[Senate Hearing 111-502]
[From the U.S. Government Publishing Office]
S. Hrg. 111-502
PROTECTING CONSUMERS FROM ABUSIVE
OVERDRAFT FEES: THE FAIRNESS AND
ACCOUNTABILITY IN RECEIVING OVERDRAFT COVERAGE ACT
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE FAIRNESS AND ACCOUNTABILITY IN RECEIVING OVERDRAFT
COVERAGE ACT IN ORDER TO PROTECT CONSUMERS FROM ABUSIVE OVERDRAFT FEES
__________
NOVEMBER 17, 2009
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Amy Friend, Chief Counsel
Catherine Galicia, Counsel
Lynsey Graham Rea, Counsel
Deborah Katz, OCC Detailee
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
TUESDAY, NOVEMBER 17, 2009
Page
Opening statement of Chairman Dodd............................... 1
Prepared statement........................................... 31
Opening statements, comments, or prepared statements of:
Senator Vitter............................................... 4
Senator Brown................................................ 4
Senator Reed................................................. 6
Senator Merkley.............................................. 6
Senator Bunning
Prepared statement....................................... 32
WITNESSES
Mario Livieri, Consumer, State of Connecticut.................... 8
Prepared statement........................................... 32
Jean Ann Fox, Director of Financial Services, Consumer Federation
of
America........................................................ 8
Prepared statement........................................... 33
Frank Pollack, President and Chief Executive Officer, Pentagon
Federal
Credit Union................................................... 10
Prepared statement........................................... 51
John P. Carey, Chief Administrative Officer, Citibank NA......... 12
Prepared statement........................................... 52
Michael Calhoun, President, Center for Responsible Lending....... 14
Prepared statement........................................... 56
(iii)
PROTECTING CONSUMERS FROM ABUSIVE OVERDRAFT FEES: THE FAIRNESS AND
ACCOUNTABILITY IN RECEIVING OVERDRAFT COVERAGE ACT
----------
TUESDAY, NOVEMBER 17, 2009
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 3:07 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. Senator
Shelby, I have been notified, is not able to be here right now,
but he wanted us to start and go ahead, and I appreciate that
very much. And let me welcome our witnesses this afternoon to
our hearing on ``Protecting Consumers from Abusive Overdraft
Fees: The Fairness and Accountability in Receiving Overdraft
Coverage Act.'' That is a long title. There is an acronym in
there someplace here for all of this. We appreciate your being
here. We welcome the audience who is here as well. I welcome my
colleague Sherrod Brown of Ohio, a Member of the Committee, and
members of staff who are here and other members who will come
in and come out. I should notify my colleagues as well that I
am told there may be a vote around 3:45. What I will try to do
is continue the hearing, and we will try and stagger people
here so we do not interrupt the flow of this and allow our
witnesses to be able to proceed. Senator Reed of Rhode Island
has just joined us as well.
Let me begin with a brief opening statement after which I
will ask my colleagues if they have any quick opening comments
they would like to make, and then we will turn to our witnesses
and hear from them, and then have a series of questions for you
this afternoon regarding this bill and related matters.
I will begin by again thanking each and every person for
being here this afternoon. Our job on the Banking Committee,
this Committee, is to make sure that regular folks get a fair
deal from their lending institutions and other financial
institutions. The whole notion that depositors in a bank,
people who buy insurance policies, people who buy shares in our
public companies, people who have mortgages, all of those
financial activities we have got to keep in mind as we talk
about the stability of our financial institutions, the safety
and soundness of financial institutions. It is also critically
important to talk about the safety and security of consumers
who depend upon these institutions serving their interests
well. And this brings us to the subject matter this afternoon.
For too long, credit card companies have made tremendous
profits--excessive profits, in my view--by charging consumers
outrageous fees or raising rates whenever they felt like it, it
seemed. Our Committee approved legislation to stop those
abusive practices, legislation that passed the Senate earlier
this year with overwhelming bipartisan support, and it was
signed into law by President Obama later this spring, and we
thank him for that.
Today we need to discuss another practice that I find in
too many instances abusive, and that is, misleading overdraft
programs that encourage consumers to overdraw their accounts
and then slam them with too high fees.
Now, let us be clear. People have a responsibility. You
begin there. It is a responsibility each one of us has to
manage our personal accounts as well as we possibly can and to
spend within the means that we have available to us. And banks
have a right to charge a fair fee for legitimate services that
they provide. To do otherwise would expect them to perform or
conduct activities that would leave them disadvantaged.
But lending institutions often add overdraft coverage to
consumer accounts without informing them or giving those
consumers a choice in whether or not they want to have an
overdraft fee or be notified, in fact, that they have overdrawn
and allow them then to deal with it accordingly.
The overdraft charge is usually a high fee. A consumer can
pay as much as a $35 fee for overdrawing on a $2 transaction,
and we are going to hear specifically about just such a case
this afternoon.
In some cases, a consumer can rack up multiple overdraft
fees in a single day without ever being notified until days
later that, in fact, they have overdrawn their accounts. Many
institutions also charge additional fees for each day an
account is overdrawn. The longer it takes you to realize there
is a problem, the more fees, of course, you can be charged.
Sometimes banks will even rearrange the order in which they
process your purchases, charging you for a later, larger
purchase first so that they can charge you repeated overdraft
fees for earlier, smaller purchases. So the truth is that the
service of overdraft protection often serves as nothing more
than a way for lending institutions to profit by taking
advantage of their very own customers.
Last year, American consumers paid $24 billion in overdraft
fees, and the Financial Times recently reported that banks
stand to collect a record $38.5 billion in overdraft fees this
year--almost double what they collected a year ago. According
to the Center for Responsible Lending, nearly $1 billion of
those fees will come from young adults; another $4.5 billion
will come from senior citizens like Mario Livieri, one of our
witnesses today and a resident of Branford, Connecticut. We
thank him for being with us.
I will let Mario tell his own story about how an initial
overdraft of $2 ended up in $140 overdraft coverage fees in
just a matter of days. The method his bank used will sound
familiar to many, many Americans. Families in my State of
Connecticut and across the country are already struggling, of
course, to make ends meet. We all know that, and these unfair
and excessive charges are making it even harder on them.
Last week, the Federal Reserve, to its great credit,
announced that they will require banks to get a consumer's
consent before enrolling them in an overdraft coverage program.
This was a welcome but long overdue announcement for American
consumers, and we need to do far more to protect them from
these abusive practices. And that is why I introduced the
Fairness and Accountability in Receiving Overdraft Coverage
Act. My colleagues Senator Schumer, Senator Reed of Rhode
Island, Senator Brown, Senator Merkley, Senator Menendez,
Senator Levin, Senator Reid of Nevada, and Senator Franken have
joined us as cosponsors of this bill. And like the Federal
Reserve's rule, our legislation would establish an opt-in rule
for overdraft coverage for ATM and debit transactions.
Customers would now have to consent before overdraft coverage
is applied to their account.
Our legislation would go further, however, and limit the
number of overdraft fees that banks can charge to one per month
and to no more than six per year, and that fee would have to be
reasonable and proportional to the cost of processing the
overdraft. Our legislation would also put a stop to the
practice of manipulating the order in which the transactions
are posted and require banks to warn customers if they are
about to overdraw their account, giving them a chance to cancel
the very transaction they are about to engage in.
Finally, our legislation would require banks to notify
customers promptly when they have overdrawn an account through
whatever means the customer chooses--e-mail, text messages--so
that they can quickly restore their balances and avoid
unnecessary future fees.
Abusive overdraft policies are blatantly unfair, in my
view, and the banks know it. After it came out in the press
that I was working on this legislation, a few of the large
institutions took their own steps toward responsible reform, I
assume out of the kindness of their hearts, and I welcome it as
well. It was a thoughtful thing to do.
Last week, the Federal Reserve released a new rule that
will require banks to get a customer's consent before enrolling
them in an overdraft coverage program. That is a very good
start, and, again, I applaud them for doing so.
But our legislation goes further, and I remain committed to
ensuring that American consumers are going to be further
protected. And let us just remember, regulators did little
while consumers were taken advantage of by these very
misleading and unfair overdraft programs for years, despite the
fact these regulators had the power for years to step in and
put an end to these practices.
This is exactly why we need, in my view, an independent
Consumer Financial Protection Agency that would be focused on
preventing these abuses and addressing them quickly rather than
having to wait week after week, month after month, for the
Congress to pass legislation. It should not take that. Folks
such as Mario Livieri deserve a lot better. He is one person
here today, but there are literally millions like him across
the country. And I remember committed, as my colleagues, I
believe, do, to ensuring that American consumers are protected,
and I look forward to our discussion that we are going to have
this afternoon.
With that, let me turn to my colleagues. Senator Vitter,
would you care to be heard on this at all for a minute or so?
We are going to give our colleagues a chance to be here, and
then we will get to our witnesses.
STATEMENT OF SENATOR DAVID VITTER
Senator Vitter. Thank you, Mr. Chairman. Thanks for holding
this hearing, and I wanted to come by and offer a few thoughts.
Unfortunately, I will not be able to stay for the entire
hearing.
This is an important topic, and I am sure there are abuses
in this area of banking. I am very concerned, however, as
Congress often does, that we are going to push the pendulum to
another extreme and create problems--perhaps as we are solving
others, but create other problems. I believe that happened with
some aspects of the credit card legislation. I would rather it
not happen here.
In particular, I am concerned about closing certain
services and opportunities to consumers and also shifting the
cost that should be borne by consumers, depending on their
behavior, to consumers more broadly. I am very concerned about
that. It seems to me there is no way that this legislation, as
it is currently drafted, would do that since, as the Chairman
just said, it sets a limit on overdraft charges and fees no
matter what a particular consumer's practice is, no matter what
number of overdrafts may happen.
Now, it seems to me if that is the case at the end of the
day, then we are going to shift costs from less responsible
consumers to the entire class of consumers, including those who
act more responsibly. And I do not think that is the proper
direction to move in.
I would hope we can focus on real problems and real abuses
and close those without that massive cost shifting and without
closing the door of certain opportunity and service to
consumers who may want them.
So those are my thoughts and concerns going into the
process at the front end, and I look forward to working with
the Chairman and the entire Committee as we move forward. Thank
you, Mr. Chairman.
Chairman Dodd. Well, Senator, thank you. Actually, you
raise very legitimate issues, and that is why we have hearings
like this, to hear these ideas and thoughts, and I welcome
them. So I thank you for raising them. You will not be
surprised to hear it is not the first time I have heard them,
as have others who have expressed those very concerns as well,
so I appreciate your bringing them up.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for convening this
hearing and for your leadership on this issue. Thank you all,
to all five members of the panel.
I am proud, as Senator Dodd is, to be an original cosponsor
of the FAIR Overdraft Coverage Act. We need this bill because
too many Americans pay too much for a service that is supposed
to be a courtesy. When I think of the nearly $24 billion in
overdraft fees Americans paid last year, $900-plus million in
my State of Ohio alone, ``courtesy'' is not the word that comes
to mind.
Fees generated from this so-called ``courtesy'' have been
growing by leaps and bounds. The Center for Responsible Lending
tells us the average overdraft fee was about $35. That means
that if a woman in Toledo or a man in Akron purchases something
and it is a few dollars short, they can be charged a fee 10,
20, 30 times the amount of the overdraft. One of the things we
have to keep in mind is that these are real people, real
families struggling, when banks are placing them deeper in debt
by imposing high overdraft fees. They are people like Kerry
from Toledo, who was overdrawn by $6, but ended up paying $113
in fees. If that were a loan, she would have paid nearly 1,700
percent in interest.
The Center for Responsible Lending reports that 93 percent
of all overdraft fees are paid by only 14 percent of account
holders, and these account holders are most often folks who
have lower income, are often young, are often nonwhite. These
are people like Charles from Wadsworth, Ohio, near Akron. A
recent college grad who never paid an overdraft fee in his life
until a couple months ago, his problem was that when he checked
his balance through his ATM, the balance report he received did
not deduct pending transactions. So while he thought he had $80
in his account, he only had $15. He paid for three items
totaling less than $20, but when the bank reconciled the
transactions, he had $80 in fees charged to him.
Overdraft protection loses its meaning if consumers are at
greater risk with that protection than without it.
Understanding the cautionary notes or words from Chairman Dodd
and the comments from Senator Vitter that people need to be
responsible, this is something that has just gone too far.
We need to pass the FAIR Overdraft Coverage Act, reduce the
amount of these fees, and give consumers more control over
their bank account.
In closing, I just want to share a frustration that I hear
too many times from too many people in my State. People
believe, rightly or wrongly, each of the following things:
They believe that our economy was almost brought to its
knees because of the financial services industry. They see that
Government bailed out the financial services industry. They see
that many of the executives of the financial services industry
get big bonuses. And they see people in the companies in the
financial services industry charge these kinds of fees to
generally working-class consumers. And that just doesn't--I
just hope the people from the industry on this panel and others
in the audience understand the frustration, fair or not in
those assessments, understand the frustration that so many
Americans have with how their Government is treating them, how
Wall Street is treating them, and how banks--and I do not lay
this at the feet of the community bankers, to be sure, but how
banks are treating them and how their lives are going in these
very tough economic times.
Chairman Dodd. I thank the Senator for that comment, and we
do not often enough draw the distinction between community
banks and regional and large investment banks. And I always
promise myself I am going to draw that distinction when we
gather because it is important. To use the word ``banks''
across the board draws in an awful lot of people who, frankly,
do a very good job and are far more customer sensitive in their
behavior, so we thank you for those comments.
Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Well, thank you, Mr. Chairman. Thank you for
holding the hearing, and I want to thank the witnesses, and I
want to echo your comments about community banks. I was in
Rhode Island yesterday, and the two largest participants in our
SBA programs are community banks, not the big national and
regional banks, and they actually have avoided some of the
excesses, and they are well positioned to help out. So they are
an example that should be emulated, and I think you are right
to point that out.
I am pleased not only to be here today, but also to be a
cosponsor of Senator Dodd's FAIR Overdraft Coverage Act. We are
in the midst of significant financial reform legislation, and I
hope we can include aspects of this bill in this legislation,
if not pass it separately. The Federal Reserve has taken some
steps, but I think we have to do more. And the legislation that
Senator Dodd has proposed will do that, and I think it will
provide a sense of opportunity, transparency, and choice for
customers.
Senator Brown's comments about perceptions I think are
absolutely right. I think most people had a suspicion as they
saw during the first decade of this century that no real
increases in income, yet financial executives were enjoying
huge, huge paydays, and when they saw insurance deteriorating
for working families, that the deck was stacked against them.
And I think the more we learn about what happened in the
financial situation, the more that suspicion is buttressed by
some evidence about how, when large institutions get in
trouble, they get help, but when families across the country
need help with avoiding foreclosure or avoiding excess charges,
it is their responsibility.
So I think this legislation is timely, appropriate, and
extremely important. Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator.
Senator Merkley.
STATEMENT OF SENATOR JEFF MERKLEY
Senator Merkley. Thank you very much, Mr. Chair. And my
mind goes back to our credit card discussion earlier this year.
I had Maggie from Salem, Oregon, who had had a credit card
account for about 15 years, always paid on time, could not
believe it when she found out she had a late payment. So she
called up her bank and said, ``I always pay on time. I always
pay at the same time. How could I possibly be late?'' And the
credit card representative checked and said, ``Well, here is
the thing. We got your payment on time, but if you will notice
in the contract, we can sit on the payment for 10 days, and we
did, and when we posted it, it is now late and you owe us a
late fee.''
And Maggie said, I think, the phrase that captures the
sense of millions of Americans, she said, ``How can that be
fair?'' And that is the same standard of reasonableness and
fairness that we need to bring to this conversation.
I think any bank customer who finds out that their bank has
reordered their transactions in order to multiply the number of
overdraft fees that they are being charged would say, ``How can
that be fair?''
So certainly this is an important conversation. I am
pleased to be a cosponsor, and I look forward to the testimony.
Thank you.
Chairman Dodd. Thank you very much, Senator. I appreciate
that.
I am going to leave the record open for our other
colleagues as well for any comments they may want to make,
opening comments as part of the bill.
Now let me introduce our panel of witnesses. I have already
introduced, in a way, Mario Livieri, who is a constituent, as I
pointed out earlier. He has traveled here from Branford,
Connecticut, and will testify before us with regard to his own
personal experience. He and I have talked about this before. We
met, actually, in Connecticut several weeks ago, and I thought
his story was so compelling that he deserved a national
audience for his story. So we thank you, Mr. Livieri, for being
with us.
Jean Ann Fox is the Director of Financial Services for the
Consumer Federation of America. CFA is a nonprofit association
of 300 consumer groups, and Ms. Fox advocates for issues
including financial services, electronic commerce, and consumer
protection.
Frank Pollack is the President and CEO of the Pentagon
Federal Credit Union, which has close to 1 million members and
whose core membership comprises men and women of the Army, Air
Force, Coast Guard, and Department of Homeland Security, and we
thank you very much, Mr. Pollack for being with us.
John Carey is the Chief Administrative Officer for Consumer
Banking in North America at Citigroup. He is responsible for
external matters impacting his company's business, including
business practices, external affairs, and community,
regulatory, and governmental relations, and we thank you very
much, Mr. Carey, for joining us.
Michael Calhoun is the President for the Center for
Responsible Lending, where he has held that position since
2006. The center is a research and policy institute focusing on
consumer lending and protection.
Again, we are very pleased to have all of you with us
today, and we thank you. And, by the way, your full opening
statements and comments and any supporting information you
would like the Committee to have will be included in the
record.
So we will begin with you, Mr. Livieri. Again, we are very
grateful to you. You have to pull that microphone close to you.
It is right in front of you. And there is a button down there
that should active the microphone.
Mr. Livieri. I got it.
Chairman Dodd. You got it. You are all set. You are on.
STATEMENT OF MARIO LIVIERI, CONSUMER, STATE OF CONNECTICUT
Mr. Livieri. Good afternoon, Chairman, Senator Dodd, and
esteemed Members of the Committee. My name is Mario Livieri. I
am a senior citizen and live in Branford, CT. I am honored to
be invited here today to share my story with you. I hope that
it will help you do right by consumers like me, who have been
treated unfairly and misled by their bank about overdraft fees.
Until a few months ago, I was a customer at a prominent
bank in my town. I am no longer a customer there because I do
not think they treated me fairly.
Over the summer, I wrote a check for $200. When the check
was cashed, it overdrew my checking account by $2.17. My bank
charged me a $35 fee for my $2.17 mistake. I had no idea I had
overdrawn my account. If I had known, I would have immediately
deposited money in the account to cover the overdraft.
But, instead, it took the bank over a week to notify me of
the overdraft. By the time they finally got around to telling
me my account was overdrawn, I had made a few other
transactions with my ATM card totaling $100, and the bank
charged me $140 in fees.
Now, I owned a small business--a building and lumber
company--when I was a young man, and I had been in business for
over 50 years. I am quite sure they would have never done this
to me 50 years ago. And I know that it is important to stick to
a budget. But I also know that you do not get anywhere in the
world of business by treating your customers unfairly.
So I called the bank, and after a whole bunch of arguing,
they agreed to refund one $35 charge, but insisted that I pay
all of the other fees. I told them I did not think it was fair.
They told me it was legal. As a matter of fact, the people that
told me it was legal was the thrift institution in Washington,
DC.
I have been in business too long for that to be an
acceptable answer. If that sort of practice--running up
ridiculous charges for an overdraft ``protection'' program I
didn't even sign up for--is legal, it shouldn't be. And it
certainly isn't fair.
I am glad my Senator, Chris Dodd, is doing something about
it. And I am grateful to the entire Committee for the
opportunity to discuss my story with you. There are a lot of
folks like me in your States who are in the exact same
situation. They make a little mistake and get slammed for it by
their bank.
I hope that we can stop abusive overdraft coverage
practices so that no one else, no matter what bank they use,
has to go through what I went through.
Thank you for inviting me here today and thank you for
fighting the good fight on behalf of us consumers. Thank you.
Chairman Dodd. Mr. Livieri, thank you very much. I
appreciate that.
Jean, we thank you for being here with us today.
STATEMENT OF JEAN ANN FOX, DIRECTOR OF FINANCIAL SERVICES,
CONSUMER FEDERATION OF AMERICA
Ms. Fox. Thank you, Chairman Dodd and Members of the
Committee. I am Jean Ann Fox, Director of Financial Services
for Consumer Federation of America. I am testifying today on
behalf of the national consumer groups listed on our testimony.
We enthusiastically support Senate bill 1799, the FAIR
Overdraft Coverage Act. We also commend you for the proposal to
create a Consumer Financial Protection Agency, which would not
only implement the FAIR Overdraft Coverage Act, but also
enforce the law and clamp down on all high-cost loan abuses. So
thank you for doing that.
In docket after docket, the Federal Reserve has failed to
protect consumers from abusive overdraft lending. The rule that
was announced last week will be a help, but it is not
sufficient to protect consumers from the abuses that are
inherent to overdraft coverage by banks. Along with recently
announced changes in big bank overdraft programs, the rules are
too little, too late, to provide the reforms that American
consumers need and want.
Banks extend credit when they pay a transaction that
overdraws a consumer's checking account. Instead of denying a
debit purchase at the point of sale or a cash withdrawal at the
ATM on insufficient funds, banks permit this transaction to go
through, loan the bank's money, and then the largest banks
charge a typical $35 fee for the extension of that credit.
These loans are not authorized by consumers. No consumer opts
in typically on overdrafts that are provided as a ``courtesy''
by the bank. Consumers do not apply for these loans. They do
not get truth-in-lending cost disclosures. They do not get a
contract that the bank promises to cover overdrafts up to a
certain limit. They do not get a warning when the transaction
will trigger an overdraft and a fee. And their creditworthiness
is not evaluated when this credit is extended.
