It would also prohibit manipulations designed to increase overdrafts, and would require banks and credit unions to warn their customers before authorizing an electronic overdraft.

CRL said consumers should consider linking their checking account to a savings account or line of credit to protect themselves from the high fees of abusive overdraft loans.

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