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Congress should curb overdraft loan fees

March 8, 2008

Congress Should Curb Abusive Overdraft Loan Fees, Say Advocates
GAO Report Finds Many Banks Fail To Disclose Fees to Consumers

WASHINGTON, D.C. – In a letter today, consumer groups urged Congress to rein in abusive “overdraft loan” practices after a new Government Accountability Office (GAO) report released this week underscored the need for reform. The report found that many banks fail to provide consumers with information about fees and the terms and conditions of the accounts they offer.
“The only way to ensure that consumers get the information they need about costly overdraft loan fees is to require written consent by the consumer prior to enrollment,” said Jeannine Kenney, senior policy analyst with Consumers Union. “Consumers should not be asked to pay abusive fees for a hidden service they never agreed to.”
“Bank regulations and federal legislation have left consumers unprotected from these abuses,” said Eric Halperin, director of the DC office of the Center for Responsible Lending. “It’s time for Congress to step in and do the job.”
GAO investigators made undercover visits to 185 branches of 154 depository institutions to request checking and savings account fee information and account terms and conditions. Federal law requires banks to disclose fees and interest rates to consumers prior to account opening. Even when the investigator, posing as a potential customer, requested the information, one-fifth of the financial institutions studied by the GAO did not provide a comprehensive list of fees that they charge and 33 percent failed to disclose terms and conditions of the accounts. Web-based information was even more lacking: half of the websites did not provide information on fees and 66 percent did not provide information on account terms and conditions.
“As GAO noted, the results of their secret shopper investigation was similar to the findings of previous U.S. PIRG Big Banks, Bigger Fees reports, which the Federal Reserve Board has ignored despite our letters to them,” said Ed Mierzwinski, U.S. PIRG consumer program director. “Congress should reinstate a consumer’s right to enforce the Truth in Savings Act and extend its disclosure requirements to the Internet.”
Highly criticized and costly overdraft loan fees were among those fees not disclosed in advance. With overdraft loans, banks approve a transaction and then charge fees as high as $34 per overdraft without notifying the consumer that their account lacks sufficient funds and the fee will be charged. While financial institutions market some formal overdraft loan protection services, many automatically enroll account holders in systems where the bank decides on a debit-by-debit basis whether to pay the debit and charge a fee.
According to the GAO, consumers paid over $36 billion in fees associated with checking and savings accounts at banks, thrifts and credit unions. Adjusted for inflation, overdraft fees rose 11 percent between 2000 and 2007 and were among the highest fees, on average, of all those investigated. A 2007 study by the Center for Responsible Lending estimated that overdraft loan fees alone cost consumers $17.5 billion annually.
The GAO noted that increased consumer reliance on electronic forms of payment that result in rapid or even immediate debits from accounts may be contributing to the rise in overdraft loan fee income. While electronic forms of payment are speeding up withdrawals, banks are still allowed to maintain holds for some consumer deposits for as long as 11 days. Some banks debit high-value payments prior to low-value payments regardless of the order in which the consumer made the payment – a practice that can result in more overdraft charges than if low-value transactions were paid first.
In a letter to Congress, the groups urged members to support H.R. 946, the Consumer Overdraft Protection Fair Practices Act, sponsored by Rep. Carolyn Maloney (D-NY) which addresses the concerns raised by GAO’s findings. The bill requires banks to obtain customer consent before enrolling consumers in overdraft protection loan program, to warn them when an electronic debit will result in a fee and disclose the effective interest rate of the loans. The bill also prohibits banks from manipulating deposits in order to maximize overdraft loan fees.
Sending the letter were the Center for Responsible Lending, the Consumer Federation of America, Consumers Union, the National Community Reinvestment Coalition, and the U.S. Public Interest Research Group.
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Jeannine Kenney, CU – 202-238-9249
Eric Halperin, CRL – 202-349-1859