These loans are for small sums of money. The FDIC study
released last year found the typical debit card purchase
overdraft was just $20, so banks are charging $35 to loan $20
for a few days. And the typical overdraft did not exceed $78 in
the FDIC study. These small loans come at astronomical cost
with bank fees up to $39, the highest we found in a most recent
survey. Banks pile on extra fees if you do not repay in a day
or two. The majority of the largest banks charge sustained
overdraft fees. You can be charged $35 for your first $5
overdraft. If you do not pay that back in 5 days, it now costs
you $70. And these overdraft loans are taken out of the next
deposit into consumers' bank accounts, making the banks the
first creditor who gets paid out of your next paycheck or your
Social Security check deposited to your account. And these
loans are extremely expensive. For the FDIC's typical $20 debit
overdraft, if the fee is just $27 and you get a whole 2 weeks
to pay it back, that is 3,520 percent APR, which leads us to
describe bank overdraft lending as payday loans as done by
banks.
These loans come with balloon payments. You do not get an
affordable repayment schedule. These get paid first, which can
cause other checks consumers have written to bounce and trigger
more bounced check or overdraft fees. And banks use tricks and
traps to drive up the number of transactions that will overdraw
by ordering the largest withdrawals first so that that wipes
out your balance, and then they can charge you overdraft fees
on all the other smaller transactions.
This is not what consumers want to have happen. In polling
that CFA did this summer, we found that 71 percent of American
consumers say they want banks to get permission to cover
overdrafts for a fee; 85 percent of Americans want banks to be
required to disclose on the ATM screen if a withdrawal will
trigger an overdraft; 70 percent say that banks should pay
transactions in the order they receive them; and in polling
done for Consumers Union, they found that consumers expect that
if you do not have enough money to cover a transaction and you
use your debit card, the bank will reject it. That is not
typically the case.
The consumers who are trapped in overdraft are the ones who
can least afford the most expensive form of credit that banks
offer. About a fourth of bank customers paid the $24 billion in
overdraft fees that were collected last year, and they are most
likely young, low-income, and minorities.
I would be glad to answer questions later about the
specific provisions of the bill, but let me wrap up by saying
fee-based overdraft lending traps consumers in astronomically
expensive debt and deprives families of money that they need to
meet their basic needs. These are not a convenience. Overdraft
loans are dangerous, high-cost loans that must be reined in,
even for people who agree to use them. We urge this Committee
to reverse the drain on vulnerable consumers' bank accounts by
supporting Senate bill 1799.
Thank you.
Chairman Dodd. Well, thank you very, very much, Ms. Fox. We
are grateful to you for your testimony and support.
Mr. Pollack, we welcome you to the Committee. You are very
gracious to be here today, and we are anxious to hear your
perspective.
STATEMENT OF FRANK POLLACK, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, PENTAGON FEDERAL CREDIT UNION
Mr. Pollack. Thank you, Mr. Chairman, and thank you to the
Members of the Committee. On behalf of the board of directors
and management of the credit union, I would like to thank you
for this opportunity to testify today. As you mentioned
earlier, we serve the military and Department of Homeland
Security, and we are a conservative institution that is
particularly fee averse. Our total fee income represents less
than 10 percent of our total income in any given year.
While our first priority is to remain safe and sound, our
strategic objective is to provide products and services that
offer high rates on savings, low rates on loans, and low fees.
We have been recognized in the military community as a leader
with our overdraft protection programs. And we have always
viewed overdraft protection as a particularly valuable service
for the military member. In their line of work, maintaining
good credit is important to their military readiness and
ultimately their career. Thus, our program dates back more than
20 years, preceding most of the overdraft programs that have
come into question today.
From the very beginning, we have believe that members
should either qualify for our low-cost line of credit, or we
should not allow overdrafting of their accounts. We would note
that with more than two decades of experience, we find that our
members are appreciative of that approach.
We offer a line of credit attached to a member's checking
account with a minimum of $500 overdraft protection. This
service is offered to every creditworthy member who opens a
checking account. Forty-five percent of our active checking
account members have such a line of credit. As a result, our
programs have always been opt-in. We believe strongly that
every consumer must have opt-in rights.
At the Pentagon Credit Union, we charge 14.65 percent
annual percentage rate calculated on a simple interest basis
with no other fees and charges for overdrafts. We believe that
by using a line-of-credit product which is formally recognized
as a loan and, thus, subject to all of the Federal lending
disclosure requirements, the cost to the consumer is both fully
disclosed and properly proportional to the amount that they
overdraw their account by.
At PenFed, we post transactions smallest to largest to
avoid charging unnecessary overdraft and nonsufficient fund
fees. We provide separate mail notifications for each overdraft
event so that our members are kept fully aware of the status of
their accounts. We believe that rapid notification is important
to those members so that they can pay off their overdraft as
quickly as possible.
In short, we have attempted to craft a product that is
truly consumer friendly. We would make note of the fact that we
have not received a single complaint from our membership
regarding the order in which we process items in more than 20
years.
Nevertheless, there are members who do not choose to opt-
in, and there are those who cannot qualify for a line of
credit. These members are not allowed to overdraft their
account with the limited exception of an offline debit
transaction where we are required by contract to process such
payments. In those instances, we do charge a $30 fee. This does
not happen with great frequency, and we recognize that the
proposed bill would eliminate that fee. We support that. We
also recognize that the recent action of the Federal Reserve
Bank will prohibit such a fee. However, we do believe that
merchants and networks should be required to process all
transactions in real time, which would eliminate this exception
circumstance.
As an organization, we are constantly focused on process
improvement. We felt that there was more that we could do for
our military members in the area of overdrafts. This summer, we
made a decision to eliminate as many of the nonsufficient fund
fees that our military members incur as we possibly could. The
product we created is called ``Warriors Advantage.'' It waives
the checking account fees associated with instances of
insufficient funds for up to two occurrences in any rolling 3-
month period. Importantly, this program is separate and
distinct from our overdraft line of credit and goes beyond the
minimum requirements of the proposed legislation.
Under this program, a military member without overdraft
protection can use all of the money available in their
checking, plus their line of credit, and still have two
additional instances of return items every 90 days with no fee
or charges beyond the interest on their loan. Our research
indicated that this program would result in just over 98
percent of our military members with checking accounts never
experiencing a fee. The Warriors Advantage program represents
only a beginning for us. We intend to extend this program to
our entire membership, and we are already at work on our next
version, which we hope to roll out in the summer of 2010.
So thank you very much for this opportunity to testify. We
are indebted to you for the work that you are doing on behalf
of the American consumer.
Chairman Dodd. Mr. Pollack, we thank you very, very much.
Mr. Carey, we welcome you to the Committee. I want to point
out, we say this to you because oftentimes we have these
discussions and hearings and people like Citibank and others
are the subject of our concerns, to put it mildly, but I would
like it to reflect here that Citi, overdraft fees from ATM and
point of sale, PIN transactions, and debit transactions, when
there are not sufficient funds in the account, real-time
posting of debit and ATM transactions are part of Citi's
program. So we compliment Citi for those actions. Because we do
often sit here and berate you for what you are not doing, I
want to compliment you when you do something right. So I want
that to be reflected.
STATEMENT OF JOHN P. CAREY, CHIEF ADMINISTRATIVE OFFICER,
CITIBANK NA
Mr. Carey. Well, thank you, Senator. I appreciate it. Thank
you very much for the opportunity----
Chairman Dodd. There are still other things I want you to
do. You are not off the hook.
Mr. Carey. I understand that. I understand that.
Thank you very much for the opportunity to talk about the
bill and to offer some recommendations for improving the choice
with overdrafts.
You know, we have heard today that the policies that some
of the banks employ in applying their overdraft protection,
particularly with ATM and debit transactions, can be very
confusing, frustrating, and often expensive for consumers,
especially for those people who don't manage their daily
finances that closely. There are many stories that we have all
heard where a consumer incurred an unexpected fee for a
transaction that could easily have been avoided had there been
better information at the point of sale. It is the $5 cup of
coffee that ends up costing $40 after the overdraft fee is
slapped on.
So at the outset, it is important for me to be clear, and
Senator, I think you have made it very clear, is that at Citi,
we help customers avoid overdraft fees. We have never
authorized--never authorized--ATM or debit transactions if we
know the money is not there. And therefore, we do not charge an
overdraft fee when a customer attempts such a transaction.
Moreover, through incentive programs with our personal
bankers, we encourage our customers at the account opening and
throughout their relationship with us to link a savings account
or a line of credit to cover potential overdrafts and avoid
either an overdraft fee or a bounced check fee. This practice
is one of the best ways to reduce the risk and the costs of
overdrafts.
Separately, we do allow overdrafts for checks and ACH
transactions. We do this because the situation is very
different. With checks and ACH transactions, customers have the
sole control over the transactions. We cannot know what amount
they are writing on the check or exactly when the check was
written. In those cases, we mitigate risk for our customers and
ourselves by allowing customers a cushion to cover a small
overdraft. Further, in order to avoid large overdraft
situations, Citi will not authorize a payment beyond a
reasonable amount.
Today, fewer than 20 percent of Citibank customers are
charged even one overdraft fee a year. Of those, only a few are
charged more than once annually. We think that the reason for
this is because we decline ATM and debit transactions when the
funds are not available.
While we have concerns with aspects of the bill, we fully
support the goal of protecting consumers from unnecessary
overdraft fees. We support the additional efforts to improve
consumer awareness regarding overdraft protection and
alternative payment options. Moreover, we agree that banks
should provide more transparent and easy-to-understand
disclosures so that consumers can better manage their own
money. We believe in the importance of giving consumers the
ability to make choices based upon their individual
circumstances as they manage their finances from 1 day to the
next. That is why we believe there are opportunities for reform
to provide consumers with even greater choice and control
related to overdraft fees.
Of course, most consumers do not overdraft and never will.
Still, consumers may not fully understand the effect of opting
into or out of overdraft coverage will have on them over time.
In the future, they may find themselves in the circumstance
where they wish they could proceed with a specific transaction,
even if they know they would be charged a fee. I am not
referring to the $5 cup of coffee that ends up costing $40, but
rather, it is about someone being stranded without cash in a
foreign country and being able to access $100 from an ATM even
if it costs them $135. Having previously opted out would
eliminate the flexibility.
So it is our position that consumers should be given the
choice of opting in at the point of sale. The choice and
control should lie squarely in the hands of the informed
consumer. So consumers should be alerted at the ATM or debit
terminal that the transaction will overdraft their account and
they should be able to choose at that moment whether or not
they want to incur the fee and have them go forward with the
transaction. In the absence of the choice, perhaps the
transaction should be denied.
Understandably, updating the technology to provide such
transparency will take time and it will be incumbent upon the
merchants, the networks, and the banks to help create this
functionality at the point of transaction.
With this point of transaction approach, all the issues in
the bill about how many fees can be allowed, whether those fees
are reasonable, exactly when the customer should be notified,
and the other concerning policy and business implications of
those points will all become moot. Informed consumers can
decide whether a fee is too high or being charged too often
based on their personal needs. In short, consumers need to
decide.
As I have noted, we agree with the overriding goals of the
bill. However, we have some important points of concern in the
current bill that should be addressed. Some, I have noted here,
and others in more detail in my submission.
I thank you very much for the opportunity to participate in
this hearing.
Chairman Dodd. Thank you very much. Very creative thoughts.
We appreciate that.
How are you doing this afternoon? It is good to have you
with us here today, as well, Mr. Calhoun, and we thank you for
coming before the Committee.
STATEMENT OF MICHAEL CALHOUN, PRESIDENT, CENTER FOR RESPONSIBLE
LENDING
Mr. Calhoun. It is good to be here, Chairman Dodd and
Members of the Committee. Thank you for your leadership in
protecting consumers, especially enacting the CARD Act
recently, and thank you for inviting us to testify today.
Nearly 5 years ago, Federal regulators studied overdraft
fees and found serious problems. They issued joint guidance
advising banks to consider prohibiting overdraft fees on debit
cards and to limit the fees. Had this guidance been enforced,
we would not be here today discussing the explosion in the
amount and frequency of these fees. Instead, the regulators
chose to not enforce the guidance, and in the intervening
years, American families have lost an additional $70 billion.
Current overdraft practices are a pipeline out of the
pockets of American families. Federal regulators have the
present authority and duty to stop this abuse. Their hands are
on the valve to cutoff the siphoning of consumers' money, but
they refuse to cut it off.
I am going to focus my comments today on overdraft fees on
debit cards, since this is the largest and fastest-growing
source of overdraft fees.
Overdraft fees on debit cards are abusing and should be
prohibited. It is a penalty fee totally unrelated to the cost,
and the bank can stop the bank by doing as Citi does, just
declining the transaction, and there is no NSF fee for the
customer or the consumer when that is done. This is a little
like a town with an intersection with a green traffic light,
and then the town imposes a high fine on travelers who enter
the intersection.
Today, banks manipulate bank accounts to generate fees and
then oppose these high penalties. There are lower-cost
alternatives, as have been mentioned today, but these abusive
high fees are driving them out of the market. Several banks
have discontinued alternative products, like lines of credit,
because of the revenue from high overdraft fees.
Overdraft fees are turning debit cards into high-cost
credit cards without the protection of CARD Act. These fees
cause immense damage to families. More than 27 million families
pay over five overdraft fees each year. It is taking families
out of the financial mainstream, as we run into counselors who
feel that they cannot tell families to get a bank account
because these overdraft fees drive them into a financial hole
they can't get out of.
These abusive overdraft fees also harm the banking industry
and our overall economy. They disadvantage responsible programs
who don't charge these fees, and it turns our banks into a
competition of who can enroll the most customers in overdraft
programs and then deplete their accounts rather than which bank
can offer sustainable credit and fair financial services. One
testimonial from a banker for overdraft programs went on to
say, quote, ``If I had two more products like this, I could
quit making loans altogether.''
We praise the reforms that are set out in S. 1799. It
imposes critical limits on the amounts and number of fees. In
contrast, the recent Fed consent rule is too little, too late.
There was consent on credit cards before the CARD Act, but that
did not solve the problem. Substantive protections were needed.
Again, overdraft abuses demonstrate the need for a Consumer
Financial Protection Agency. If overdraft abuses had been a
primary focus of an agency, they would not have developed in
the way they have. There is a need for an agency that can act
quickly and respond to new problems, and a Consumer Financial
Protection Agency focused on consumer protection is best suited
to do this.
It is said that to whom much is given, much is required.
The American taxpayers have given hundreds of billions of
dollars to the big banks, and taxpayers will pay for this for
many years. It is not too much to expect that the recipients of
this aid will use it to restore the American economy that they
helped bring down, and at the very least, that these banks will
not, in return, siphon away families' hard-earned dollars,
hurting not only those families, but also the many businesses
in dire need of the boost those dollars would provide if
available to purchase useful goods and services.
We again call on the financial regulators, and especially
the OCC, which oversees the biggest overdraft programs, to
enforce the overdraft guidance sitting on their shelf and to
issue regulations with substantive protections for American
families. We also urge Congress to enact substantive overdraft
reform, closing the gap in the CARD Act and putting an end to
these abusive practices. Thank you.
Chairman Dodd. Thank you very much, Mr. Calhoun, and again,
I thank all of you for your participation today and your
thoughts and ideas. They have been very constructive and
helpful.
Let me, if I can, why don't we begin with you, Mr. Livieri,
just a question or so. I was curious, and you and I have talked
about this, but I wonder if you had received notice--we talked
about this week that went by between the time you actually
wrote that check for $200 and you only had $197.80, or close to
80 cents, in your account, and so you had $2.17 of an overdraw
on that account. Would you have continued to use your debit
card to make additional purchases had you been notified right
away----
Mr. Livieri. Definitely not.
Chairman Dodd. Yes.
Mr. Livieri. Definitely not.
Chairman Dodd. I think you told me at one point that
actually in the notice you received, that the postmark on the
notice----
Mr. Livieri. The notice was given to me on the 18th and the
postmark was the 24th. Then they sent me another one on the
16th, and the postmark was the 22nd. So I didn't know that I
was overdrawn. As soon as they told me I was overdrawn, 10
minutes later or a half-an-hour later, I brought down money and
everything was fine.
Chairman Dodd. So it was 6 days after they actually took
notice of it that they notified you?
Mr. Livieri. Correct.
Chairman Dodd. Yes. And so had you been notified more
promptly, you would have dealt with it. In fact, I hesitate to
ask you this, but you have told me this, so I know the answer.
You had enough money in your own accounts to more than cover
these things.
Mr. Livieri. Oh, yes.
Chairman Dodd. You weren't short that amount that was in
the bank. You just weren't aware of what limited amount was----
Mr. Livieri. Was going on, right.
Chairman Dodd. Yes.
Mr. Livieri. I didn't have it in their bank. I had it in
another bank----
Chairman Dodd. Yes.
Mr. Livieri. ----which was close by.
Chairman Dodd. You are a multiple banker here. You are a--
--
Mr. Livieri. Well, no, but I didn't have it in their bank,
but it was down the street a couple of blocks. So as soon as
they told me that the thing was overdrawn, I just went and got
the money and brought down cash to them.
Chairman Dodd. Yes.
Mr. Livieri. So it wasn't a serious problem. Before this,
on many occasions--because I was with this bank for 10 years--
when I did something, and a lot of times it was their mistake,
but if it wasn't, as soon as you put your card in and you put
your PIN number and so forth, it would say ``insufficient
funds, go see your banker.'' It didn't this time. Nothing, like
everything was fine. I mean, we are only talking $10.60, $30,
and $20. That is all the things were for. It was not a serious
amount. The only thing is the serious amount was the $35 to get
$10.60.
Chairman Dodd. So the technology existed in your bank where
actually the machine notified you of insufficient funds?
Mr. Livieri. Sure. Yes. Sure.
Chairman Dodd. That is interesting.
Let me ask the panel, if I could, Mr. Carey in his
testimony talked about the frustrations that consumers express
is centered on ATM and debit transactions where the overdraft
coverage fees could have been avoided if the customer had only
known at the ATM point of sale that the transaction would
result in a fee. And I should let you know, in our bill, by the
way, we ask for a study of this, to look at this particular
point, so we have already accommodated your interest to some
degree and recognize--although you heard from Mr. Livieri that
actually the technology existed at his bank at an earlier time
where they were able to notify him instantaneously----
Mr. Livieri. Correct.
Chairman Dodd. ----about whether or not there was an
amount--there was not an adequate amount of funds there to
cover that particular transaction. But you make a good point,
and as I say, we are evaluating it through a study.
But even if the technology were readily available at a
reasonable cost, overdraft coverage fees should still be
reasonable and proportional. You have got $2.17 and you have
got a $35 fee. It seems to me if someone is overdrawn by $500,
or $250, having an overdraft fee that would somehow be
proportional to the amount of the overdraft would be more
reasonable to me, at least. But the idea that even a few cents,
where a person--literally, there are examples, plenty of these,
where a cup of coffee or multiple transactions--young people
particularly that are more inclined to maybe use that card more
frequently and they have small transactions--where each
transaction is at $35, or gets doubled that amount.
It doesn't seem that, at least in the interim, before we
get point of transaction, that what we are trying to do here
should be adopted rather than wait for all of that to occur.
Mr. Carey. Senator, I guess the question is directed at me,
so I will give it a shot.
Chairman Dodd. OK, because you made the point----
Mr. Carey. I made the point. That is fair. At Citi, at this
point, if you were to go and buy that $4 cup of coffee and you
did not have $4 in your account, we wouldn't authorize the
transaction. Basically, the transaction wouldn't go through and
the customer would have this decision to pull out another means
of basically paying for it.
Chairman Dodd. Yes.
Mr. Carey. What we are essentially saying is that is what
ought to happen until the technology is there at any point of
sale, just to simply deny the transaction in its entirety and
have the customer go someplace else or use some other mechanism
to pay for it.
Chairman Dodd. Right.
Mr. Carey. That way, when you do that, when the customer
literally--when this technology gets built, and it is not that
far away because it can be done and it already is--it is in the
ATMs, as we have heard--is you can make the decision about
whether or not you want to incur the fee. Do I want this or do
I not want this? No, I don't want the fee. I am willing to go
someplace else to do that. And that is where the real choice
is.
Chairman Dodd. Right.
Mr. Carey. My concern is that if we give a choice in a
static environment, where I opened an account 2 years ago and I
opted into this thing and I had no idea that I would be
incurring this fee, that is the problem now.
You asked about the reasonableness of fees----
Chairman Dodd. Yes.
Mr. Carey. ----and it is a slippery slope. My concern about
it is, certainly in the debit and the ATM space, establishing
limits and establishing those, what is reasonable or not, I
think that is worth discussing. But I think when we start
talking about people writing checks and bouncing checks and the
banks offering the service for overdrafts rather than having
the check bounce, that is a good thing.
Chairman Dodd. But my point, I guess, I want to make to
you, that in the absence of these other matters being adopted,
I wanted to determine whether or not you felt it was
reasonable, our bill. I am not asking every dotted ``i'' and
crossed ``t''----
Mr. Carey. No. In essence, what I would say, what I would
suggest is that the transaction should just simply be denied.
Chairman Dodd. Yes. Let me ask other members of the panel.
Ms. Fox.
Ms. Fox. Senator Dodd, when banks talk about overdraft fees
being set high to serve as a deterrent, that is a bit
disingenuous. If they wanted to deter overdrafting, they would
deny the transactions on debit cards at the ATM----
Chairman Dodd. You anticipated my next question, because
the GAO found that the average noninterest fees, including
overdraft fees, increased by 10 percent or more since the year
2000. So how has the imposition of these fees as a deterrent
fared if, indeed, recent data has shown increasing revenue
coming to banks from these fees? It seems to me it is----
Ms. Fox. Right. We have been surveying the largest banks'
overdraft fees for the last several years, and every time we go
back and look, the fees have gone up. More banks are charging
tiered fees, so the second and third and fourth overdraft is
even more expensive. And now they are starting to add sustained
overdraft fees, so you can get charged $35 immediately. If you
don't pay the bank back in a few days, it is another $35. Some
banks charge an $8 per day sustained overdraft fee.
I heard a young fellow in Indiana this summer, just out of
high school, working a minimum wage job, and made a $10 math
error on his bank account. He had four debit transactions that
overdrew his account by $6.58. His bank charged $35 for each of
them. He rushed down and deposited $100. That was sucked out to
pay the overdraft fees, so he was still overdrawn, and they
charged him $8 a day. By the time this young kid's family got
in touch with me, he was $500 in the hole. That is not a
deterrent. That is not a service. That is a debt trap.
Chairman Dodd. Yes. Does anyone else want to comment on
this before I turn to Senator Reed, or Senator Brown, excuse
me? Does anybody else want to comment on this particular point?
