More than 50 consumer groups have joined together to blast "fee-based overdraft programs" in place at more than 1,000 financial institutions, including credit unions.
Calling such programs a "hidden and unfair tax on the most vulnerable depositors," 54 advocacy groups, including the Center for Responsible Lending (CRL), National Community Reinvestment Coalition, National Consumer Law Center and ACORN, are urging the Federal Reserve Board to implement minimum disclosure and consumer protections for fee-based overdraft charges and "free checking" accounts.
Signees to the letter include the North Carolina Minority Support Group, representing 12 CDCUs, representatives of Kau FCU, Latino Community CU, and Self-Help CU in North Carolina.
Call For Truth-In-Lending Regs
"We are concerned that banks may be steering low-and moderate-income customers to this high-cost credit, rather than to the much more affordable credit alternatives offered to wealthier customers," the groups said in the letter.
They are calling for Truth in Lending regulation on overdraft charges
According to the groups, more than 1,000 banks and other financial institutions now offer programs that charge fees to cover check or ATM overdrafts, but they are not required to disclose their true cost as loans to consumers. "The new programs charge a flat fee (typically $20 to $35) for each overdraft, equivalent to 1,000% interest or more on an annualized basis, instead of the annual 6% to 18% interest typically charged by banks on lines of credit to more established customers," the groups said in a joint release.
"It's very simple: these are very high-cost loans, and should be disclosed as loans," said Eric Stein, a spokesperson for the Center for Responsible Lending. "If you have $80 in the bank and go to an ATM asking for $100, many banks will give you the $100 without mentioning that you're overdrafting your account. By the time you pay the $21 overdraft fee and re-pay the $20 balance a week later, you've paid a 5,475% rate of interest, and this fact was never disclosed."
The advocacy groups claimed that financial institutions "induce" consumers to open accounts with high-cost, fee- based overdraft programs by offering "free" checking; accounts they said are not free at all.
"These are linked services," said the CRL's Stein. "By marketing with the promise of 'free checking,' banks can find customers most likely to be susceptible to overdrafting their account, without being required to disclose the fee- based overdrafts as loans. These lenders take advantage of an inadvertent loophole in the Fed's regulations, since a checking account can be called 'free' so long as there is no minimum balance, even though the account may be structured with the purpose of repeatedly charging large fees."
Want An End To Practice
The groups asked in the letter to the Fed that it clamp down on banks that intentionally put accounts into overdraft by paying larger checks first. "Banks say overdraft protections aren't loans, but a consumer convenience," said Stein. "If it were, the banks would pay smaller checks first, and then pay a small number of larger checks as an overdraft-this would save consumers money. But they don't, and consumers are caught paying overdraft fees for many more checks."