As efforts to curb overdraft abuse gain traction in the Senate, Bank of America, Chase, and Wells Fargo last week announced a kinder, gentler bounced check loan – but are these changes enough to fend off sweeping reforms? And will banks and regulators finally provide consumers with the full disclosure they need to make an informed decision?
Initially, overdraft protection products were introduced as a convenience intended to spare bank customers the embarrassment of a bounced check. As banks increasingly recognized the potential profits of covering short-term charges, the product was expanded to apply to debit card transactions and even transactions performed at an ATM. Many consumers are unaware that overdraft protection is part of their accounts and are under the impression that their debit card will be rejected if the transaction would overdraw their account. Instead, the bank lends them the money necessary to complete the transaction along with a $25-35 fee. Common deceptive processing procedures have also increased the frequency of overdrafts, with some banks processing the largest transactions first, instead of in the order they receive the charges, so that customers incur more overdraft charges.
The result? Banks bring in over $27 billion a year in overdraft charges—more than on credit card penalty fees.
Consumers are rightly upset, and in a bid to avoid the national outrage that led to the federal crackdown on abusive credit card practices, Bank of America, Chase, and Wells Fargo will now allow customers to opt-out of their existing overdraft programs and new customers at Bank of America and Chase will have to affirmatively opt-in to the program in order to receive overdraft protection. Chase is discontinuing its practice of processing the biggest payment first.
The changes introduced by these three banks will address some of the problematic features of overdraft protection, but meaningful protections must be applied industry-wide. Real reform means consumers should be enrolled in an overdraft protection program only if they have affirmatively opted in and charges should be levied only due to consumer behavior, not processing procedures such as gaming the order in which charges are applied.
Still, no one has addressed the biggest problem with overdraft – the programs’ failure to disclose the true cost of credit.
Since 2004, Woodstock has asked the Federal Reserve Board, which regulates overdraft programs, to require banks to disclose the full cost of using overdraft programs as an annual percentage rate, similar to the disclosures on credit cards or payday loans. FDIC chair Sheila Bair agrees: “When consumers (overdraw) recurrently, it is a credit product, and they're paying eye-popping rates.” Comparing apples to apples would mean that consumers, for the first time, would have the information they need to make an informed overdraft credit decisions.
The recent changes from Bank of America, Chase, and Wells Fargo will help consumers avoid some of most deceptive trick and traps associated with bounced check loans. But these voluntary changes must become federal regulations applied to all overdraft programs, from the largest retail bank to the smallest credit union. Opt-in requirements, charges based on actual consumer behavior instead of processing quirks, and clear disclosure of the cost of credit should be mandated for all overdraft programs.