Mr. Calhoun. If I may add, that is what the practice was
not many years ago, and that was a big selling point, in fact,
of debit cards, was that they had a limit. They were different
from credit cards. And again, what these overdraft programs
have done, particularly with debit cards, is they have turned
debit cards into extraordinarily high-cost credit cards----
Chairman Dodd. That is a very good point.
Mr. Calhoun. ----with none of the substantive protections.
The CARD Act limits the number of fees and is patterned similar
to what you have in S. 1799 and requires that those fees be
reasonable, proportional, and they be consented to. If you are
going to require that for a credit card, it seems like you need
at least those protections when something is marketed as a
noncredit product.
Chairman Dodd. Thank you very much.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman, and thank you,
Senator Reed.
A question for Mr. Calhoun and a question for Mr. Pollack.
The American Bankers Association say that consumers appreciate
having overdraft protection, that it is a service that their
members' customers want. Why are your survey findings so
different, Mr. Calhoun, from what the American Bankers
Association tells us?
Mr. Calhoun. Well, as many surveys, it depends what you ask
and to whom you ask it. Our survey was done by an independent
group, a larger sample nationwide, more than 2,000 respondents,
and people want to know what it will cost them. When they are
told $35, it is a whole different kettle of fish.
The other main thing is that for people who want it
covered, there is an alternative, both a line of credit, which
the typical charge if you use overdraft protection from a line
of credit is less than $1 for an overdraft versus $35, or they
used to regularly offer linking, as some still do, linking your
debit card to your savings, and then some charge imposed, like
a $1 fee each time you access it. Banks are discontinuing those
programs because the regulators have allowed these abusive
products to drive out the good ones.
So you can have--it is not an either/or. If somebody truly
wants coverage for overdraft, they can have it and on a fair
basis that is profitable to banks.
Senator Brown. So 5 or 10 years ago, it would be much more
likely for a bank to set up a situation that the account, the
overdraft, if you will, would simply be money taken out of my
savings account. There would be a link there. The bank would
just do that automatically. I would get the statement that they
had done that.
Mr. Calhoun. Yes.
Senator Brown. And that is much less common today than it
was 5 years ago?
Mr. Calhoun. Yes. If you go in, many banks no longer offer
it and those that do often actively discourage it and point
people toward the high-fee overdraft program instead.
Senator Brown. Mr. Pollack, at the Pentagon Credit Union
where you work, do your customers complain that you decline
these debt transactions? Do you hear discussions from customers
about this after they see how your system works?
Mr. Pollack. Actually, we do not. We share the view, and we
think that our members do, as well, that Citicorp has, that
when they do not have money in the account, they prefer to know
they don't have money in the account and not be charged a fee
to get $20 or $5 for a cup of coffee. And so we have had no
complaints.
Senator Brown. You don't have the technology Mr. Carey
talked about that someone is notified that they would be
overdrawn but still has the option to be overdrawn and get the
fee, pay the fee, in case of emergency? You don't have that
technology, I assume, yet?
Mr. Pollack. That is correct, and we reject if you do not
have available funds.
Senator Brown. As Citi, you said.
Mr. Pollack. Right.
Senator Brown. Would you know if most credit unions around
the country have the policy that you have? Are other credit
unions more likely to mimic the Pentagon Credit Union or are
they more likely to mimic some banks that do this?
Mr. Pollack. It is probably 50-50, roughly.
Senator Brown. Can you--is it the larger credit unions that
are more likely to do it? The smaller ones? Can you give me----
Mr. Pollack. I think the larger ones are less likely to
charge a fee. In the House meeting, the second-largest credit
union showed up, which is North Carolina State Employees. They
do not charge fees, either. So I think the larger credit unions
are more apt to have programs similar to ours or similar to
Citi's.
Senator Brown. OK. Thank you. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, witnesses, for your wonderful testimony.
Let me ask, Mr. Carey, you have initiated these steps with
respect to your policies as a result of any type of regulatory
suggestion, or is this just something that you think is good
business?
Mr. Carey. This is something--this has been our practice
really since we invented the ATM and that we have never done
anything, literally----
Senator Reed. Be careful, because somebody invented the
Internet and got in a lot of trouble.
[Laughter.]
Mr. Carey. I don't think there is much--not as much dispute
around this one as, I think, the other one. But it has
basically essentially been our practice, if the funds aren't
there, the transaction doesn't go forward.
Senator Reed. Well, the majority of banks, though, both
large and medium and all sizes, charge these fees, and I guess
my point is that do regulators ever look at you and say, that
is great, or do they in any way sort of try to suggest what a
good fee structure would be with respect to consumers, or do
they just remain aloof?
Mr. Carey. Well, I think to your first point, I have yet to
be in a meeting with a regulator where they have said
everything that I have ever done is really good and pat me on
the head. I think that is not their job.
But, you know, they both through their compliance oversight
as well as the safety and soundness oversight, they challenge
us on all sorts of issues about how we are approaching specific
things. I have not had specific conversations around our
practices with respect to debit and ATM, but--nor would I
expect to have them because, I think, it is not a driver of
consumer complaints. They are not surprised that the coffee
that they bought, in fact, cost them $40. And with respect to
ACH and checks, our customers like the fact that we can cover
off a transaction that is important to them rather than
bouncing their check and having them face a returned, bounced
check fee from a vendor and all the flow-down problems that
come from it.
Senator Reed. Thank you.
There is some evidence, though, I think, Mr. Calhoun, that
consumers would rather be denied in some cases, and
particularly debit cards, than to have automatic fees. Is that
your findings at your agency?
Mr. Calhoun. We polled and 80 percent of consumers prefer
to be denied rather than impose the $35 fee on a debit. They
want choice on all of these.
And going back to your question about the regulators, I
think one of the really striking things is I mentioned the
joint Federal guidance that was issued 5 years ago. That was
February--almost 5 years ago, February 2005. But even going
back further than that, the OCC, going back as far as 2001, was
approached by a bank that wanted to offer one of these
overdraft programs, kind of a new thing then, on debit cards,
and it was very similar to the programs that have been
described here today. In August 2001, the OCC responded in very
harsh criticism noting all the lack of consumer protections and
the program was never instituted at that time. Why the change
of heart by the regulators? Consumers suddenly have more money
that they want to pay in fees? Not only have they failed to
address this problem, they have actively condoned the
development of these overdraft programs, as your questioning
was suggesting.
Ms. Fox. Senator, could I add to that?
Senator Reed. Ms. Fox, please.
Ms. Fox. Also, the Comptroller of the Currency has had a
set of guidelines for the order in which banks process
payments, and none of those criteria add any consumer
protection. It talks about deterring misuse of the account, or
that the bank lets you overdraw. You haven't misused anything.
You have been invited to do that. None of the OCC's guidelines
about the ordering of payments says that consumers shouldn't be
charged extra fees just because it has been manipulated. So the
regulators have really failed to curb this practice. As the
fees went up, overdrafts became more pervasive. More
transactions became covered by it, and more money went out of
people's pockets.
Senator Reed. And that is, from your perspective,
consistent across the board, not just OCC, but OTS and other--
--
Ms. Fox. Well, it is the Federal Reserve that writes the
rules that implement the Federal banking and credit laws, and
we have been urging them for years to require banks to comply
with Truth in Lending when they extend credit through letting
you borrow from the bank with an overdraft. And in docket after
docket, the Federal Reserve has failed to do that. They have
written Truth in Savings Act rules. They have now added rules
to Reg E. But they have failed to provide a basic set of
comparable protections to overdraft lending that every other
creditor has to comply with.
Senator Reed. And Mr. Pollack, you point out in your
testimony that essentially that is what you do voluntarily,
that because you treat, because of your practices, if someone
has overdraft protection, you are consistent with all the
lending laws and consumer protection laws, is that correct?
Mr. Pollack. Yes, sir, that is correct.
Senator Reed. And you have not seen that as an impediment
to business or to profitability?
Mr. Pollack. To the contrary. We are doing quite well.
Senator Reed. Good. And Mr. Carey, just in my mind to
clarify, your policy about debit cards is that you don't charge
these fees, et cetera. With respect to checks, you do charge
those, and unlike Mr. Pollack's organization, you don't do it
through an overdraft, you do it automatically?
Mr. Carey. Oh, no. We have, as I said in my testimony, we
have programs similar to what Pen Fed has, which, again, at
account opening and throughout the relationship, there is an
opportunity to link a savings account or link a line of credit
and then customers can move those funds back and forth and make
sure that they have the appropriate coverage. So we do have all
of those things. And so at those points of sale, money can
literally move over and cover those particular transactions and
people aren't denied of them. So we essentially have the same
capability.
What I was essentially focusing on was if someone just
simply didn't opt-into those programs, in the current
environment, we simply wouldn't authorize the transaction if
there weren't funds there.
Senator Reed. Well--yes, sir, Mr. Livieri. Thank you.
Mr. Livieri. A lot of times, and it has been my policy, and
it has been quite a while, but I remember having a credit card
or a debit card or whatever and you put it in the machine and
you say you want $200 or whatever it is, and then it says the
fee will be $18. Do you want to continue? And if you say no,
the transaction is null and void. That is OK. As long as you
know what it is going to cost you, if you want it, you do it.
If you don't want it, you just put ``no'' and forget about it.
Senator Reed. And I think you are right.
Mr. Livieri. Doing it without you knowing what they are
going to charge, that is a horse of a different garage.
Senator Reed. I could not say it any better. I better
remember that, a horse of a different garage.
Chairman Dodd. A different garage. That is a new one for
me, Mr. Livieri. And a garage of a different color.
[Laughter.]
Senator Reed. Mr. Chairman, thank you.
Chairman Dodd. Thank you very much, Senator Reed. Good
questions.
Let me pick up on the points that Senator Reed was making.
It may be duplicative. I hope it is not. But, you know, for
many, many years, the Federal Reserve--because it is the
Federal Reserve, Ms. Fox, you are correct, that actually has
the primary responsibility or has had the primary
responsibility in this area of consumer protection. And they
have been aware of the abusive overdraft fees for a long time.
In fact, an interagency guidance in 2005 called overdraft
coverage programs ``abusive and misleading.'' That is 4 years
ago. That is their words to describe this going back in 2005.
Over the past several years, of course, the Federal Reserve
has issued modest rule after modest rule to address the
programs. And I am pleased to see what they have done. I do not
want to have anyone leave the room here thinking we are not
grateful, but I understand in a sense. I would love to be
convinced that it would have happened in the absence of
introducing legislation in this regard and also absence of the
consideration of the financial regulatory reform proposals that
are out there. And as I say, I have a lot of respect for Ben
Bernanke, and I do not say that lightly. I think he has done a
very good job, and I do welcome these changes here, it seems to
me. But are these sufficient rule changes going to be adequate
enough? And let me just take advantage of the panel here, and,
again, I say this not because it should be punitive or
adversarial, but merely sort of to complete the entire picture
if we are looking at creating stability and safety and
soundness in financial institution, which we all want. At the
same time, it is very, very important that people like Mr.
Livieri, a hard-working guy who ran his own business for 50
years, goes in and does a simple transaction and ends up paying
$140 for a $2.17 overdraft, you know, again, if this were the
bizarre exception, I would not have him here. He would not come
here. Mistakes happen. Unfortunately, this happens with great
regularity.
And the idea that in this reorganization of the regulatory
process here, instead of me going through the process--and,
look, all of you understand and know the Senate pretty well.
The likelihood I can take a bill like this and get it out of
Committee, get it on the floor of the U.S. Senate, go through a
week or two, maybe, if I am lucky here, without a whole lot of
other things being added to it, to complete it in the other
body of 435 people, to have the President of the United States
sign it into law, in order to get some changes that the Federal
Reserve 4 years ago called abusive and misleading, it seems to
me it cries out for a different process here that would allow
an agency with responsibility of confirmation by the Senate,
appointment by the President, to watch out for what happens to
the Mr. Livieris of this world.
I should not have to go through this process on every
matter like this. This ought to be delegated to a responsible
regulatory body to provide the kind of protections.
In the Great Depression, we came up with the Federal
Deposit Insurance Corporation. We did not require a piece of
legislation every time a bank failed to make sure that the
depositors in those banks were going to have their money
protected. With the Securities and Exchange Commission, we
guaranteed that if you bought a share of stock, you were not
going to be deceived and defrauded.
Now, obviously, that still goes on, the Bernie Madoff case.
But, nonetheless, there was an agency of protection rather than
a bill in Congress every time some action occurred out there.
Shouldn't we today in the 21st century, given all the
wonderful technologies that exist today that can inform
consumers of what is going on--I apologize for the length of
this question, but it just seems to me it cries out. This is a
further example of instead of waiting around and hoping and
praying, despite years of acknowledgment of this problem
existing and waiting for a bill to get passed by Congress, we
would have responsible people at a responsible regulatory body
making these kinds of decisions. Doesn't it cry out for an
independent consumer--if your lawn mower breaks today, you can
call somebody and say, you know, ``The warranties are not
there. Who can help me out to get my money back from a faulty
product that I got sold, a consumer product?'' Who do you call
when all of a sudden you are Mr. Livieri and you have been
taken to the cleaners for 140 bucks for a $2.17 transaction?
Who does he call? He called his Senator. You should not have to
call your Senator.
Ms. Fox. Right. And if he calls the bank regulatory agency,
they will tell him, ``This did not violate any rule. This did
not violate any law.''
Chairman Dodd. He was told that. It was legal.
Ms. Fox. They can charge you any amount. They can charge
you any number of fees. They can charge you over and over for
the same overdraft, that there are no limits on what the banks
can do in this area. And you are correct that a Consumer
Financial Protection Agency would be very important to keep
this kind of abusive practice from getting out of hand.
Chairman Dodd. Mr. Pollack, I do not mean to draw you into
this, but, you know, you are in the business of financial
services. Do you have a reaction to this? I do not even know
what your answer would be, so I am just curious what your
thoughts are.
Mr. Pollack. Well, at PFCU we believe that the CFPA is a
good idea. We think that the ability of an agency to focus
solely on consumer protection will make that agency more
effective. The fact of the matter is today that regulators have
a very difficult job and have to cover a lot of ground, and I
do not think that anybody at any of the regulatory agencies was
trying to do a bad job. I do not think that at all. I simply
think that when you are trying to cover a lot of ground, you
cannot do as well as when you are focused on one sole area.
So we believe strongly that the CFPA is a beneficial event
for the American consumer.
Chairman Dodd. Yes. Mr. Carey, I will invite any comments
you want to make. I will let you even speak as a private
individual here rather than representing the bank.
Mr. Carey. I think the best thing I could say is that
clearly there is an opportunity to improve consumer protection,
and whether it is through the CFPA or whether it is through
enhancing the authorities, Senator, you probably know that
better than I do. But, clearly, the stories that you are
describing here deserve attention, and if it is not being done
by the regulatory agencies, then the questions have to be asked
as to why not.
Chairman Dodd. Yes. And, of course, Mr. Calhoun, we know
where you stand on this. You have already spoken about it. But
do you want to make additional comments--Senator Merkley
returned. I apologize. I did not see you walk in the room,
Jeff, so why don't you just jump in here. I do not know much
longer we will have before a vote starts. Go ahead.
Senator Merkley. Well, I wanted to ask a question, and I
apologize that I had to leave and come back, so if this has
been answered, you can just indicate to me to check the record,
if you would. But I use a debit card, a Visa debit card, for
just about everything that I am purchasing. And I try to keep
enough balance to not worry about this issue of overdraft. But
how difficult would it be to have a system in which I could be
given a real-time choice of whether or not, if I have, in fact,
depleted my funds with a transaction and I am buying a
newspaper in the airport, how difficult would it be to give a
real-time warning and allow me to choose do I wish to have an
overdraft and pay a fee for that or simply not do the
transaction?
Mr. Calhoun. Why don't you start, John.
Mr. Carey. Right now the technology is there, but it is not
capable of being done now. In other words, it is not like we
have to invent a new idea. We do not have to invent the
transporter room in order to make this happen. The technologies
are there. The processes are not. And that requires the
cooperation of merchants, it requires the cooperation of banks,
and it requires the cooperation of the networks to get that
done.
So it is not there today, but, for example, it is your own
ATM, and it should be for your--you are on us or your home ATM
about having that capability, if you do this, you are going to
be overdrawn, would you like to go forward with the fee? So it
is not that far away, but there has to be the incentive to be
able to basically go out and build it. And part of that is--and
that is the point that I have been trying to make--until that
is there, then perhaps the transaction should not be approved,
just simply flat out not approved. So if there is a market for
that, if there is the need for that, then let us build it and
let us give consumers the choice at the moment in time they
need it most.
Senator Merkley. And it does not seem that long ago that
that was the response. You have hit your limit, ad your
transaction will not go through.
Mr. Carey. Right.
Senator Merkley. That is just a few years ago, isn't it?
Mr. Carey. According to the testimony today, again, at Citi
we do not do it, and so if you do not have the dough in the
account or it is not linked to another account, there just
simply are not funds available for you to draw, the transaction
is not authorized. And I suspect that that was a much more
typical practice earlier on, and it has migrated over time. But
I am sure Mr. Calhoun has a point of view on this.
Mr. Calhoun. I would echo his comments that it is not going
to immediately be available to have point-of-sale real-time
warning. And it is critical that reform not be dependent upon
that, because particularly if you set the standard as universal
two-way communication, there is going to be a gas station out
in some small county that it may be 10 years before it would
have two-way communication. And I think as this bill properly
does, it ought to set the goal and the incentive to move in
that direction. But in the absence of that warning, the
practice should be and the law should be that no fee should be
charged on those debit transactions.
If the bank for convenience or for a particular customer
wants to cover it, this bill, 1799, does not prohibit it. It
prohibits, though, these abusive fees, which also--I think a
point that has not been covered--these fees actually beget more
defaults. The majority of these fees are from accounts where
people have fallen into a hole where they cannot make up the
money, and most of these fees, programs, overdraft fees have,
for example, $500 limits. Once you hit that limit, you are
getting checks turned down even or overdrafts turned down. You
have just been triggered into all these defaults, because, as
we heard about, the defaults put you behind and a lot of
people's paychecks cannot catch up that hole and cover their
deficiency, so next month they are facing more of these
overdrafts.
Senator Merkley. Well, and I would think that regardless of
the technology for the two-way communication in the future,
right now we have the old style that would work, which is a
bank could say, ``Well, Jeff Merkley, you have a choice. You
can either sign up for a line of credit and have your overdraft
covered by a line of credit. Or you can choose for us to turn
down your transaction if you have hit your limit.'' Or you can
choose to do some third option. But there are a range of
options that could address this that we do have the technology
for right now.
Mr. Calhoun. Yes.
Senator Merkley. OK.
Mr. Carey. That is correct. We do.
Senator Merkley. Thank you, Mr. Chair.
Chairman Dodd. Well, it is a great line of questioning and
an important point. I feel each of our colleagues raises
certainly--it may have been you, Senator, and maybe some of you
know the answer to this. As I heard it, it was something like
17 or 20 percent of consumers are paying about 90 percent of
the fees. Am I close to accurate on that, something like that?
Mr. Calhoun. Yes, Mr. Chairman.
Chairman Dodd. It is a relatively small number of people,
and they are people, obviously--I will not say ``obviously,''
but primarily people who are in difficulty, lost their jobs,
are in difficult straits, going through a medical crisis of one
kind or another. They are in a tough spot. Is that correct? Do
I have the numbers?
Ms. Fox. Yes, Senator, the FDIC did a very extensive study
that was issued late last year, and they reported that 9
percent of customers had 10 or more overdrafts in a year. You
know, 25 percent of banking account customers overdraw in a
given year. So it is a very small fraction of customers who are
keeping the banks afloat with $24 billion----
Chairman Dodd. So it is that constituency that has paid the
$24 billion last year and the estimated $38.5 billion this
year.
Ms. Fox. Yes. I think the $38.5 billion includes both
bounced check and overdraft fees.
Chairman Dodd. Yes.
Ms. Fox. But that is the cost to consumers of not having
sufficient money in the bank accounts and the banks going ahead
and loaning money and charging a fee.
Chairman Dodd. Well, here I have got it. Let me give it to
you exactly from the FDIC.
Ms. Fox. Yes, that is great.
Chairman Dodd. The FDIC reported that 93 percent of all
overdraft fees are paid by 14 percent of account holders.
Ms. Fox. Yes, that is about right.
Chairman Dodd. So 14 percent of account holders pay 93
percent of that number.
Ms. Fox. And a lot of those fees----
Chairman Dodd. And so it is the worst off, people who are
struggling the most, are paying the lion's share of these
billions of dollars in fees. That is ridiculous.
Mr. Calhoun. And, Mr. Chairman, if I could add, there are
really sort of two subgroups, again, over--there are two
separate problems. Over 27 million families that will pay five
or more overdrafts in this year based on the last data, so that
is a pretty good hit. And then there is this group that just
gets hammered because that same study found that the average
household in that high-use group paid $1,600 a year in
overdraft fees--$1,600. So you really have--but the abuse is
not just that very high use. It does spread across a much
larger swatch of account holders--27 million, to be exact.
Mr. Carey. Senator, if I may.
Chairman Dodd. Yes, Mr. Carey.
Mr. Carey. A couple points worth making. What I asked,
because I anticipated this question, is that I wanted to see
whether there was a disproportionate impact of the people who
receive an overdraft fee or an NSF fee across our checking
account business. Again, since we do not do the debit and we do
not do the ATM, so this is limited really to a group that would
otherwise be bouncing checks. And it actually does not spread
out to--it does not load up on the LMI. It spreads out across
the entire spectrum.
So, again, I want to make sure that we are focusing on the
problem, and the problem to me is around the velocity of
electronic debit and ATM transactions where people are just
simply caught unaware.
Chairman Dodd. And we again appreciate what Citi has done
in this area.
Mr. Carey. Thank you.
Chairman Dodd. Have I said that enough times?
Mr. Carey. You have, and I appreciate it very much. You can
never say it enough.
[Laughter.]
