WASHINGTON – The Center for Responsible Lending, a consumer lobby group financed by Self Help CU, issued a report yesterday indicating that fees earned from overdraft protection programs have become a lucrative profit center for credit unions and banks and urged Congress to enact new restrictions on the programs.
The study indicates that consumers paid $23.7 billion in overdraft fees last year–$3.5 billion of it to credit unions–making the programs the largest single source of fees collected by financial institutions. The CRL estimated that credit union fees from overdraft protection rose from $2.4 billion in 2006, more than 45%.
Release of the study, titled "Overdraft Explosion," comes as Congress is debating a broad array of new restrictions on the popular programs, including requiring consumers to actively request, or opt-in, to overdraft protection or requiring credit unions and banks to calculate the fee under the Truth In Lending disclosures as annual percentage rate, which could preclude credit unions from offering the program in most cases. That’s because the APR on overdrafts charged for small debit or ATM transactions could exceed NCUA’s 18% limit on interest rate charged.
Release of the study comes as credit unions are trying to maintain their distinction as nonprofits while Congress is debating legislation targeting predatory practices by banks on subprime lending, overdraft charges and credit card programs.
The study notes that banks assert that their customers prefer paying overdraft protection fees than to bounce checks. Credit union executives make the same assertion. But the CTR study says most overdraft fees are not paid on checks, but on debit and ATM transactions. "Overdraft fees are most typically triggered not by checks, but by debit card transactions and ATM withdrawals that could easily be denied for no fee," says the study.
In addition, says the study, common banking practices—such as re-ordering transactions from largest to smallest—increase the number of overdraft fees paid by customers rather than helping them avoid charges. Institutions also generally place no meaningful limits on how many fees a customer can incur within a given period.
Finally, because banks generally charge a fixed overdraft fee regardless of the size of the transaction covered, the fee bears no relationship to the actual cost to the institution of covering the overdraft. In fact, previous CRL research found that consumers paid about $2 in fees for every $1 in credit extended if they overdrew their account using a debit card at a checkout counter.
"These practices," says the CRL, "are especially alarming given that automatically enroll consumers into this type of program, even when lower-cost forms of overdraft protection—such as a formal overdraft line of credit or a link to a savings account—are usually available."
Leslie Parrish, author of the study, said the data for credit unions is based on the amount of total amount of fees reported to NCUA on 5300 Call Reports than extrapolated by figures used by the FDIC and well-respected industry consultants.
The CTR endorsed several curbs for overdraft protection including: requiring opt-in for all overdraft protection programs; barring overdraft fees on debit card purchases and ATM withdrawals; requiring that overdraft fees be "reasonable" based on the cost fo the financial institution; and requiring credit unions and banks to comply with Truth In Lending by disclosing the APR for overdraft fees;