Chairman Dodd. We appreciate the step in the right
direction. Well, that is an interesting statistic as well. Tell
me again how that works. Among your check cashers----
Mr. Carey. In essence, because it is primarily made up of
people who are writing checks or are overdrawn through ACH
transactions, and the question that I ask is: You know, it is
disproportionately impacting LMI? And it is not. It is spread
out across that spectrum. And I think the reason why is because
we do not charge that fee, people are not caught with--they are
not using debit cards the way----
Chairman Dodd. I suspect another factor is that an awful
lot of low-income people do not have checking accounts. There
are 10 million people in this country that never access a
traditional financial institution other than through credit
cards and debit cards the way they do things. So there is that
element, Yes, Ms. Fox?
Ms. Fox. Senator, a few years ago Congress enacted EFT 99
to require that Federal benefit recipients get direct deposit
of their income--Social Security, SSI, veterans benefits. So we
have pushed a lot of unbanked consumers into mainstream banking
without making it safe for them to have bank accounts. And all
the Social Security and SSI are supposed to be exempt from
attachment. Banks take that money to pay overdraft fees for
overdrafts they permitted to take place. So that is a drain on
older consumers and low-income consumers.
The FDIC study looked at a cross-section of large and small
banks that they supervise. They do not have the big money
center, big national banks in their field of supervision. But
if you look at banking across the board, it is low- to
moderate-income consumers who have a bank account; they do not
have enough money to make ends meet, and the banks are not
helping them avoid fees.
Chairman Dodd. And they have problems. Thank you.
One of the things I wanted to point out, I think the idea
of letting someone know they could opt-into an overdraft
coverage, but we need to make sure that, one, these fees are
not going to be excessive, which is a point we made earlier,
and also that there are alternatives such as lines of credit or
linked accounts that, again, Citi does but not everyone else
does--in fact, they have moved away from that--are important as
well, but consumer awareness about what is available to them,
rather than just do you want to have a fee charged or not have
a fee charges, but what else is available to me, ought to be
critically important.
Senator Merkley.
Senator Merkley. Thank you.
Mr. Carey, I wanted to ask you about the type of
conversation your financial institution went through, because I
picture a board meeting in which someone comes forward and
says, ``Now, our competitors are charging these fees for
overdrafts, and it is X billion dollars a year, and to be
competitive, we want to make sure we do not give up this source
of revenue.'' And someone Citibank came to the conclusion not
to do that, and I am just--could you walk us through the
thinking that transpired?
Mr. Carey. Well, I am not sure if you were here earlier,
but what I said is we just simply----
Senator Merkley. No, I missed it. I apologize.
Mr. Carey. We have just never done it, and it has not been
part of the sort of fabric of the company in this space. You
know, people are very unhappy about fees in general, and I
think you have to basically try and drive better transparency.
You know, I am responsible for business practices within the
consumer businesses, and a lot of it is centered around all
sorts of revenue opportunities. And we spend a great deal of
time in those discussions trying to weigh all of the risks and
rewards that come from that, such as the damage to reputation
risk, what is the potential revenue opportunity, where are we
in the competitive space. And there is vigorous debate and
discussion, and it is a very good and, I think, useful process
that we do to try and come up with really what the right answer
is. But it is through those kinds of things that we come up
with the decisions that we do come up with about what makes the
most sense. And I think what we would like to believe is that,
you know, at the end we have got to be entirely transparent to
our customers. We have got to make sure that they understand
exactly what is going on and that they have informed choices
and that they can make those choices over a reasonable period,
you know, in a reasonable time so that they are not trapped,
and that that is basically a bedrock in how we look at these
things.
Senator Merkley. Thank you.
Mr. Calhoun. Senator, if I may add, I think Citi's
testimony addresses an important point that was raised earlier
today. There was concern that perhaps this reform effort would
disadvantage other consumers, and particularly one argument
that has been thrown out is somehow that if you regulate
overdraft fees, it would mean the end of free checking, which
lots of consumers like. And I think two points are: first of
all, Citi finds a way to both turn down and not charge
overdraft fees on debit cards but still offer free checking;
and free checking predated these aggressive, abusive overdraft
programs. They are not interdependent, and that if you take
away the abusive overdraft, you are no longer going to have
free checking.
Chairman Dodd. No, and that is a good point, and you have
provoked me to say, as someone who obviously negotiated and
tried for many, many years to get some reform of the credit
card industry and this year, thanks to Senator Merkley and
other Members of this Committee, we were able to get out of the
Committee by a one-vote margin the credit card bill, and yet it
passed the Senate overwhelmingly, but one of the reasons we
negotiated that process was a delay before implementing the
provisions of that bill in order to provide at the request of
the industry time for them to be able to adjust to the changes.
What, of course, they have done in that interim period is not
just adjust to the changes, but charge outrageous fees, and
interest has just been skyrocketing in this window, to get as
much out of this window as you could get, completely defying,
in effect, the very request they made, and that was to
basically allow for an adjustment period, which I thought was a
reasonable request. I am angry now in a sense that they took
advantage of that request in here, and we, of course, got
legislation to put a freeze on here if we can get it done. I do
not know if we can or not. And they have been arguing then,
``You see, this is what happens, because you have changed the
rules now, we are going to end up doing all of these things,
and we are only doing them because you passed the credit card
bill.'' And, frankly, that is baloney, that argument, and,
frankly, the argument now that we are going to do away with
free checking and other things. Citi is a living example of
what you can do. You can do exactly what they have done with
the debit and the credit cards, also provide free checking, and
have a very reasonable response in these areas. So I hope that
those who are involved in the lending institutions are not
going to try these tricks, again, further evidencing why you
need a Consumer Financial Product Safety Agency. You do not
have to have a bill in every time. Here I have got to introduce
a bill again to put a freeze on these rates instead of having
an agency that could put an end to it immediately without
having to go through all of this.
Well, I thank all of you. You have been very gracious. Mr.
Livieri, we thank you particularly. You have come down, and we
know it is not easy for anyone to stand up and talk about
something. And, again, I think all of us agree. I think we all
bear responsibility at the outset to conduct our affairs and be
knowledgeable about where we are in these matters. And so to
stand up and to talk about a situation that involved $2.17 for
a guy who has been in business for many, many years obviously
is an uncomfortable moment, but we appreciate your doing it
because you become the face of an awful lot of people. These
are not just numbers and statistics, so we are very grateful to
you.
Mr. Livieri. Thank you for the opportunity.
Chairman Dodd. I appreciate it. Again, Ms. Fox, Mr.
Pollack, Mr. Carey, Mr. Calhoun, we thank you as well.
The Committee will leave the record open for additional
questions that Members may have, but, again, I am pleased that
all of you were here. The Committee will stand adjourned.
[Whereupon, at 4:37 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Thank you all for being here this afternoon.
Our job on the Banking Committee is to make sure that regular folks
get a fair deal from their banks.
For too long, credit card companies made profits by charging
consumers outrageous fees, or raising rates whenever they felt like it.
Our Committee approved legislation to stop those abusive practices,
legislation that passed the Senate with overwhelming bipartisan support
and was signed into law by President Obama earlier this year.
Today, we meet to discuss another abusive practice--misleading
overdraft programs that encourage consumers to overdraw their accounts
then slam them with a high fee.
Now, let's be clear. People have a responsibility to spend within
their means. And banks have a right to charge a fair fee for legitimate
services.
But banks often add overdraft coverage to consumer accounts without
informing them or giving them a choice.
The overdraft charge is usually a high fee--a consumer can pay a
$35 fee for overdrawing on a $2 transaction.
In some cases, a consumer can rack up multiple overdraft fees in a
single day without being notified until days later. Many institutions
also charge additional fees for each day an account is overdrawn--the
longer it takes for you to realize there's a problem, the more fees
they can charge you.
Sometimes, banks will even rearrange the order in which they
process your purchases, charging you for a later, larger purchase first
so that they can charge you repeated overdraft fees for earlier,
smaller purchases.
So the truth is that the ``service'' of overdraft protection often
serves as nothing more than a way for banks to profit by taking
advantage of customers.
Last year, American consumers paid $24 billion in overdraft fees,
and the Financial Times recently reported that banks stand to collect a
record $38.5 billion in overdraft fees this year.
According to the Center for Responsible Lending, nearly $1 billion
of those fees will come from young adults. Another $4.5 billion will
come from senior citizens like Mario Livieri, one of our witnesses
today and a resident of Branford, Connecticut.
I'll let Mario tell his own story about how an initial $2 overdraft
ended up in $140 in overdraft coverage fees. The methods his bank used
will sound familiar to many Americans.
Families in my State of Connecticut and across the country are
already struggling to make ends meet--and these unfair and excessive
charges are making it even harder.
Last week, the Federal Reserve announced that they will require
banks to get a customer's consent before enrolling them in an overdraft
coverage program. It was a welcome but long-overdue announcement for
American consumers.
And, we need to do far more to protect them from these abusive bank
products.
That's why I introduced--The Fairness and Accountability in
Receiving Overdraft Coverage Act. Senators Schumer, Reed, Brown,
Merkley, Menendez, Levin, Reid, and Franken have joined me as
cosponsors.
Like the Federal Reserve's rule, my bill would establish an opt-in
rule for overdraft coverage for ATM and debit transactions. Customers
would now have to consent before overdraft coverage is applied to their
account.
My legislation would go further and limit the number of overdraft
fees banks can charge to one per month, and no more than six per year.
And that fee would have to be reasonable and proportional to the cost
of processing the overdraft.
My legislation would also put a stop to the practice of
manipulating the order in which transactions are posted, and require
banks to warn customers if they are about to overdraw their account,
giving them a chance to cancel the transaction.
Finally, it would require banks to notify customers promptly when
they've overdrawn an account--through whatever means the customer
chooses, from e-mail to text message--so that they can quickly restore
their balances and avoid unnecessary fees.
Abusive overdraft policies are blatantly unfair. And the banks know
it. After it came out in the press that I was working on this
legislation, a few of the big ones took steps towards responsible
reform--I assume out of the kindness of their hearts.
We will see whether they are truly committed to reform. But folks
like Mario deserve better.
Last week, the Federal Reserve released a new rule that will
require banks to get a customer's consent before enrolling them in an
overdraft coverage program. That's a good start. But my legislation
goes further, and I remain committed to ensuring that American
consumers are protected.
And let's remember, regulators did little while consumers were
taken advantage of by these misleading and unfair overdraft programs.
This is exactly why we need an independent consumer financial
protection agency that would be focused on preventing these abuses and
addressing them quickly.
Folks like Mario deserve better. I remain committed to ensuring
that American consumers are protected--and I look forward to our
discussion today.
______
PREPARED STATEMENT OF SENATOR JIM BUNNING
We now live in a time where no one is responsible for his or her
own actions. We have witnessed billion dollar bailouts of irresponsible
banks, and automakers who operated on flawed business models. We have
also witnessed people who used their homes as a line of credit and took
on too much debt receive a bailout from those who acted responsibly.
The Federal Government continuously rewards irresponsibility at the
expense of responsibility. So why should Americans be responsible for
overdrawing funds from their checking accounts? While I understand the
significant impact unreasonable fees can have on consumers, I also
recognize that it is the responsibility of individuals to have a better
knowledge of their own financial situation.
Again, the Federal Reserve has dragged its feet in implementing
consumer protections. We saw this with mortgage regulation and now with
overdraft fees. While the Fed is late in doing so, I believe their
recent rules outline some key issues in this debate.
It used to be considered ``illegal'' to overdraw from your checking
account. In today's technological age, consumers have many different
methods of confirming their checking account balance and there is no
excuse for not knowing how much money is in their individual accounts.
If a person wants overdraft protection on his or her checking account
and agrees to pay a fee in the case of an overdraft, that person should
have the option to do so if his or her bank wants to offer that
service. On the other hand, if a person realizes that he or she could
possibly act irresponsibly and would rather pass on overdraft
protection in exchange of having his or her debit card rejected at the
time of purchase, then that person should have the ability to make that
decision. Capitalism thrives on choice and it only makes sense to give
consumers a choice on what kind of financial product caters to their
financial needs. But with that choice comes responsibility and
consumers must be expected to face the consequences of their actions. I
look forward to debating this important issue.
______
PREPARED STATEMENT OF MARIO LIVIERI
Consumer, State of Connecticut
November 17, 2009
Good afternoon Senator Dodd and esteemed Members of the Committee.
My name is Mario Livieri. I am a senior citizen, and I live in
Branford, Connecticut. I'm honor to be invited here today to share my
story with you. I hope that it will help you do right by consumers like
me, who have been treated unfairly and misled by their bank about
overdraft fees.
Until a few months ago, I was a customer at a prominent bank in my
town. I am no longer a customer there, because I don't think they
treated me fairly.
Over the summer, I wrote a check for $200. When the check was
cashed, it overdrew my checking account by $2.17. My bank charged me a
$35 fee for my $2.17 mistake.
I had no idea I'd overdrawn my account. If I had known, I would
have immediately deposited money in the account to cover the overdraft.
But instead, it took the bank over a week to notify me of the
overdraft. By the time they finally got around to telling me my account
was overdrawn, I had made a few other small purchases using my debit
card totaling about $100--and the bank charged me $140 in fees.
Now, I owned a small business--a building and lumber company--for
50 years. And I know that it's important to stick to a budget. But I
also know that you don't get anywhere in the world of business by
treating your customers unfairly.
So, I called the bank. After a whole bunch of arguing, they agreed
to refund one $35 charge, but insisted that I pay all of the other
fees. I told them I didn't think that was fair. They told me it was
legal.
I've been in business too long for that to be an acceptable answer.
If that sort of practice--running up ridiculous charges for an
overdraft ``protection'' program I didn't even sign up for--is legal,
it shouldn't be. And it certainly isn't fair.
I'm glad my Senator, Chris Dodd, is doing something about it. And
I'm grateful to the entire Committee for the opportunity to discuss my
story with you today. There are a lot of folks like me in your States
who are in the exact same situation--they made a little mistake and got
slammed for it by their bank.
I hope that we can stop abusive overdraft coverage practices so
that nobody else, no matter what bank they use, has to go through what
I went through.
Thank you for inviting me here today and thank you for fighting the
good fight on behalf of us consumers.
______
PREPARED STATEMENT OF JEAN ANN FOX
Director of Financial Services, Consumer Federation of America
November 17, 2009
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
I appreciate the opportunity to testify in support of the FAIR
Overdraft Coverage Act, S. 1799, on behalf of the Consumer Federation
of America, \1\ as well as Consumer Action, \2\ Consumers Union, \3\
USPIRG, \4\ National Association of Consumer Advocates, \5\ and the
National Consumer Law Center (on behalf of its low income clients). \6\
We also commend Chairman Dodd for the financial reform discussion draft
he released last week, and in particular, his proposal for the creation
of a Consumer Financial Protection Agency. This agency would not only
implement the FAIR Overdraft Coverage Act, but also enforce the law and
clamp down on other high cost loan abuses. The agency will monitor the
marketplace both for evasions in current law and watch out for new
products and services designed to trip and trap consumers.
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\1\ The Consumer Federation of America is a nonprofit association
of over 280 pro-consumer groups, founded in 1968 to advance consumers'
interest through advocacy and education.
\2\ Consumer Action (www.consumer-action.org) is a national
nonprofit education and advocacy organization serving more than 9,000
community based organizations with training, educational modules, and
multilingual consumer publications since 1971. Consumer Action's
advocacy work centers on credit, banking, and housing issues.
\3\ Consumers Union is a nonprofit membership organization
chartered in 1936 under the laws of the State of New York to provide
consumers with information, education and counsel about goods,
services, health and person finance, and to initiate and cooperate with
individual and group efforts to maintain and enhance the quality of
life for consumers.
\4\ The U.S. Public Interest Research Group (USPIRG) serves as the
federation of and Federal advocacy office for the State PIRGs, which
are nonprofit, nonpartisan public interest advocacy groups that take on
powerful interests on behalf of their members.
\5\ The National Association of Consumer Advocates, Inc. is a
nonprofit 501(c) (3) organization founded in 1994. NACA's mission is to
provide legal assistance and education to victims of consumer abuse.
NACA, through educational programs and outreach initiatives protects
consumers, particularly low income consumers, from fraudulent, abusive
and predatory business practices. NACA also trains and mentors a
national network of over 1,400 attorneys in representing consumers'
rights.
\6\ The National Consumer Law Center, Inc. (NCLC) is a nonprofit
corporation, founded in 1969, specializing in low-income consumer
issues, with an emphasis on consumer credit. On a daily basis, NCLC
provides legal and technical consulting and assistance on consumer law
issues to legal services, Government, and private attorneys
representing low-income consumers across the country.
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We appreciate your interest in protecting consumers from
unauthorized and extremely expensive overdraft loans, the banking
equivalent of payday lending. Marketed as ``overdraft protection'' or
``courtesy overdraft,'' fee-based overdraft programs protect the banks'
ability to maximize fees while jeopardizing the financial stability of
many of its customers. Rather than competing by offering lower cost and
truly beneficial overdraft products and services, many financial
institutions are hiding behind a smokescreen of misleading terms and
opaque practices that promote costly overdrafts.
Without asking for their consent, banks and credit unions
unilaterally permit most customers to borrow money from the bank by
writing a check, withdrawing funds at an ATM, using a debit card at the
point of sale, or preauthorizing an electronic payment that exceeds the
funds available in a checking account. Instead of rejecting the debit
card purchase or ATM withdrawal at no cost to the consumer, or
returning the check unpaid with a bounced check fee, most institutions
will now cover the overdraft and impose an expensive fee for each
transaction.
Consumers do not apply for this form of credit, do not receive
information on the cost to borrow bank funds via overdrafts, are not
warned when a transaction is about to initiate an overdraft, and are
not given the choice of whether to borrow the funds at an exorbitant
price or simply cancel the transaction. Banks are permitted by the
Federal Reserve to make cash advances through overdraft loans without
complying with Truth in Lending cost disclosure rules, denying
consumers the ability to make informed decisions about whether to
access credit, as well as comparison shop for the lowest cost overdraft
program.
Overdraft loans are the bank equivalent of payday lending. Just as
payday lenders use the borrower's personal check or debit authorization
to insure priority payment, banks use their contractual right of set-
off to collect the amount of the overdraft loan and the fee by taking
money out of the next deposit into the borrower's checking account,
even when the funds are Social Security or other exempt funds.
Overdrafts are typically repaid within days, and the flat overdraft
fees for very short-term extensions of credit result in outrageous
interest rates.
Common banking practices, as confirmed by the FDIC's 2008 study of
overdraft programs, now increase the number of overdrafts rather than
minimize them--and can cost the account holder hundreds of dollars in a
matter of hours, when they otherwise may have been overdrawn by just a
few dollars for a few days or less.
Debit card overdrafts are now the single largest source of
overdraft fees and are especially costly for account holders because
they carry the same high flat fee but for much smaller loans. As
recently as 2004, about 80 percent of banks rejected unfunded debit
transactions without charging a fee. As consumers have switched to
payment by debit instead of paper checks, banks have expanded overdraft
programs that cover debits to make up for disappearing bounced check
fees.
Abusive overdraft loans are costly for everyone, but are most
destructive to people who are struggling to meet their financial
obligations. The FDIC's study found that consumers most likely to be
charged repeated overdraft fees are younger consumers and lower-income
consumers. In a system hugely out of balance, our big financial
institutions are collecting enormous fees from people who have nothing
to spare, making them even less able to meet their obligations.
Banks continue to increase the dollar amount of fees, even as the
recession makes consumers less able to pay ever higher fees for
inadvertently overdrawing their accounts. Banks that received TARP
funds from the public have not returned the favor. Indeed, the most
recent CFA survey of the Nation's 16 largest banks found that overdraft
fees continue their upward spiral, with the largest fee charged by big
banks ranging from $34 at Citibank (up from $30 in the last year) to a
maximum $39 charged by Citizens Bank. The median maximum overdraft fee
for the largest banks is now $35. While major banks have announced
changes to their overdraft programs in recent weeks, none of the
largest banks have lowered the price for an overdraft.
We strongly support S. 1799 as a strong solution to the problem of
overdraft lending. This legislation will help stop the abuse, without
limiting the ability of financial institutions to provide genuine
protection for their customers. While the Federal Reserve Board's new
rule under the Electronic Fund Transfer Act is a good first step, the
comprehensive protections in this legislation are essential to
protecting consumers and making it safer for consumers of modest means
to use mainstream banking.
In this testimony:
We will describe the dysfunctional overdraft lending system
that now dominates the market, the failure of bank regulatory
agencies to protect consumers, and the vulnerable consumers
most likely to use overdrafts. Our testimony also documents
that consumers want to opt-in and have warning before
triggering debit overdrafts and oppose manipulation of payment
processing that drives up total fees.
We will explain that abusive overdraft lending costs $24
billion per year and that nearly half of these fees come from
overdrafts triggered by debit cards at the checkout counter or
ATMs--overdrafts that could be prevented with a warning or if
the transaction were simply declined. We will review overdraft
fees and practices at the Nation's largest banks, including
recently announced voluntary ``reforms.''
We will recommend that Congress enact S. 1799, a solution
that will put real protection back into overdraft policy, and
enact the Consumer Financial Protection Agency to enforce this
law.
Abusive Overdraft Lending Systematically Strips Funds From Checking
Accounts
Fee-based overdraft loans should not be confused with cheaper
sources of back-up funds for checking accounts. Under traditional
programs that link checking accounts to a savings account or line of
credit, which are legitimate money management tools, funds are
transferred in increments when the checking account is temporarily
overdrawn. Financial institutions have offered such programs for
decades. The largest banks charge a median $10 fee to transfer
consumers' funds from savings accounts to cover overdrafts in their
checking accounts. Banks with overdraft lines of credit generally
charge around 18 percent per year and provide installment repayment
arrangements.
Today, banks commonly automatically enroll their checking account
holders in a high-cost fee-based system at the time they open a
checking account or add this feature for existing customers without
their consent. The FDIC reports that over three-fourths of the banks it
surveyed automatically pay overdrafts for a fee and seventy-five
percent of those banks automatically enroll their customers in
overdraft programs without their permission. \7\ If an account dips
into a negative balance, the bank routinely covers the overdraft--a
change from past practices--paying the shortfall with a loan from the
banks' funds. When the account holder makes the next deposit, the bank
debits the account in the amount of the loan plus a fee, which now
averages $34. \8\ At the largest banks, the median overdraft fee is
$35.
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\7\ The FDIC Study found that 75 percent of banks surveyed
automatically enrolled customers in automated overdraft programs. FDIC
Study of Bank Overdraft Programs at iii (Nov. 2008) [hereinafter ``FDIC
Study''].
\8\ Eric Halperin, Lisa James, and Peter Smith, ``Debit Card
Danger: Banks Offer Little Warning and Few Choices as Customers Pay a
High Price for Debit Card Overdrafts'', Center for Responsible Lending,
at 8 (Jan. 25, 2007), available at http://www.responsiblelending.org/
pdfs/Debit-Card-Danger-report.pdf [hereinafter Debit Card Danger]. The
FDIC study found that the median fee charged by surveyed institutions
was $27. CRL's research reflects the average paid by account holders.
It is not surprising that it is larger since larger institutions with
more customers generally charge higher fees. Government Accountability
Office report on bank fees, ``Bank Fees: Federal Banking Regulators
Could Better Insure That Consumers Have Required Disclosure Documents
Prior To Opening Checking or Savings Accounts'', GAO Report 08-291 at
16 (Jan. 2008) (noting larger institutions' average NSF and overdraft
fees were higher than smaller institutions').
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Overdraft Loans Give Banks First Claim on Consumers' Pay or Benefits
The method in which overdraft loans are collected contributes to
the harm they cause consumers. Banks, with the Federal Reserve's
permission, currently treat overdraft loan ``fees'' as checking account
fees under the Truth in Savings Act. As a result, banks can and do use
set-off to pay themselves first out of the consumer's next deposit of
pay or benefits. Consumers caught by overdraft loans do not get
affordable installment repayment schedules. The full amount of the
overdraft and the fees are due and payable immediately and the bank
reserves the right to deduct full payment out of the next deposit of
funds into the account, giving banks the first claim on a consumers'
income.
For low-income account holders who have no cushion of cash in their
bank account, repayment of the overdraft and the average $34 charge is
difficult to make up before another debit hits their account, sending
them further into the red, triggering another $34 fee, and accelerating
a downward spiral of debt. As discussed below, a small percentage of
customers end up paying enormous amounts for overdraft loans, and these
consumers tend to be lower-income and minorities.
Consumers Trapped in Overdraft Loans Can Least Afford Astronomical Fees
Overdraft loans create a debt trap for a significant number of
consumers. The FDIC examined individual transaction information from 39
banks to provide a snapshot of customers who overdrew their accounts on
22.5 million transactions. Nine percent of customers had 10 or more
insufficient fund transactions in 1 year. Consumers who overdrew 10 to
19 times in 1 year paid $451 in fees, while consumers who overdrew 20
times or more paid $1,610 in fees per year. \9\
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\9\ FDIC Study. Id.
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Unfortunately, abusive overdraft fees have the greatest impact on
those who can least afford them. In July of this year, 13 percent of a
representative sample of 2000 adult Americans surveyed for CFA by
Opinion Research Corporation said they had taken out a bank overdraft
loan to cover a check or debit purchase or ATM withdrawal in the past
year. Eighteen percent of those with incomes under $25,000 said they
had used such a loan while 26 percent of African-Americans paid for
overdrafts in the last year. \10\ Two Center for Responsible Lending
(CRL) surveys, conducted in 2006 and 2008, found that account holders
who are repeatedly charged abusive overdraft loan fees were more likely
to be lower income, single, and nonwhite. \11\ The FDIC study also
found that customers living in low-income areas carry the brunt of
overdraft fees. \12\ This is not a recent development. CFA conducted a
national opinion poll in 2004 which found that 28 percent of consumers
say they overdrew their accounts which would trigger either
insufficient funds or overdraft fees. Consumers who stated they
overdrew their accounts and were most likely to pay overdraft and
bounced check fees were moderate-income consumers with household
incomes of $25,000 to $50,000 (37 percent). Those 25 to 44 years of age
(36 percent) and African Americans (45 percent) were most likely to
have bounced checks. \13\
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\10\ ORCI Poll for CFA, July 2009.
\11\ CRL Research Brief.
\12\ FDIC Study at v. It further found that account holders who
overdrew their accounts more than 4 times per year paid 93.4 percent of
all overdraft fees. Id.
\13\ ORCI Poll for Consumer Federation of America, 2004.
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Overdraft fees strip funds from Americans of all ages, but research
indicates they hit America's oldest and youngest checking account
holders--often the least financially stable--especially hard. Older
Americans aged 55 and over paid $4.5 billion of the $17.5 billion total
overdraft fees paid annually in 2006, \14\ an especially alarming
figure given that one in four retirees has no savings of any kind. \15\
Those heavily dependent on Social Security pay nearly $1 billion, \16\
while those entirely dependent on Social Security pay over $500
million. \17\
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\14\ See, Shredded Security.
\15\ Id. at 4 (citing 2008 Retirement Confidence Survey, Employee
Benefit Research Institute (April 2008) finding that 28 percent of
retirees have no savings). Shredded Security also notes that even those
who do have savings are increasingly spending it on rising healthcare
costs (citing Paul Fronstin, Savings Needed to Fund Health Insurance
and Health Care Expenses in Retirement, Employee Benefit Research
Institute (July 2006), projecting that retired couples will need
between $300,000 and $550,000 to cover health expenses such as long-
term care).
\16\ Shredded Security at 6, Table 1. ``Heavily dependent'' was
defined as recipients who depended on Social Security for at least 50
percent of their total income.
\17\ Id.
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At the other end of the age spectrum, young adults who earn
relatively little as students or new members of the workforce pay
nearly $1 billion per year in overdraft fees. \18\ CFA's 2009 ORCI poll
found that 17 percent of those 18-34 years old had used overdraft loans
in the last year, compared to 13 percent for the total sample. Because
younger consumers are far more likely to use a debit card for small
transactions than older adults, \19\ they pay $3 in fees for every $1
borrowed for debit card overdrafts. \20\ The situation is exacerbated
by deals banks make with universities to provide school ID cards that
double as debit cards. Banks pay the partner school for exclusive
access to the student population and sometimes even split the fee
revenue they collect on debit card transactions with the university.
\21\
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\18\ See, Leslie Parrish and Peter Smith, ``Billion Dollar Deal:
Banks Swipe Fees as Young Adults Swipe Debit Cards'', colleges play
along, Center for Responsible Lending, at 1 (Sept. 24, 2007)
[hereinafter Billion Dollar Deal], available at http://
www.responsiblelending.org/pdfs/billion-dollar-deal.pdf.
\19\ Seven out of ten young adults would use a debit card for
purchases costing less than $2. Id. (citing Visa USA Generation P
Survey, conducted July 24-27, 2006. Findings and discussion at http://
corporate.visa.com/md/nr/press638.jsp (last visited Mar. 15, 2009)).
\20\ Billion Dollar Deal.
\21\ Id. at 7 (citing ``U.S. Bank Pays Campus for Access to
Students'', Milwaukee Journal Sentinel, June 18, 2007 (noting the
agreement between U.S. Bank and the University of Wisconsin at Oshkosh
prohibits all financial institutions other than U.S. Bank and the
college's own credit union from locating ATMs on campus); Amy
Milshtein, ``In the Cards, College Planning and Management'' (Dec.
2005) (noting the fee-sharing deal Higher One has with partner
universities)).
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Banks Turn Debit Cards Into High Cost ``Credit Cards'' When Overdrafts
Are Permitted
Today, banks swipe a large portion of these fees when their account
holders swipe debit cards at ATMs and checkout counters. A 2007 CRL
report found, and the FDIC study confirmed, that debit card purchases
are the most common trigger of overdraft fees. \22\
---------------------------------------------------------------------------
\22\ ``Debit Card Danger.'' See, also, ``FDIC Study of Bank
Overdraft Programs'' (Nov. 2008) (finding 41 percent of NSF-related
transactions were triggered by point-of-sale/debit and another 7.8
percent by ATM transactions).
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When debit cards first came into common use, they promised the
convenience of a credit card without the cost, because debit card users
were required to have the funds in their account to cover their
purchase or withdraw cash. As recently as 2004, 80 percent of banks
still declined ATM and debit card transactions without charging a fee
when account holders did not have sufficient funds in their account.
\23\ But banks now routinely authorize payments or cash withdrawals
when customers do not have enough money in their account to cover the
transaction, so debit cards end up being very costly for many account
holders. Among large banks, Citibank stands out for not permitting
debit card transactions to overdraw its customers' bank accounts,
protecting those consumers from unexpected high fees.
---------------------------------------------------------------------------
\23\ Mark Fusaro, ``Are `Bounced Check Loans' Really Loans?'', n.
4, at 6 (Feb. 2007), available at http://personal.ecu.edu/fusarom/
fusarobpintentional.pdf (last visited Mar. 15, 2009). See, also Sujit
Chakravorti and Timothy McHugh, ``Why Do We Use So Many Checks?''
Economic Perspectives, 3rd quarter 2002, Federal Reserve Bank of
Chicago, 44, 48 (``When using debit cards, consumers cannot overdraw
their accounts unless previous credit lines have been established.'')).
---------------------------------------------------------------------------
Banks and credit unions could prevent every dollar of debit card
overdraft fee charges by simply notifying account holders when they are
about to overdraw their accounts or by declining a transaction when
there are insufficient funds available, as they did in the past.
Indeed, consumers would appreciate the warning: 80 percent of consumers
surveyed would rather have their debit transaction denied than covered
for a fee, whether that transaction is $5 or $40. \24\
---------------------------------------------------------------------------
\24\ Leslie Parrish, ``Consumers Want Informed Choice on Overdraft
Fees and Banking Options'', CRL Research Brief (Apr. 16, 2008),
available at http://www.responsiblelending.org/pdfs/final-caravan-
survey-4-16-08.pdf [hereinafter CRL Research Brief].
---------------------------------------------------------------------------
Institutions often claim that denial at the point of sale or ATM is
not feasible, but it would be surprising if banks couldn't accomplish
now technologically what they could in 2004. Furthermore, 7.9 percent
of banks in the FDIC survey reported that they did inform customers at
a debit card point of sale that funds were insufficient before
transactions were completed, offering the customers an opportunity to
cancel and avoid a fee, and 23.5 percent did the same at ATMs. It's
difficult to believe that these banks have some sort of advanced
technology unavailable to other banks.
Absent meaningful regulatory reform, banks will only increase their
profits from overdraft fees as debit card transactions continue to
skyrocket. \25\ Debit card transactions will not only continue to grow
as a percentage of all bank transactions, but they will continue to
provide banks more transactions overall as more account holders use
them in place of cash for small transactions.
---------------------------------------------------------------------------
\25\ Debit card transactions are increasing at a rate of 17.5
percent per year, while check payments are decreasing 6.4 percent
annually. 2007 Federal Reserve Payments Study, ``Financial Services
Policy Committee, Federal Reserve Study Shows That More Than Two-Thirds
of Noncash Payments Are Now Electronic'' (Dec. 10, 2007), available at
http://www.federalreserve.gov/newsevents/press/other/20071210a.htm
(last visited Mar. 15, 2009).
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Consumers Cannot Rely on Bank Overdraft Programs
Based on CFA's review of the largest banks' account disclosures and
fine print in mid-2008, it is clear that consumers are unable to rely
on their bank to honor overdrafts, are held responsible for immediately
repaying the bank in many cases without notice or demand from the bank,
and can have their overdraft ``service'' terminated at any time for any
reason. Banks employ contract language making overdraft coverage a
discretionary program. As a result, a consumer writing a check or
paying by debit card never knows for sure whether the bank will honor
or reject the overdraft. The consumer has no way of knowing whether any
particular transaction will trigger merchant NSF fees, penalties for
nonpayment, or legal problems from writing an unfunded check. \26\
Banks set internal but unannounced limits on the amount consumers can
overdraw an account. Even if a bank provides fee-based overdraft
programs, an individual consumer initiating a transaction for more
funds than are on deposit cannot know with certainty that the
transaction will be covered by the bank.
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\26\ The Indiana Department of Financial Institutions warned banks
that ``courtesy'' overdraft programs arguably entice consumers to
unwittingly commit a criminal offense. ``Since the Program gives no
assurance of coverage in the event of an overdraft, but leaves that to
the discretion of the bank, a customer will never be certain that a bad
check will be covered. This could make both the customer and the bank
accountable under the criminal statute.'' Letter from J. Philip
Goddard, Indiana Department of Financial Institutions, February 21,
2002.
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Banks make no promise to pay an overdraft while obligating
consumers to immediately repay both the overdraft and the fee in a
single balloon payment (often without notice or demand). The new
Federal Reserve Reg E rules maintain the discretionary nature of
overdraft coverage, even when consumers opt-in to have debit card
overdrafts paid for a fee. The Model disclosure form includes this
statement: ``We pay overdrafts at our discretion, which means we do not
guarantee that we will always authorize and pay any type of
transaction.'' \27\ Banks use set-off to extract payment out of the
next deposited funds, even when those funds are exempt Federal
benefits. \28\
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\27\ Federal Reserve Board, Model Consent Form for Overdraft
Services (205.17), Regulation E: Docket No. R-1343, Final Rule,
November 12, 2009.
\28\ For examples of one-sided bank account contract terms, See,
``CFA Comments to Federal Reserve Board'', FRB Docket No. R-1314,
August 4, 2008.
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Banks Speed Withdrawals but Not Deposits
In this age of fast-paced banking and electronic bill pay, anyone
can temporarily slip into a negative balance. Check 21, passed in 2004,
allows banks to debit accounts more quickly, while the rules for how
long they can hold deposits before crediting accounts have not been
updated in 20 years. In an age of 24/7 online banking and branches open
six and seven days a week, the expedited funds rules defining a
``business'' day to exclude weekends result in consumers overdrawing
when deposits could have covered the transactions. When banks hold
deposited local checks until the permitted second business day, a
paycheck drawn on a local bank and deposited on Friday afternoon can be
held until Tuesday before money is available in the account to cover
transactions. Fifth-day availability for deposited nonlocal checks
means consumers may have to wait a whole week for deposits to become
available, even when the check is drawn on the bank where it is
deposited.
Banks Manipulate the Order of Processing Withdrawals and Drive Up Fee
Revenue
Financial institutions can manipulate the order in which
withdrawals are posted in order to trigger more overdraft fees. Large
institutions usually clear the largest transaction first, causing more
transactions to overdraw the account. This practice generates more in
overdraft revenues because the institution can charge an overdraft fee
for each transaction once the account is below zero.
Consumers do not know the order in which items drawn on their
account will be presented to their bank and are not likely to know the
order in which their bank pays items. Banks bury the disclosures about
the order in which they process transactions, and these disclosures
provide the banks the widest possible latitude to engage in this
behavior. \29\ Even the Federal Reserve noted in adopting Truth in
Savings regulations in 2005 that consumers who are aware that their
account may be overdrawn are not likely to know the number of items
that will bounce or the total fees they will be charged. \30\
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\29\ See, e.g., U.S. Bank's 26-page document, Terms and Conditions
for Deposit Accounts, effective Feb. 1, 2005, available at https://
fastapp.usbank.com/fastapp/en_us/termsAndConditions/TandC/
LinkDepositAgreementCurrent.jsp (last visited Mar. 15, 2009): ``If we
get a batch of such items in a day (checks typically come in batches),
and if one, some or all of them would overdraw the account if paid, we
can pay or refuse to pay them, in any order, or no order . . . We have
all these options each time you might overdraw an account. What we do
one time does not make that a rule you can rely on for the future'';
Bank of America's 36-page document, Deposit Agreement and Disclosures,
available at https://www1.bankofamerica.com/efulfillmentODAO/
new_window_np.cfm?appURL=https://www1.bankofamerica.com/efulfillment/
&showdaddoc=91-11-2000ED&daddoc2use=20081101&type=1&view=htm (last
visited Mar. 15, 2009): ``We may process and post items in any order we
choose . . . We may change categories and orders within categories at
any time without notice . . . [S]ome posting orders may result in more
insufficient funds items and more fees than other orders. We may choose
our processing and posting orders regardless of whether additional fees
may result.'' Wachovia, Deposit Agreement and Disclosures for Personal
Accounts, effective Feb. 8, 2008, available at http://www.wachovia.com/
personal/online_services/disclosure/view/0,,7,00.html (last visited
Mar. 15, 2009): ``Although we generally pay larger items first, we are
not obligated to do so and, without prior notice to you, we may change
the order in which we generally pay items.''
\30\ Federal Reserve Board, Final Rule, Regulation DD, Docket No.
R-1197, 5-19-2005, p. 4.
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Banks claim they do customers a favor by paying the largest, and
presumably most important, items first to ensure those items get paid.
But this argument is disingenuous when a bank has an overdraft loan
program, because the bank pays all of the transactions, regardless of
the order in which they are posted. So no matter what order the
transactions are cleared in, all items get paid up to the bank's
internal guidelines, and the only difference is how much the customer
pays in overdraft fees. Legislation is necessary because bank
regulatory agencies have failed to require banks to fairly treat their
customers. (For a review of bank regulatory actions on processing
order, please see Appendix C.)
Indeed, the FDIC's 2008 overdraft study found that over half of the
large banks they surveyed process overdrafts from largest to smallest.
\31\ The survey further found, not surprisingly, that banks that engage
in this abusive practice generate more overdraft fees than those that
don't, but they also end up with more uncollectible debt related to
overdraft loans. \32\
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\31\ FDIC Study at iii (noting that 53.7 percent of large banks
batched processed transactions by size, in order from largest to
smallest).
\32\ FDIC Study at 62.
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CFA's review of the largest banks' account agreements and customer
information for comments filed in 2008 at the Federal Reserve found
that 15 banks disclose that they pay the largest transactions first or
reserve the right to pay withdrawals in the order the bank chooses.
There was insufficient information to determine payment order at one
bank surveyed. Bank customer agreements typically reserve the bank's
right to change the order of processing withdrawals without notice or
consent from account holders.
The public wants banks to pay checks in the order they are
received, as opposed to the current practice of allowing banks to
routinely pay the largest first, which drains some accounts more
quickly and increases bounced check fees. In a poll of 1,018 people
conducted by Caravan Opinion Research Corporation for CFA this summer,
70 percent supported (53 percent strongly supported) this requirement.
\33\ This confirms the finding of an older poll conducted for CFA which
found that only 13 percent of the public support the bankers' claim
that consumers want the largest transaction paid first.
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\33\ CFA ORCI Poll, July 24-27, 2009.
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Consumers Want To Decide Whether To Use Fee-Based Overdrafts
Most banks do not require customers to apply for and affirmatively
choose to use fee-based overdraft coverage. Using either consultant-
provided overdraft programs or internal bank policies, financial
institutions decide which customers will be permitted to overdraw, the
limit on the amount of overdrafts, and the fee or fees that will be
charged. Banks do not contract or promise to cover overdrafts but claim
this is a discretionary service that can be withdrawn at any time.
Consumers Want Choice and Warning on Overdrafts
Consumers think they should be provided the opportunity to
affirmatively opt-in to overdraft provisions of their checking
accounts. CFA polled a representative sample of adult Americans in July
2009 and learned that 71 percent support requiring banks to gain the
permission of customers before routinely providing loans to cover
overdrafts. In CFA's 2004 ORCI poll, more than twice as many consumers
thought it would be unfair for banks to permit overdrafts without
obtaining their customers' consent (68 percent) rather than fair (29
percent).
The Consumer Reports National Research Center 2009 poll of a
nationally representative sample of 679 people found that two-thirds of
consumers prefer to expressly authorize overdraft coverage, so that
there would be no overdraft loan--or fee--until they opted into the
service. Likewise, two-thirds of consumers said that banks should deny
a debit card or ATM transaction if the checking account balance is too
low.
A 2009 Center for Responsible Lending survey found that 80 percent
of consumers who wanted a choice about overdraft thought that their
debit purchases and ATM withdrawals should only be covered for a fee if
they affirmatively asked for overdraft coverage for those transactions.
But the default arrangement for most institutions continues to be
coverage--whether or not the account holder asked for it.
In addition to wanting to opt-in for overdraft coverage, consumers
want to be warned when ATM withdrawals will trigger an overdraft. CFA's
2009 ORCI poll found that 85 percent of adult Americans want banks to
be required to disclose on the ATM screen when a withdrawal will
overdraw an account. Seventy-three percent strongly supported that
requirement. In a 2004 CFA poll, consumers by a wide margin said they
are treated unfairly when banks permit them to overdraw at the ATM
without warning. The 2004 ORCI survey also found that an overwhelming
majority (82 percent) of consumers thought permitting overdrafts
without any notice at the ATM was unfair, while 63 percent said it was
``very unfair.'' Fewer than one in five (17 percent) people thought it
was fair.
The Consumer Reports National Research Center poll also found that
many consumers do not expect their bank to pay a debit card or ATM
transaction that overdraws an account. Forty-eight percent of those
polled thought an ATM card would not work if the account balance was
too low and another 10 percent thought they would not be assessed a fee
if the bank allowed the overdraft. Thirty-nine percent of people
thought their bank would either deny a debit transaction or allow it to
proceed without charging a fee. \34\
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\34\ Consumer Reports National Research Center, Financial
Regulation Poll, as filed with the Federal Reserve Board in Reg E
Docket R-1343, March 12, 2009.
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A 2006 study by Forrester Research Group documented that consumers
are ``irked'' by overdraft fees. While 65 percent of consumers with no
overdraft fees said they were very satisfied with their banks, only 53
percent of consumers charged overdraft fees in the last few months
reported being very satisfied. \35\ By offering contractual overdraft
protection by linked savings accounts, low cost lines of credit, and
transfers to credit cards, banks can provide real protection at lower
cost to consumers and avoid angering a large number of banking
customers.
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\35\ CUNA News: ``Consumers Ignore ATM Fees, Get Irked at
Overdraft Fees,'' January 17, 2006.
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Overdraft Loans Are Credit but Don't Have Credit Protections
There is no question that overdrafts loans constitute a form of
credit. Overdrafts are credit under the Truth in Lending Act (TILA),
which defines ``credit'' as the right to ``incur debt and defer its
payment.'' See 15 U.S.C. 1602(e). When a bank permits a consumer to
use the bank's funds to pay for an overdraft, and then requires the
consumer to repay the bank, it is granting the right to incur a debt
and defer its payment until the consumer's next deposit.
Involuntary Overdraft Credit
Overdraft loans are unique in that they are one of the few forms of
involuntary credit. Banks impose this form of credit on consumers who
have not requested it. Furthermore, some consumers may not be aware
until they overdraw their account that they are accessing a high-cost
credit product. This is especially true in the ATM or debit card
context, where transactions that would overdraw an account were
previously declined and did not incur a fee.
Indeed, we can recall only one time that consumers were sent loan
products without their affirmative opt-in--when creditors sent
unsolicited credit cards to consumers in the 1960s. \36\ As a result of
the outcry over this practice, Congress stepped in, amending TILA in
1970 to ban unsolicited credit cards. \37\ According to the Senate
report that accompanied this TILA amendment, unsolicited credit cards
encouraged consumers to incur unmanageable debt, and many consumers
found them an unwarranted intrusion into their personal life. \38\
These same problems cited by this Senate report nearly 40 years ago
hold true today for unsolicited overdraft loans--they cause severe
financial distress and represent an intrusion on the lives of
consumers.
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\36\ Note that a ``stickiness'' of default options was observed
with respect to unsolicited credit cards, which is the same with
unsolicited overdraft loans. When unsolicited credit cards were
permitted, very few consumers opted out--only 1 percent returned the
card. However, when prospective customers were asked whether they
wanted to receive a card, only 0.7 percent said they would. Jack
Metcalfe, ``Who Needs Money'', New York Sunday News, Nov. 24, 1968,
reprinted in 115 Cong. Rec. 1947, 1951 (Jan. 23, 1969).
\37\ Pub. L. No. 91-508, 84 Stat. 1126-27 (Oct. 26, 1970).
\38\ S. Rep. No. 91-739, at 2-44 (1970).
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Note that in the case of unsolicited credit cards, the consumer at
least has to affirmatively and knowingly take action to use the credit
card, by making a purchase or taking a cash advance. In the case of
overdraft loans, the consumer not only receives credit without
requesting it, the consumer often unknowingly and involuntarily uses
that credit when she triggers an overdraft, especially in the debit
card situation where many consumers don't realize they can overdraw
their accounts.
Thus, overdraft loans represent an even worse problem than
unsolicited credit cards did nearly 40 years ago. S. 1799 would
prohibit this ``cramming'' of overdraft loans on consumers by requiring
banks to obtain specific written consumer consent before adding this
feature to a bank account for debit purchases and ATM withdrawals.
The Federal Reserve Board Has Failed To Protect Consumers Under Truth
in Lending
As discussed above, overdrafts are clearly ``credit'' under the
Federal Truth in Lending Act (TILA). The reason that overdraft loan
programs do not require TILA disclosures is an exemption created by the
Federal Reserve. Regulation Z, which implements TILA, excludes
overdraft fees from the definition of a ``finance charge.'' This
exemption, written in 1969, was originally designed to exclude from
TILA coverage the traditional banker's courtesy of occasionally paying
overdrafts on an ad hoc basis as a customer accommodation. However,
banks exploited this exemption as a gaping loophole, creating and
promoting predatory credit, extended on a routine basis without
adequate disclosure--contrary to the clear statutory language and
intent of TILA. The new Reg E rule maintains the special carve-out from
TILA for the debit-card based overdrafts covered. As a result, S. 1799
would amend TILA itself to define an overdraft fee as a finance charge
to ensure that institutions no longer benefit from a loophole to
exploit account holders and that all short-term consumer lending
operates by the same set of rules.
Consumers Need ``Truth'' in Overdrafts To Make Informed Decisions
A requirement that banks comply with TILA and quote an effective
APR for overdraft loans would be an eye-opener for the extreme high
cost of these loans. In general, the fees for overdraft loans translate
into APRs that are triple-digit or even higher. For example, consider a
$100 overdraft loan that is repaid in 2 weeks, for which the bank
charges a $20 fee. A comparable payday loan would have to disclose an
APR of 520 percent. Instead of requiring TILA disclosures, the Board
chose to regulate overdraft loans under the less effective Truth in
Savings Act (TISA), simply requiring disclosure of the fee and a
running tally. See Regulation DD, 12 C.F.R. Part 230.
Furthermore, most overdraft loans are paid much more quickly than 2
weeks--sometimes in a matter of days or hours--and sometimes the loan
is only for a few dollars. The FDIC study gave a more realistic example
of the extreme cost of fee-based overdraft. The typical $20 debit card
overdraft with a $27 fee repaid in 2 weeks costs 3,520 percent APR if
calculated as a closed-end loan. Bank overdraft loans are parallel to
payday lending in that the high interest rates and short repayment time
often trap marginally banked consumers in a cycle of debt. Consumers
should not have to pay triple or quadruple-digit interest rates for
either form of credit. (See Appendix D).
The failure of the Federal Reserve to require TILA disclosures and
other protections for overdraft loans undermines the statute's key
purpose of strengthening ``competition among the various financial
institutions and other firms engaged in the extension of consumer
credit.'' \39\ Without the uniform disclosure of the APR required by
TILA, consumers have no way to compare overdraft loans to the cost of
an overdraft line of credit or transfer from savings. Under the Fed's
rules, the disclosed APR for a typical payday loan is 391 percent to
443 percent \40\ but for an overdraft loan program the lender may
disclose under TISA that the account is actually earning interest!
Without apples-to-apples comparisons, there is no competition to reduce
the cost of any of these products.
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\39\ 15 U.S.C. 1601(a)
\40\ Keith Ernst, et al., ``Quantifying the Economic Cost of
Predatory Payday Lending'', Center for Responsible Lending (December
18, 2003), at 3.
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Legislation is needed because the Federal Reserve Board has failed
to protect bank customers from abusive overdraft practices or to
require financial institutions to comply with credit laws that apply to
other forms of small lending or substitute products.
The new rule announced by the Federal Reserve last week amends Reg
E and is substantially weaker than the provisions of S. 1799. The
Board's rule does not recognize that overdrafts are extensions of
credit that should require Truth in Lending disclosures, does not
prohibit bank manipulation of the clearing of transactions to maximize
overdraft fees, and places no limits on the number of overdraft fees
banks can impose. The Federal Reserve's Reg E rule also does nothing to
curb excessive fees. Industry calls for Congress to defer to a narrow
Federal Reserve rule-making should be ignored. Opt-in alone is not
sufficient protection. Consumers also get to ``opt-in'' to using credit
cards, but legislation was needed to curb abusive practices as well.
Overdraft Lending Cost Americans $24 Billion in 2008
Americans pay more in abusive overdraft loan fees than the amount
of the loans themselves, paying almost $24 billion in fees in 2008 for
only $21.3 billion in credit extended. \41\ High fees, coupled with
small overdrafts, result in consumers paying more to borrow from banks
than the banks extend as credit.
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\41\ Eric Halperin and Peter Smith, ``Out of Balance: Consumers
Pay $17.5 Billion per Year in Fees for Abusive Overdraft Loans'',
Center for Responsible Lending, at 9 (June 2007), available at http://
www.responsiblelending.org/issues/overdraft/reports/
page.jsp?itemID=33341925' [hereinafter Out of Balance]. CRL analyzed 18
months of bank account transactions from participants in Lightspeed
Research's Ultimate Consumer Panel, from January 2005 to June 2006. For
further discussion of CRL's database and methodology, See, ``Out of
Balance'' at 13-14.
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Overdraft loan fees now make up 69 percent of all overdraft-related
fees, while traditional NSF fees--generated when the paper check
transaction is denied--make up only 31 percent. \42\ The FDIC reports
that all banks collected service charges on deposit accounts as of June
30, 2009, that totaled $21,796,013,000. Projected to a full year, banks
will take in almost $43.6 billion in bank account service charges.
According to the FDIC report on overdrafts, about 74 percent of that
line item on call reports is generated solely by insufficient fund fees
and overdraft fees. If trends continue, consumers will pay banks $32.26
billion due to lack of sufficient funds to cover transactions. At 69
percent of that total, American consumers will pay banks alone almost
$22.3 billion for overdraft loans in 2009. Credit union overdraft fees
add to that total.
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\42\ ``Out of Balance'', at 10.
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Small Dollar Overdrafts Trigger Steep Fees
The FDIC's report on bank overdraft loan programs, fees and
practices, based on a detailed study of 462 FDIC-supervised banks and
data on overdraft transactions from 39 banks, found that the typical
debit card purchase overdraft was only $20 but cost an average $27 fee
at FDIC banks. If repaid in 2 weeks, that overdraft costs 3,520 percent
APR. The typical $60 ATM withdrawal on insufficient funds costs 1,173
percent APR. The median size check that overdraws an account is $66, an
APR of 1,067 percent. \43\ If the bank adds a ``sustained overdraft
fee'' or requires repayment in less than 2 weeks, the APRs on these
loans are even higher. Furthermore, because consumers often use their
debit cards several times per day, multiple fees will be charged when
an account is overdrawn.
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\43\ FDIC Study at v.
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CFA's 2009 survey of the Nation's largest banks confirms that not
only are multiple overdraft fees becoming more common, but the fee per
transaction is getting larger. The maximum overdraft fee at this sample
of banks is now $39, while the median fee is $35. Five of the largest
banks use tiered fee schedules, with fees rapidly escalating when
consumers incur more than a few overdrafts over a 1-year period. U.S.
Bank charges $19 for the first overdraft, $35 for the second through
fourth, and $37.50 thereafter. Fifth Third Bank switched to tiered fees
in the last year, now charging from $25 to $37 per overdraft. Bank of
America terminated its tiered fee structure and now charges $35 for
each incidence.
Majority of Largest Banks Double Up on Overdraft Fees
Ten of the sixteen largest banks add sustained overdraft fees when
consumers are unable to pay the overdraft and fee within a few days. On
top of already high initial overdraft fees, SunTrust adds a $36
additional fee while Bank of America and Citizens Bank add a $35 fee
when overdrafts are not repaid in less than a week. Chase Bank adds up
to $25 per overdraft when an overdraft goes unpaid for 5 days. When
initial overdraft fees and sustained overdraft fees are combined for
overdrafts unpaid after 7 days, consumers can be charged as much as $74
at Citizens Bank for a single overdraft. The combined cost at Bank of
America is $70, at SunTrust $72, and at U.S. Bank $69.50. In recently
announced changes to overdraft programs, six of the largest banks
lowered or set a maximum on the number of overdraft fees charged on a
single day. For banks with a limit on daily fees, the range is three to
seven overdraft fees levied. (See Appendix B.)
Voluntary Bank Overdraft Changes Are Too Little, Too Late
Recently announced changes in overdraft programs by some large
banks are unlikely to significantly reduce costs to customers. Some
banks have changed the threshold that triggers overdraft fees to a
total of $5 to $10 in total overdrafts per day before fees are charged
and some have lowered the total number of overdraft fees a consumer can
be charged in one day. But none of the banks are lowering the fees
charged for initial or sustained overdrafts.
While a few banks will soon permit consumers to opt-in for some
forms of overdraft coverage, the norm is to permit current customers to
opt-out and to only permit new customers to make choices about
overdraft loans at those banks announcing changes. It has taken some of
the largest banks in the country 4 years to get around to complying
with the Interagency Guidelines for overdrafts, issued in 2005, that
advised banks to at least provide an opt-out opportunity for consumers.
Chase Bank plans to permit its existing and new customers to
affirmatively sign up to use overdraft loans and will process payments
as they come in during the day. In some cases, banks will permit only
new customers to opt-in to some forms of overdrafts in the future. In a
change initiated in the last year without fanfare, Citibank does not
permit its customers to incur overdrafts when using debit cards for
purchases or at ATMs, although Citibank customers can incur four $34
overdraft fees per day for checks. Citibank does not charge sustained
overdraft or tiered fees.
Other banks have also announced adjustments to their overdraft
practices. For example, Capital One, starting in early 2010, will not
charge fees if consumers overdraw their accounts by a total of $5 or
less in a single day and will limit the number of overdraft fees to
four per day. Capital One permits customers to opt-out of having
overdrafts paid for a fee. Starting mid-2010, Capital One will permit
new account holders to decide whether to opt-in to overdrafts triggered
by debit cards and at ATMs. (See Appendix A: Summary of Recent Changes
to Bank Overdraft Practices and Prices.)
S. 1799 Protects Bank Account Customers
S. 1799, the FAIR Overdraft Coverage Act, will prevent abuses
created by the relatively new system of unauthorized fee-based
overdraft lending that is premised on generating fee revenue rather
than protecting the funds of account holders. This important
legislation places bank overdraft lending on the same legal playing
field as other forms of small-dollar loans and provides consumers with
information necessary to make an informed decision.
S. 1799 requires financial institutions to obtain account holders'
specific written consent in order for financial institutions to enroll
them in fee-based overdraft programs triggered by debit cards at point
of purchase and ATM withdrawals. We also support requiring affirmative
consent for overdraft coverage triggered by checks, preauthorized
debits, and other ways funds are spent from consumers' accounts. This
control over bank account credit features is what consumers expect and
want to have.
S. 1799 requires banks and credit unions to warn account holders
before making them a high-cost loan at the ATM or from a teller and
permits them to terminate the withdrawal to avoid the fee. This warning
is what consumers expect and want. A GAO study is mandated to explore
the feasibility of point-of-sale warning and ability to terminate a
debit purchase in the future.
S. 1799 prohibits manipulation of account activity if the result is
to increase overdrafts. This should mean no debiting accounts with the
highest dollar charge first in order to increase the number of
overdraft fees an account holder is charged and no holding deposits
before crediting accounts in order to create a negative balance and
charge an overdraft fee. Bank manipulation of payment order is strongly
opposed by consumers.
S. 1799 also clarifies that an overdraft fee is a finance charge
subject to the Truth in Lending Act. This will confer TILA protections
to overdraft loans and require cost-to-borrow disclosures as determined
by the Federal Reserve. The Board will need to devise disclosures that
provide consumers with comparable cost to borrow information.
S. 1799 requires the Federal Reserve Board to set ``reasonable and
proportional'' bank overdraft fees, based on the cost to banks to cover
these loans. Competition has had no impact on bank overdraft fees that
continue to escalate even in a recession. This feature of S. 1799 is
comparable to the CARD Act's requirement that the Board set the over-
the-limit fee.
S. 1799 protects consumers from being buried in overdraft fees and
requires banks to provide information on their less expensive and more
appropriate products available to address overdrafts or extend small
dollar loans. The bill applies the FDIC's payday loan suitability
standard \44\ as well as the over-the-limit policy in the CARD Act by
limiting banks to one overdraft fee per month up to a total of six per
year. The bill permits banks to cover more overdrafts without charging
additional fees. Banks can and should reject debit card purchases or
ATM withdrawals for which funds are not available, which was standard
banking practice just a few years ago. A cap on the number of overdraft
fees that can be charged is not an invitation for consumers to initiate
numerous unfunded transactions. In fact, limiting banks to one fee per
month gives banks a financial incentive to limit unfunded purchases and
withdrawals.
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\44\ FDIC Guidelines for Payday Lending, 2005, Renewals/Rewrites
amended the Retail Classification Policy, directing institutions to
``Ensure that payday loans are not provided to customers who had payday
loans outstanding at any lender for a total of three months during the
previous 12 months . . . What a customer has used payday loans more
than three months in the past 12 months, institutions should offer the
customer, or refer the customer to, an alternative longer-term credit
product that more appropriately suits the customer's needs. Whether or
not an institution is able to provide a customer alternative credit
products, an extension of a payday loan is not appropriate under such
circumstances.'' See: www.fdic.gov/news/news/financial/2005/
fill405a.html, viewed 3/2/2005. Since payday loans are typically 2
weeks in duration, a three month payday loan limit is equivalent to
permitting six monthly overdraft fees per year.
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S. 1799's one-fee-per-month limit will prevent banks from piling on
sustained overdraft fees when consumers are unable to repay the
overdraft and initial fee in just a few days. Not only will this limit
protect frequent users of overdrafts, it will provide an incentive for
financial institutions to market their more affordable and appropriate
products such as overdraft lines of credit, transfers from savings, and
small dollar loans.
We also urge the Senate to enact Senator Dodd's legislation to
create the Consumer Financial Protection Agency to provide a strong
consumer protection agency for financial services. The CFPA will be
assigned the job under Truth in Lending to write the rules that
implement the FAIR Overdraft Protection Act, to supervise compliance
with these new protections, and to provide consumer information. The
Federal Reserve has failed to adequately exercise its authority to
protect consumers from unfair and abusive overdraft loan practices.
Conclusion
Today, as many American families struggle to meet daily obligations
in the worst economy since the Depression, the last thing they need is
to be surprised by high-cost credit to which they never expressly
consented. S. 1799 would benefit consumers by requiring financial
institutions to get consumers' affirmative and informed consent to
select fee-based overdraft programs for debit card purchases and ATM
withdrawals; defining overdraft fees as a finance charge covered by
Truth in Lending; capping fees based on Federal Reserve rules using
reasonable and proportional costs to cover an overdraft; and limiting
overdraft fees to one per month up to six per year. Overdraft loans are
not a ``convenience,'' but are dangerous high-cost loans that must be
reined in, even for people who agree to use them. We urge this
Committee to reverse the drain on vulnerable consumers' bank accounts
and the current trend toward even greater overdraft abuses by
supporting S. 1799.
PREPARED STATEMENT OF FRANK POLLACK
President and Chief Executive Officer, Pentagon Federal Credit Union
November 17, 2009
Good afternoon, Mr. Chairman and Members of the Committee. On
behalf of the Board of Directors and Management of the Pentagon Federal
Credit Union I would like to thank you for the opportunity to testify
here today.
The Pentagon Federal Credit Union is a $14 billion credit union
serving nearly 950,000 members around the globe. Our core field of
membership comprises the men and women of the Army, Air Force, Coast
Guard, and Department of Homeland security. We are a conservative
institution that is particularly fee averse. Our total fee income
represents less than 10 percent of our total income. While our first
priority is to always remain safe and sound our strategic objective is
to provide products and services that result in high rates on savings,
low rates on loans and low fees.
We have been recognized in the military community as a leader with
our overdraft protection programs. We have always viewed overdraft
protection as a particularly valuable service for the military member.
In their line of work maintaining good credit is important to their
military readiness and ultimately their career. Thus, our program dates
back more than 20 years preceding most of the overdraft programs that
have come into question today.
From the very beginning we have believed that members should either
qualify for our low cost line of credit or we should not allow over
drafting of their accounts. We would note that with more than two
decades of experience we find that our members are appreciative of the
responsible approach that we have taken. We offer a line of credit
attached to a member's checking account with a minimum of $500
overdraft protection. This service is offered to every creditworthy
member who opens a checking account. Forty five percent of our active
checking accounts have line of credit overdraft protection. As a result
our program has always been opt-in. We believe that every consumer must
have opt-in rights. At the Pentagon Federal Credit Union we charge
14.65 percent annual percentage rate, calculated on a simple interest
basis with no other fees or charges when an overdraft occurs. We
believe that by using a line of credit product which is formally
recognized as a loan and thus subject to all of the Federal lending
disclosure requirements, the cost to the consumer is both fully
disclosed and properly proportional to the amount that they overdraft
their account by.
At PenFed we post transactions smallest to largest to avoid
charging unnecessary overdraft and nonsufficient funds fees. We provide
separate mail notifications for each overdraft event so that our
members are kept fully aware of the status of their account. We believe
rapid notification is important because it enables members to pay off
the loan immediately if they are able thus further reducing the cost of
the overdraft. In short, we have attempted to craft a product that is
truly consumer friendly. We would make note of the fact that we have
not received a single complaint from our membership regarding the order
in which we process items in more than 20 years.
Nevertheless, there are members who do not choose to opt-in and
there are those who can not qualify for a line of credit. These members
are not allowed to overdraft their account with the limited exception
of an off line debit transaction where we are required, by contract, to
process such payments. In those instances we do charge a fee of $30.
This does not happen with great frequency and we recognize the proposed
bill would eliminate this fee. We support that and we recognize that
the recent action of the Federal Reserve Bank will prohibit such a fee.
However, we do believe that merchants and networks should also be
required to process all transactions in real time which would eliminate
this exception circumstance.
As an organization we are constantly focused on process
improvement. We felt that there was more that we could do for our
military members in the area of overdrafts. This summer we made a
decision to eliminate as many of the nonsufficient funds fees that our
military members incur as we possibly could. The product we created is
called, ``Warriors Advantage.'' It waives the checking account fees
associated with instances of insufficient funds for up to two
occurrences in any rolling 3 month period. Importantly, this program is
separate and distinct from our overdraft line of credit and goes beyond
the minimum requirements of the proposed legislation.
Under this program a military member with overdraft protection can
use all of the money available in their checking account plus all of
their line of credit and have two additional instances of returned
items every 90 days with no fees or charges beyond the interest on
their loan. Our research indicated that this program would result in
just over 98 percent of our military membership with checking accounts
never experiencing a fee!
The Warriors Advantage program represents only a beginning for us.
We intend to extend this program to our entire membership and we are
already at work on our next version which we hope to roll out in the
summer of 2010.
Thank you very much for this opportunity to testify and we are
indebted to you for your work on behalf of the American consumer.
______
PREPARED STATEMENT OF JOHN P. CAREY
Chief Administrative Officer, Citibank NA
November 17, 2009
Good afternoon Chairman Dodd, Ranking Member Shelby, and Members of
the Committee. My name is John Carey, and I am the Chief Administrative
Officer of the Citigroup North America Consumer Banking business and am
responsible for, among other things, the business practices of
Citibank, North America. I appreciate the opportunity to appear before
you today to discuss our views on the Fairness and Accountability in
Receiving (FAIR) Overdraft Coverage Act (S. 1977) and to offer
recommendations for improving customer choice in and protection by
overdraft coverage.
Citibank serves more than 4 million customers in our retail banking
business and has a network of more than 1,000 branches, 3,200 Citibank
proprietary ATMs, and an additional 23,000 surcharge free ATM's
available to our customers through various partnerships.
As we will discuss today, the policies that most banks employ when
applying overdraft protection policies, most particularly for ATM
transactions or debit purchases, can be very confusing, frustrating,
and too expensive for consumers, particularly for those people who
don't closely manage their daily finances. We have all heard stories
about consumers being caught unaware and incurring unexpected fees for
transactions they could have easily avoided with greater transparency
at the point of sale.
So let me be clear--at Citibank, we help customers avoid overdraft
fees. We decline ATM transactions or debit purchases when sufficient
funds are not available to cover the transactions. Therefore we do not
charge overdraft fees when a customer attempts such a transaction.
At Citibank, we believe that we have an obligation to our customers
to be fair and fully transparent and to use practices and disclosures
that are clear and easy to understand. In many cases, overdraft fees
can be avoided. To that end, I will highlight some important
observations about consumer behavior and preferences describe our
position and practices relative to overdraft protection, address some
of the key aspects of the current bill that will adversely affect our
customers and the industry at large, and offer some solutions for how
consumer concerns around overdraft services could best be addressed.
When banks enter a relationship with a consumer, they take on a
significant responsibility: to provide tools and services that make
fundamental day-to-day financial activities easier, more convenient,
and beneficial to consumers, while providing value to customers for the
value they bring to banks with their business. Most banks provide their
customers with instant access to their funds through branches, ATMs and
online banking services. Moreover, most banks provide their customers
with financial expertise and assistance through their representatives
and a wide range of tools that support better money management.
At the same time, it is impossible to provide a wide variety of
banking services to the public without assuming some risk. Therefore,
it is the responsibility of both the customer and the bank to work
together to mitigate those risks. The services that banks provide
regarding overdrafts are an important component of the basic banking
relationship and in mitigating risk. Responsible money management
ultimately must lie in the hands of the consumer, because it is the
individual consumer who has immediate control and knowledge of his
finances and accounts. We recognize, however, that it may not always be
practical for customers to keep track of every purchase. There are ways
to make purchases that operate in different time frames (for example,
instant PIN debit purchases versus check processing or scheduled
payments), and merchants have a wide range of processing options that
add complexity, so banks have widely instituted the service of
occasionally covering transactions through overdraft payments.
In thinking about overdraft services, it is important to
distinguish ATM transactions or debit purchases from other transactions
such as checks and Automated Clearing House (ACH) transactions. The
frustration that consumers express is centered on those ATM or debit
transactions where the overdraft fee could have been avoided, if the
customer had only known at the ATM or point of sale that the
transaction would result in the assessment of an overdraft fee.
Conversely, customers find overdraft services for checks and ACH
transactions to be a valuable service. They prefer to have their bank
cover the occasional overdraft payment of a check for a fee, rather
than having the check returned, receiving an insufficient funds fee, an
additional bounced check fee imposed by a merchant for the returned
item, and the possibility of negative impact to their credit report.
Overview of Citibank Overdraft Policies and Practices
For Citi, our guiding principle to overdraft payment services is
simple: we help our customers effectively manage their finances and
avoid spending money they don't have in their accounts. That's why for
ATM transactions or debit purchases (both PIN-based and signature-
based), where balances can be instantly checked electronically, we will
not authorize a transaction when the customer does not have the funds
to spend in his account.
Separately, we do allow overdrafts for checks and ACH transactions.
We do this because the situation is very different. With checks and ACH
transactions, the customer has the sole control over those transaction
requests; we cannot know what amount they are writing on a check or
exactly when they have written the check. In those cases, we mitigate
risk for our customers and ourselves by allowing customers a cushion
that covers a small overdraft. In order to avoid large overdraft
situations, Citi will not authorize payment beyond a reasonable amount.
Moreover, we encourage customers to link other accounts or lines of
credit to cover potential overdrafts and avoid either an overdraft fee
or a bounced check fee. Overdraft/NSF fees help cover the cost of
processing the transaction, cover the risk of possible loss, cover the
cost of an interest-free advance of funds, as well as provide an
incentive to customers to not spend more than they have in their
account, or to use the other, lower-cost services we have that can
cover potential overdraft transactions.
We have also made other important policy decisions to ensure our
overdraft protection is fair. We instituted a cap of four fees per day
(which also includes insufficient funds fees) in early 2008; fees that
for Citibank generally would arise only if a customer drew multiple
checks where funds were unavailable. We do not do ``continuous
overdraft,'' where a bank will impose an additional fee on an overdraft
if the overdraft remains on an account after a certain period of time.
Finally, because we track electronic debits instantly, we have
established a processing order that is beneficial for our customers.
Customer Needs and the Importance of Choice
As technology has improved and customers expect more choice in
their banking, Citibank has gone to great lengths to provide tools to
help customers manage their finances. In addition to providing alerts
and instant access to balances online and through mobile services, we
make sure that our customers' transactions are updated in real time so
that customers can move money as needed to cover payments. Our
customers are able to see credits or the electronic purchase they made
at the grocery store reflected immediately in their available balance.
And, we know they avail themselves of this service as a significant
number of customers make transfers at branches, online, or at ATMs
every day to cover potential overdrafts they are able to see happening
during the day.
In addition, a third of our customers have signed up to link a line
of credit or savings account to their checking accounts, which can be
used to cover overdrafts in addition to simply being used for savings
or as additional credit to draw upon. We encourage the establishment of
these services at account opening and throughout our relationship with
our customers. Our personal bankers are in fact incented to encourage
customers to open additional savings accounts and lines of credit to
cover overdrafts. When a customer uses these services to cover
overdrafts proactively, there are no additional fees charged; when Citi
covers the overdraft for them using these accounts or lines, a nominal
fee is charged. Finally, many of our customers have signed up for low-
balance alerts, which help them avoid unnecessary bank fees.
Today fewer than 20 percent of Citibank customers are charged even
one overdraft fee in a year. Of those, only a few are charged more than
once annually. We believe a reason for this is due to our practice of
NOT authorizing ATM and Debit transactions when funds aren't available.
Fortunately, our customers continue to do a good job of managing their
accounts, and, with tools such as the ones we offer to protect them
from overdrafts, we believe that behavior will continue. Still, it is
our fundamental belief that choice and control around overdraft fees
should lie squarely in the hands of informed customers.
Views on Pending Legislation
In general, we fully support the bill's goals of protecting
consumers from unnecessary overdraft fees. We believe that consumers
need transparency, especially at the transaction point in order to make
informed choices about incurring such fees. That is why we support
additional efforts to improve consumer awareness regarding overdraft
protection and alternative payment options to help people be smart and
responsible about money management.
Moreover, we agree that banks should provide more transparent and
easy-to-understand disclosures so that consumers can better manage
their own money. For us, meaningful customer choice and control are
paramount, and customers should be able to choose if they need to
overdraft or not.
We also believe, however, in the importance of giving customers the
ability to make choices based upon their individual circumstances as
they manage their finances from one day to the next. That is why we
support a requirement for interactivity of ATM screens that allow
customers to choose whether to continue with a transaction and pay a
fee for insufficient funds or terminate the transaction. We also see
enormous value in finding a similar solution for debit transactions. We
believe that the recent changes to Regulation DD that will go into
effect in January of next year, requiring statements to tally overdraft
and insufficient funds fees for customers annually, will go a long way
towards raising further awareness about the costs to consumers for
spending funds they don't have.
Our concerns regarding the bill are as follows:
Opt-in and Notification Requirements
Most customers do not overdraft and never will. However, customers
may not fully understand the effect that opting into or out of
overdraft coverage will have on them when they open an account and
choose not to ``opt-in'' to overdraft coverage. In the future they may
find themselves in a circumstance where they wish they could proceed
with a specific transaction even if they know they would be charged a
fee. So for example, it isn't that $5 cup of coffee that ends up
costing $40, but rather that being stranded without cash in a foreign
country and being able to access $100 from an ATM that will cost them
$135. Having previously ``opted-out'' would eliminate that flexibility.
So it is our position that customers should be given the choice of
``opting-in'' at the point of transaction instead. Customers should be
alerted when an ATM or debit transaction will overdraft an account, and
they should be able to choose at that moment whether they need to
continue with that transaction and incur the associated fee or not.
Understandably, updating the technology to provide such
transparency will take time and it will be incumbent upon the
merchants, the networks, and the banks to help create the functionality
allowing for this practice at the transaction point.
Until then, perhaps all banks should be required to deny ATM and
debit transactions that will trigger an overdraft fee, a practice that
Citi follows today. Giving the customer the choice to overdraw and
incur the fee at the time of the transaction--the moment of truth--we
believe, provides the best possible notice. In the absence of the
technology to provide this notice, the transactions should simply be
denied.
Separately, we have concerns about the same-day notification
requirements contained in the bill, especially given the amount of
detailed information that would be required. This kind of notification
would be nearly impossible to achieve technologically, and additionally
may not be relevant, above and beyond communication tools that already
exist. By way of example, many customers overdraft their account early
in the day, but through the course of the day have either made
transfers or deposits to cover the overdrafts. This tells us that these
customers are managing their financial circumstances appropriately,
making the communication potentially unnecessary or even inaccurate.
Because many transactions such as checks are received after hours and
most ACH transactions are processed overnight through posting
reconciliation, a notification would not be timely enough for the
customer to respond. In the final analysis though, we believe that
customers should manage their finances effectively and use the many
tools we already provide to achieve those goals.
Limitation of Fees Assessed to One Per Month and Six Per Year
The bill's provision that would limit the number of fees assessed
is complicated by network merchants' rules that govern how banks
process certain transactions. Many times a bank cannot control and
therefore must allow overdrafts. The most prevalent example of this is
for settlements of signature-based debit transactions. If this
limitation is meant to impose restrictions on practices such as
``continuous overdrafts,'' it also has the consequence of preventing
banks from collecting appropriate compensation for transactions they
are required to honor with merchants, but bear the entire risk of
potential losses. It is impossible for banks to predict which customers
will be responsible for those losses, so a very real result may be that
banks eliminate payment of overdrafts, including checks and ACH
transactions, so that some of the settlement risk is covered. Again,
the result will be harm to customers through additional merchant fees
and the consequences of unpaid bills. For customers who intentionally
and fraudulently create overdrafts, they would soon learn that they can
``get away'' with doing so at a fixed cost to them, which eliminates
the effectiveness of overdraft fees as a deterrent.
We suggest that if the bill is attempting to limit ``continuous
overdraft'' fees for a single overdraft, the legislation be focused to
specifically address that practice. Moreover, we believe that by
requiring customer choice at the ATM or point of sale whether or not to
incur an overdraft fee before authorizing a transaction, customers are
in complete control. Absent that choice, the transaction should not be
authorized. Finally, for ATM transactions or debit purchases, we
believe that the limitation on fees should apply only to those fees
incurred through ATM transactions and debit purchases and not apply to
ACH and check transactions.
Limitation on Fees Created by Holds and Settlements
Since authorization amounts, or holds, are entirely controlled by
merchants, banks have no way of anticipating the actual intentions of
customers when they are performing a transaction. Two common examples
of this are gas station purchases and hotel stay purchases. Although a
gas station may only authorize $1 to allow a customer to pump gas, the
settlement amount will almost always be larger. In this case, we
believe that merchants should request authorizations that are greater
than $1 and indeed ought to consider an amount closer to the average
transaction purchase at the pump. This should be an easy change for gas
stations to make, and it would go a long ways towards reducing customer
inconvenience. Moreover, at some level, the customer must also accept
responsibility for knowing whether or not they have sufficient funds in
their account to buy the gas. Banks can only authorize what is
presented to them by the merchant, and have no way of knowing for what
amount the ultimate transaction will settle.
In the case of a hotel stay transaction, the merchant may seek
authorization for an amount that exceeds the cost of the customer's
actual stay, and only the merchant is in a position to know or
communicate to the customer what the amount of the hold will be and
ultimately the amount of the settlement. Regardless, banks must in the
meantime continue to process other intervening transactions based upon
the authorization request that was submitted by the hotel. This
challenge was recognized by the Federal Reserve Board in its recent
amendment to Regulation E. These issues could be minimized through
changing the way merchants process these transactions, by either
seeking authorizations that more closely reflect the cost of the
ultimate transaction or changing the way they process the transaction.
We believe that some effort should be put into developing better
controls and rules regarding merchant hold processing, and providing
guidelines that could be much more effective in terms of protecting
consumers.
``Reasonable and Proportional Costs''
The bill recommends that a study be performed to understand what
the reasonable and proportional costs are of overdraft protection to
overdraft fees. Our request is that the study address all costs
associated with overdraft procedures, certainly including risks and
losses, but also including additional costs born today. For example, on
a daily basis we review accounts and intervene on behalf of good
customers before overdraft fees are assessed, and if the report were
not to factor such overhead costs, we may have to stop providing that
type of customer service. Moreover, we believe that if the bill
actually prohibited overdraft ATM transactions or debit purchases (both
PIN-based and signature-based) unless the customer has the opportunity
to opt-in at the point of sale, the debate around the reasonable and
proportional costs gets clearly placed in the consumer marketplace
rather than through Government imposed price controls.
Posting Order
We strongly believe that our posting order presents a fair and
simple means of processing customer transactions, which they can easily
understand. The problems that consumers report are when all
transactions are bundled and then processed from high to low. We
believe that by processing credits first, electronic payments as they
come in, and then processing ACH transactions and checks from high to
low, overdraft fees are minimized and the important transactions such
as mortgages and car payments are covered. This practice is in our
customers' best interests. Attempting to process all transactions
chronologically, particularly with checks, would be very difficult, as
checks are processed in batch, and we do not know what the customer's
particular intentions were regarding order of payment.
Conclusion
As I have noted, we find merit to the overriding goals of this bill
and we believe that customers should have informed choices before
incurring debit overdraft fees. Obviously, the ultimate goal is for
customers to manage their finances carefully and never overdraw their
accounts. Nevertheless, for the reasons noted above, we believe that
the legislation may not fully address the concerns that consumers have
with debit card overdraft fees.
Thank you for the opportunity to share our ideas with you.
______
PREPARED STATEMENT OF MICHAEL CALHOUN
President, Center for Responsible Lending
November 17, 2009
Good afternoon Chairman Dodd, Ranking Member Shelby, and Members of
the Committee. Thank you for inviting me to testify on S. 1799, the
``Fairness and Accountability in Receiving (FAIR) Overdraft Coverage
Act of 2009.'' The Center for Responsible Lending enthusiastically
supports this bill as a crucial measure for protecting consumers from
abusive bank overdraft fees.
I am president of the Center for Responsible Lending (CRL), a not-
for-profit, nonpartisan research and policy organization dedicated to
protecting home ownership and family wealth by working to eliminate
abusive financial practices. CRL is an affiliate of Self-Help, which
consists of a credit union and a nonprofit loan fund. For the past 28
years, Self-Help has focused on creating ownership opportunities for
low-wealth families, primarily through financing home loans to low-
income and minority families who otherwise might not have been able to
purchase homes. Self-Help has provided over $5.6 billion in financing
to more than 62,000 low-wealth families, small businesses and nonprofit
organizations in North Carolina and across the United States.
Self-Help has operated a North Carolina-chartered credit union
since the early 1980s. In 2004, Self-Help Credit Union (SHCU) merged
with three community credit unions offering a full range of retail
products, \1\ and it now services over 3,500 checking accounts and
approximately 20,000 other deposit accounts. \2\ In 2008, Self-Help
founded Self-Help Federal Credit Union (SHCU) to expand Self-Help's
scope of work. SHCU does not offer a fee-based overdraft program, and
it routinely denies debit and ATM transactions when the customer does
not have sufficient funds. If a debit card overdraft is inadvertently
paid, SHCU does not charge the customer a fee for covering the payment.
SHCU customers can apply for an overdraft line of credit of up to $500,
carrying an interest rate of 16 percent, with no transfer fees.
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\1\ SHCU merged with Wilson Community Credit Union and Scotland
Community Credit Union in 2004 and with Cape Fear Community Credit
Union in 2006.
\2\ These include traditional savings accounts, money market
accounts, certificates of deposits, and individual retirement accounts.
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In my testimony, I will describe the explosion of overdraft fees in
recent years and the lack of meaningful action by bank regulators to
curb these abuses. I will also summarize the reforms needed to stop
unfair overdraft practices and explain how S. 1799 would implement
these reforms.
I. Overdraft Fees Have Exploded in Recent Years
Overdraft fees are the fees charged when an institution chooses to
pay a customer's debit card, check, ATM or other electronic
transaction, even though the customer's account lacks sufficient funds
to cover the charges. In 2008, overdraft fees cost consumers $23.7
billion, and we project that in 2009, fees will reach $26.6 billion.
\3\ In 2004, these fees were $10.3 billion--which means they are now a
whopping two-and-a-half times the size they were just 5 years ago. \4\
Overdraft fees paid now exceed the amount of credit extended in
overdraft loans themselves. \5\ By far, the most common triggers of
overdraft fees are small debit card transactions--transactions that
could easily be denied at the point of sale at no cost to the consumer.
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\3\ Leslie Parrish, ``Overdraft Explosion: Bank Fees for
Overdrafts Increase 35 Percent in 2 Years'', Center for Responsible
Lending (Oct. 6, 2009), available at http://www.responsiblelending.org/
overdraft-loans/research-analysis/crloverdraft-explosion.pdf
[hereinafter Overdraft Explosion].
\4\ In 2004, CRL first estimated the annual cost consumers paid in
overdraft fees at $10.3 billion. Jacqueline Duby, Eric Halperin, Lisa
James, ``High Cost and Hidden From View: The $10 Billion Overdraft Loan
Market'', Center for Responsible Lending (May 26, 2005).
\5\ Overdraft Explosion at 7 (estimating $23.7 billion in fees
charged in exchange for $21.3 billion in credit extended).
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Total overdraft fees have increased due to both an increase in cost
and an increase in frequency:
Cost. From 1997 to 2007, the average overdraft fee charged
by financial institutions increased from $16.50 to $29. \6\ CRL
estimates that the average fee paid by consumers is $34, \7\
which is unsurprising since the sixteen largest banks charge an
average fee of $35. \8\ The FDIC's 2008 survey, which included
many smaller financial institutions, found an average among its
institutions of $27 per overdraft. \9\
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\6\ Comments of the Center for Responsible Lending to the Board of
Governors of the Federal Reserve System, Office of Thrift Supervision,
and National Credit Union Administration on Proposed Rule Regarding
Unfair and Deceptive Practices--Overdraft Practices (Aug. 4, 2008),
notes 62-63, and accompanying text, available at http://
www.responsiblelending.org/overdraft-loans/policy-legislation/
regulators/overdraft-comments-udap-final-as-submitted-w-appendices-
080408-2-1.pdf [hereinafter CRL 2008 UDAP Comments].
\7\ Eric Halperin, Lisa James, and Peter Smith, ``Debit Card
Danger: Banks Offer Little Warning and Few Choices as Customers Pay a
High Price for Debit Card Overdrafts'', Center for Responsible Lending,
at 25 (Jan. 25, 2007), available at http://www.responsiblelending.org/
overdraft-loans/research-analysis/Debit-Card-Danger-report.pdf
[hereinafter Debit Card Danger].
\8\ Consumer Federation of America, ``CFA Survey: Sixteen Largest
Banks Overdraft Fees and Terms'' (updated July 31, 2009), available at
http://www.consumerfed.org/pdfs/overdraft_fee_report_09.pdf
[hereinafter 2009 CFA Survey].
\9\ FDIC Study of Bank Overdraft Programs, p. iii of the Executive
Summary, available at http://www.fdic.gov/bank/analytical/overdraft/
FDIC138_ExecutiveSummary_v508.pdf (2008) [hereinafter FDIC 2008
Overdraft Study].
Frequency. As recently as 2004, 80 percent of institutions
denied debit card transactions that would have overdrawn the
account. \10\ Today, 90 percent of the Nation's largest
institutions routinely approve these transactions and charge a
fee for each overdraft. \11\ This shift has increased the
frequency of overdrafts significantly, particularly given the
overall increase in debit card use. \12\
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\10\ Mark Fusaro, ``Are `Bounced Check Loans' Really Loans?'', n.
4, at 6 (noting 20 percent of institutions in June 2004 were applying
``bounce protection'' to debit cards or ATM) (Feb. 2007), available at
http://personal.ecu.edu/fusarom/fusarobpintentional.pdf.
\11\ Of the Nation's 10 largest institutions (per the FDIC's June
30, 2009, listing according to total domestic deposits), only Citibank
routinely denies debit card transactions rather than approving them for
a fee. Moreover, while as recently as 2004 overdraft loans accounted
for 60 percent of institutions' total overdraft/insufficient funds
revenue, today they account for approximately 70 percent of that
revenue--indicating covering overdrafts, rather than denying them, is
increasingly the norm. Eric Halperin and Peter Smith, Out of Balance:
Consumers pay $17.5 billion per year in fees for abusive overdraft
loans, Center for Responsible Lending (June 2007), available at http://
www.responsiblelending.org/overdraft-loans/research-analysis/out-of-
balance-report-7-10-final.pdf [hereinafter ``Out of Balance''].
\12\ In 2007, the Federal Reserve reported that debit card
transactions were increasing at a rate of 17.5 percent per year. 2007
Federal Reserve Payments Study, Financial Services Policy Committee,
``Federal Reserve Study Shows That More Than Two-Thirds of Noncash
Payments Are Now Electronic'' (Dec. 10, 2007), available at http://
www.federalreserve.gov/newsevents/press/other/20071210a.htm.
Overdraft fees affect a very large number of consumers each year.
CRL recently estimated that over 50 million Americans overdraw their
accounts annually, with 27 million paying five or more overdraft or NSF
fees. \13\ Most of these fees are paid by a relatively small number of
consumers: The FDIC found that 93 percent of all overdraft fees are
paid by only 14 percent of account holders. These consumers are more
likely to be lower-income, nonwhite or young account holders, who are
the account holders least able to afford such fees. \14\ In the midst
of a recession, abusive overdraft practices are making the dire
financial situations faced by many families even worse.
---------------------------------------------------------------------------
\13\ Overdraft Explosion at 3.
\14\ FDIC 2008 Overdraft Study, Executive Summary at IV.
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II. Regulators Have Failed To Stop the Abuses
The Federal Reserve Board (FRB) first requested comment on
overdraft programs in 2002. Three years later, the FRB, along with the
Office of the Comptroller of the Currency, the FDIC and the National
Credit Union Administration, issued final Joint Guidance addressing
overdraft programs. This guidance clearly recognized the problematic
features of overdraft programs, but it failed to prohibit any of them.
Instead, it described a number of ``best practices,'' which merely
encouraged institutions to avoid those problematic features.
These best practices included that institutions (1) consider
limiting overdraft coverage to checks (i.e., consider not extending
overdraft coverage to debit card transactions) and that they (2)
monitor excessive usage, which regulators stated may indicate a need
for an alternative credit product.
When asked whether this guidance would be treated as law,
regulators responded: ``The best practices, or principles within them,
are enforceable to the extent they are required by law.'' \15\ But the
regulators required none of them by law, and the guidance has largely
been ignored in the years since.
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
Just last week, the FRB issued new overdraft rules that address
whether and how intuitions are required to obtain consumers' consent to
a product their Best Practices suggest shouldn't be provided at all--
overdraft coverage of debit card transactions. \16\ The rule will
require institutions to obtain consumers' affirmative consent, or
``opt-in,'' before charging them overdraft fees on debit card purchases
and ATM withdrawals. We strongly encouraged the FRB to issue this
version of its proposal, as no consumer should be automatically
enrolled in any credit product, much less an abusive one.
---------------------------------------------------------------------------
\16\ Federal Reserve's press release available at http://
www.federalreserve.gov/newsevents/press/bcreg/20091112a.htm. Final rule
available at http://www.federalreserve.gov/newsevents/press/bcreg/
bcreg20091112a1.pdf.
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But this measure alone is largely inadequate, as it fails to
address other fundamental problems with today's fee-based overdraft
programs. The FRB's rule condones charging fees for debit card
overdrafts, which could easily be denied for no fee; it does not
address checks and electronic payments at all; it does nothing to
address the dramatic disparity between the amount of the overdraft and
the amount of the fee institutions charge for covering it; and it fails
to address the problem of an excessive number of overdraft fees being
borne by a relatively small and vulnerable group of consumers.
In short, neither the FRB nor any other banking regulator has
meaningfully addressed the full range of harm to consumers caused by
abusive overdraft programs. Since regulators first recognized high-cost
overdraft programs as a problem in the early 2000s, practices have only
grown worse, and consumers have paid more than $100 billion in
overdraft fees. This failure on the part existing regulators is a
striking illustration of the need for a Consumer Financial Protection
Agency.
See Appendix A for further discussion of how the regulatory
agencies have failed to stem abusive overdraft practices.
III. S. 1799 Will Provide Much-Needed Reform of Overdraft Practices
Given that the Federal regulators have not prohibited abusive
overdraft practices, we are very encouraged to see the Senate
considering S. 1799. The bill contains provisions essential to
addressing the fundamental problems with today's overdraft programs:
A requirement that overdraft fees be reasonable and
proportional to the actual cost to the institution of covering
the overdraft.
A limit of six overdraft fees per year. Once a customer has
incurred six fees in a 12 month period, the institution would
be required to provide a longer-term, lower cost alternative,
such as a line of credit, in order to continue covering the
customer's overdrafts for a charge.
Codification of a prohibition of overdraft fees on debit
card and ATM transactions unless institutions have obtained the
customer's affirmative consent, or ``opt-in.''
These provisions correspond well with the best practices provided
in the 2005 Joint Guidance addressing overdraft programs. The Guidance
suggested that institutions consider making overdraft coverage
unavailable for transactions other than checks; monitor excessive
overdraft program usage, which may indicate a need for an alternative
credit arrangement or other services; and obtain customers' affirmative
consent to receiving overdraft coverage. \17\
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\17\ Department of the Treasury-Office of the Comptroller of the
Currency, Federal Reserve System, Federal Deposit Insurance
Corporation, National Credit Union Administration, Joint Guidance on
Overdraft Protection Programs, 70 Fed. Reg. 9127 (Feb. 24, 2005)
[hereinafter 2005 Joint Guidance].
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IV. The Problems With Today's Fee-Based Overdraft Programs
Financial institutions often justify overdraft fees and the lack of
relationship these fees have to cost by asserting that they are penalty
fees, intended to deter future overdrafts. But in the debit card
context, the institution can stop the behavior altogether by denying
the transaction at the point-of-sale, at no cost to the consumer. In
reality, approving debit card overdrafts facilitates rather discourages
overdrafts. Since the most effective way to prevent debit card
overdrafts is within the institution's control, a penalty fee is not
appropriate for a debit card overdraft. Overdraft fees on checks and
electronic transactions should only be allowed with baseline
substantive protections.
Today's fee-based overdraft programs cause substantial injury to
account holders. The cost of overdraft fees far exceeds any benefit
they may provide. Moreover, the large majority of fees are paid by a
relatively small number of account holders who incur numerous fees and
are least able to quickly recover from them. For these account holders,
one overdraft fee causes subsequent overdraft fees, driving them
further into debt and ultimately making them less likely to be able to
meet essential expenses. As our real-life case study detailed below
demonstrates, fee-based overdraft leaves these account holders worse
off than cheaper overdraft alternatives or even than no overdraft
coverage at all.
An overdraft line of credit is an appropriate credit product for
customers who qualify for it. If a customer does not qualify for a line
of credit, however, it is certainly not appropriate to extend that
customer far higher cost credit on repayment terms far more difficult
to meet. Indeed, those least likely to qualify for a line of credit are
those least likely to be able to shoulder high-cost overdraft fees.
This high-cost credit is predatory, and it is driving responsible
overdraft products out of the market.
A. The cost of overdraft fees far exceeds any benefit provided.
In the aggregate, fee-based overdraft programs cost consumers
nearly $24 billion each year, which is even more than the $21.3 billion
in loans extended in exchange for those fees. \18\ The most common
triggers of overdraft fees, which are debit card transactions, cause an
average overdraft of under $17 yet trigger an average fee of $34. \19\
This fee--twice the size of the loan itself--does not even provide the
account holder the benefit of avoiding a denied transaction fee because
the cost of a denied debit card transaction is zero. \20\ Charging any
overdraft fee at all on a debit card transaction is simply not
justifiable because the institution typically has the ability to
prevent the transaction at the point-of-sale.
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\18\ Overdraft Explosion at 7.
\19\ The avg. overdraft amount for debit card transactions is
$16.46. Debit Card Danger at 25.
\20\ In its Regulation E Proposal, the FRB states: ``the
consequence of not having overdraft services for ATM and one-time debit
card transactions is to have a transaction denied with no fees
assessed.'' 74 Fed. Reg. 5218. Currently, charging NSF fees for denied
debit or ATM transactions is not a common practice. See Center for
Responsible Lending's CRL 2008 UDAP Comments at 18-19 for discussion of
why this practice should be prohibited by the FRB.
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In other contexts, Federal regulators have taken steps to address
high fees imposed for low levels of credit. In the credit card context,
for example, the FRB determined that the excessive fees associated with
``fee harvester'' credit cards ``diminish the value of the account'';
as a result, the FRB limited up front fees on these cards to 50 percent
of the total credit provided and required any fees exceeding 25 percent
of the credit line to be charged over a 6-month period. \21\
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\21\ 74 Fed. Reg. 5542.
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B. The majority of overdraft fees are paid by a small group of account
holders least able to recover from them.
The large majority of fees are paid by overdrafters who pay large
numbers of fees and are least able to recover from them. The FDIC's
recent study of overdraft programs, consistent with CRL's previous
research, found that account holders who overdrew their accounts five
or more times per year paid 93 percent of all overdraft fees. \22\ It
also found that consumers living in lower-income areas bear the brunt
of these fees. \23\ Seniors, young adults, military families, and the
unemployed are also hit hard. \24\ Americans aged 55 and over pay $6.2
billion in total overdraft fees annually--at least $2.5 billion for
debit card/ATM transactions alone \25\--and those heavily dependent on
Social Security pay $1.4 billion annually. \26\
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\22\ FDIC 2008 Overdraft Study at iv.
\23\ Id. at v. Two CRL surveys, conducted in 2006 and 2008, found
that 71 percent of overdraft fees were shouldered by only 16 percent of
respondents who overdrafted, and those account holders were more likely
than the general population to be lower income, nonwhite, single, and
renters. Respondents reporting the most overdraft incidents were those
earning below $50,000/year. Leslie Parrish, Consumers Want Informed
Choice on Overdraft Fees and Banking Options, CRL Research Brief (Apr.
16, 2008) (http://www.responsiblelending.org/overdraft-loans/research-
analysis/consumers-want-informed-choice-on-overdraft-fees-and-banking-
options.html. See CRL 2008 UDAP Comments at 19-21 for further
discussion.
\24\ For further discussion, see Comments of the Center for
Responsible Lending to Board of Governors of the Federal Reserve System
on Proposed Rule to Amend Regulation E--Overdraft Practices (Mar. 30,
2009), Part II.B.1(b), pp. 10-12, available at http://
www.responsiblelending.org/overdraft-loans/policy-legislation/
regulators/comments-on-regulation-e-overdraft-practices.html
[hereinafter CRL 2009 Regulation E Comments].
\25\ Leslie Parrish and Peter Smith, ``Shredded Security:
Overdraft Practices Drain Fees From Older Americans'', Center for
Responsible Lending (June 18, 2008), available at http://
www.responsiblelending.org/overdraft-loans/research-analysis/shredded-
security.html. The report found that debit card POS and ATM
transactions account for 37.4 percent and 2.5 percent respectively (p.
7), which, when calculated, together equal $2.5 billion.
\26\ Id. at 6, Table 1. ``Heavily dependent'' was defined as
recipients who depended on Social Security for at least 50 percent of
their total income.
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C. Overdraft fees leave account holders worse off than lower cost
coverage or even no coverage at all.
Fee-based overdrafts not only leave account holders worse off than
cheaper overdraft alternatives; they even leave account holders worse
than no overdraft coverage at all. For a recent report on the impact of
overdraft fees on older Americans, we tracked 2 months of actual
checking account activity of one panelist, whom we call Mary, from our
database. \27\ Mary is entirely dependent on Social Security for her
income. We compared the actual activity with what her account activity
would have been with an overdraft line of credit. We then added a third
scenario: no fee-based coverage at all. The results are graphically
demonstrated below.
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\27\ CRL analyzed 18 months of bank account transactions, from
January 2005 to June 2006, from participants in Lightspeed Research's
Ultimate Consumer Panel. For further discussion of our database and
methodology, see ``Out of Balance'' at 13-14.
During January and February of 2006, Mary overdrew her account
several times and was charged $448 in overdraft fees. At the end of
February, she had $18.48 in her account. She was trapped in a
destructive cycle of debt, using the bulk of her monthly income to
repay costly overdraft fees. Notably, even with fee-based coverage,
Mary's utility bills were denied in both January and February because
overdraft fees had driven her so far into the red that the bank
eventually stopped approving her transactions.
With an overdraft line of credit at 18 percent, after 2 months,
Mary would have paid about $1 in total fees for her overdrafts and
would have had $420 in the bank.
Even if Mary had had no overdraft coverage at all, she would have
been better off than she was with fee-based overdraft. Five of her
transactions, totaling $242, would have been denied--two point-of-sale
transactions and three electronic transactions. She would have been
charged no fee for the two point-of-sale transactions. She might or
might not have been charged an NSF fee for each of the three denied
electronic transactions. She also might have been charged late fees if
any of the electronic transactions were bills. Assuming,
conservatively, that she was charged an NSF fee and a late fee for each
of the three transactions, her ending balance still would have been
$489--more than enough to cover the value of the denied transactions.
Mary's situation illustrates a problem common among the chronic
overdrafters who pay the vast majority of the fees: Overdraft fees
simply beget more overdraft fees. Ultimately, fee-based overdraft
coverage prevents account holders from being able to meet obligations
they otherwise would have been able to meet.
Said another way, fee-based coverage can lead to denial of
transactions that would not have been denied but for the debt created
by high-cost overdraft fees.
D. Overdraft fees are not reasonably avoidable by many consumers.
1. Account holders often lack sufficient information about their
accounts. The FRB has acknowledged the difficulty of knowing one's own
checking account balance, noting that ``consumers often lack
information about key aspects of their account'' and ``cannot know with
any degree of certainty when funds from a deposit or a credit from a
returned purchase will be made available.'' \28\ Debit holds (occurring
when institutions make a portion of a customer's account balance
unavailable pending settlement of the final amount of a purchase) and
deposit holds (occurring when institutions delay a customer's access to
deposited funds) and the lack of transparency about the order in which
transactions are cleared contribute to account holders' confusion about
their balances. Making matters worse, account balance disclosures
sometimes include funds available for overdraft, without including
warning that accessing those funds could trigger fees, potentially
leading customers to unwittingly spend more money than they have. \29\
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\28\ 73 Fed. Reg. 28929.
\29\ See, 2008 Proposed Rule to amend Regulation DD, 73 Fed. Reg.
28743-44. While the FRB's final Regulation DD rule will require that
the first balance displayed exclude overdraft funds available, it will
allow a second balance to be displayed that includes overdraft funds
available, even with no disclosure that accessing such funds will or
may incur a fee. 74 Fed. Reg. 5593.
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2. Economic hardship prevents those who pay the large majority of
fees from reasonably avoiding them. The FRB has acknowledged in
multiple contexts that broader economic hardship could prevent
consumers from reasonably avoiding injury. In the context of raising
interest rates on existing credit card balances, for example, the FRB
cited several sources indicating that loss of income, illness, or other
factors outside the consumer's control lead to delinquency. \30\
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\30\ 74 Fed. Reg. 5523. The FRB cites the FTC Credit Practices
Rule, which found ``the majority [of defaults] are not reasonably
avoidable by consumers'' because of factors such as loss of income or
illness; Bank of America testimony noting that falling behind on an
account is likely due to circumstances outside the customer's control;
and an economic journal finding conclusive evidence that unemployment
is critical in determining delinquency.
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Likewise, in its discussion of ability to repay in the final HOEPA
rule, the FRB identified several reasons why borrowers, especially in
the subprime market, cannot necessarily avoid unsustainable loans,
including that ``they may . . . urgently need the cash that the loan
will provide for a household emergency.'' \31\
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\31\ 73 Fed. Reg. 44542.
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In the overdraft context, there is no question that economic
hardship contributes to many account holders' inability to avoid fees.
\32\
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\32\ Some may posit that the injury caused by overdraft fees must
be avoidable because only a relatively small portion of consumers
frequently overdraw their accounts. But the FRB has already concluded
that, although injury may be avoidable by some consumers under some
circumstances, it may not be reasonably avoidable as a general matter.
In its analysis of payment allocation methods in the credit card
context, the FRB noted that ``[a]lthough a consumer could avoid the
injury by paying the balance in full every month, this may not be a
reasonable expectation as many consumers are unable to do so.'' It
applied a similar analysis to increasing interest rates on existing
balances. The FRB acknowledged that the injury resulting from increases
in the annual percentage rate ``may be avoidable by some consumers
under certain circumstances,'' but it nonetheless concluded that, ``as
a general matter,'' consumers cannot reasonably avoid interest rate
increases on existing balances.'' 74 Fed. Reg. 5522. In both
circumstances, the FRB concluded that the injury caused by these
practices was not reasonably avoidable.
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3. Financial institutions engage in many practices designed to
maximize overdraft revenue. The increase in overdraft fees--both the
cost and the frequency--over the past several years is the result of a
concerted effort on the part of many financial institutions to maximize
overdraft revenue. These institutions:
have purchased specialized software that helps them
maximize fee revenue and paid consultants to help them do so;
have expanded their overdraft programs to debit card
purchases and ATM transactions;
often post debits as quickly as possible, while delaying
for as long as possible making those deposits available for
use; \33\
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\33\ See, CRL 2008 UDAP Comments at 37, Part III.B.
manipulate the order in which they clear transactions. \34\
(Institutions often clear purchases in order from highest to
lowest, rather than the order in which they occurred, in order
to deplete the account to below zero more quickly. Once the
account balance is negative, the institution is able to charge
an overdraft fee on each subsequently posted transaction, often
resulting in significantly more overdraft fees.)
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\34\ See, CRL 2008 UDAP Comments at 38, Part IV. Recently, an
advisor on overdraft and card strategies at Profit Technologies
acknowledged that fees are a key driver of institutions' transaction
clearing practices: `` `Banks will say (high-to-low clearing) is for
the consumer,' he says. `Bottom line is, when it was pitched, we'd say
. . . a side effect is that it results in more fee income to you
because it bounces more checks.' [The advisor] says that after leaving
Profit Technologies, he joined a credit-counseling firm and saw the
damage fees did to consumers.'' Kathy Chu, ``Banks' `Courtesy' Loans at
Soaring Rates Irk Consumers'', USA Today, July 13, 2009.
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E. Overdraft fees harm not only consumers, but also the banking sector
and the economy as whole.
Today's exploitative fee-based overdraft programs harm the banking
industry and, ultimately, the economy as a whole.
Without baseline protections, institutions are engaged in a race to
the bottom that provides tremendous disincentives to operating fair
overdraft programs. Given the high fees that institutions generate
through fee-based overdraft, institutions choosing to operate fair
overdraft programs risk placing themselves at a substantial
disadvantage. It's unsurprising, then, that most of the largest
institutions--and many smaller institutions--have substantially similar
abusive programs. (Of the largest institutions, only one--Citi--
routinely denies debit card overdrafts.)
Moreover, institutions are generating a substantial portion of
their revenues through overdraft practices that both regulators and
legislators have deemed questionable. In the interest of safety and
soundness, all would be better served if institutions generated greater
portions of their revenue through practices that have not drawn such
scrutiny and criticism. Instead, today's overdraft programs award banks
for counterproductive programs while distracting them from core banking
activities. A representative of one financial institution that
implemented software designed to increase overdraft fees stated: ``If I
had two more products like the IMPACT Automated Overdraft Privilege, I
could quit making loans altogether.'' \35\
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\35\ Statement by an unidentified client of IMPACT Financial
Services, available until recently at https://impactfinancial.com/
portal/Endorsements/ClientTestimonials/tabid/70/Default.aspx (last
viewed on-line Mar. 8, 2009).
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Finally, taxpayers spent hundreds of billions of dollars to bail
out banks while being told they would provide critical credit to the
economy--not with the expectation that institutions would continue to
extract revenues from those with relatively little resources.
Redirecting these individuals' incomes toward productive goods and
services would do far more for economic recovery than allowing
practices that drive them deeper into debt.
F. Concern about denied checks does not justify maintaining the status
quo.
Some have posited that limiting today's fee-based overdraft
programs will create problems for consumers by leading to an increase
in bounced checks. It is important to note that, as Mary's story above
illustrates, plenty of checks bounce even under today's overdraft
programs. In fact, checks often bounce due to the debt created by high
overdraft fees themselves.
Moreover, checks account for only about a quarter of all overdraft
fees. \36\ The far more common triggers of overdraft fees are debit
cards--transactions that carry no penalty at all when denied.
---------------------------------------------------------------------------
\36\ Debit Card Danger at 25. CRL's research found that checks
accounted for 27 percent of all overdrafts, which is likely decreasing
as paper checks are decreasing generally.
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V. S. 1799 Addresses the Fundamental Problems With Today's Overdraft
Programs
S. 1799 addresses three key unfair features of fee-based overdraft
programs: (1) charging fees that are not reasonable or proportional to
the cost to the institution of covering the overdraft; (2) charging
excessive numbers of fees that create a debt trap for those paying the
majority of overdraft fees; and (3) charging overdraft fees on debit
card and ATM transactions without obtaining a customer's affirmative
consent to having overdrafts covered.
A. Addressing High Cost: Reasonable and Proportional Requirement.
S. 1799 would require that overdraft fees be reasonable and
proportional to the actual cost to the institution of covering the
overdraft, with the FRB providing additional guidelines for what
constitutes ``reasonable and proportional,'' potentially including a
safe harbor.
As noted earlier, the average overdraft fee exceeds the amount of
the overdraft covered. This disparity is particularly outrageous given
the short period of time for which the typical overdraft is
outstanding--three to five days \37\--and the low default risk
overdrafts carry. Indeed, the only two circumstances under which an
overdraft loan is not repaid are when another deposit is never made
into the account or when the customer walks away from the account.
Operational cost is also low because most programs are highly
automated.
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\37\ Debit Card Danger at 25.
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The recently passed CARD Act requires the FRB to promulgate
standards for reasonable penalty fees and specifies that penalty fees
be proportional not only to cost but also to the violation or omission.
We support S. 1799's slightly different approach, which does not
authorize consideration of the ``violation or omission'' because it is
overwhelmingly clear that overdraft fees as currently administered do
not deter overdrafting. \38\ In fact, institutions' overdraft practices
have evolved from approving the occasional overdraft as a customer
courtesy to routinely approving transactions, even those they could
easily deny at the point of sale for no fee. These practices encourage
rather than discourage overdrafts.
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\38\ There are two primary penalty fees charged in the credit card
context today--late fees and over-the-limit fees. A reasonable late fee
is not as likely as an overdraft fee to simply perpetuate the scenario
it purports to deter. In the credit card context, avoiding an
additional late fee requires that the customer pay only a minimum
payment on time--not the entire outstanding balance, including fees. In
the overdraft context, the entire loan, plus all fees, are repaid upon
the customer's next deposit, typically 3 to 5 days later. Therefore,
customers have more time to recover from a late fee than they do from
an overdraft fee, and late fees are not as likely to beget late fees as
overdraft fees are to beget overdraft fees.
Overdraft fees in the debit card context are very similar to over-
the-limit fees in the credit card context in that they result from
transactions the institution approves that it could easily deny for no
fee. The clear way to deter the behavior in both contexts is to deny
the transaction.
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In addition, the primary effect of the increase in the average
overdraft fee charged over the last decade has not been deterrence;
rather, it has been to increase the number of overdraft occurrences by
chronic overdrafters, due in large part to the debt trap created by
high fees.
The obvious way to deter overdrafts is to deny transactions that
would overdraw the account--not to approve them for an exorbitant fee
that only drives consumers deeper into debt and makes them more likely
to overdraw their account again.
We note that while S. 1799 would exclude overdraft fees from the
interest rate cap applicable to Federal credit unions, we do not
support such exclusion and believe all credit extended by Federal
credit unions should be subject to the interest rate cap.
B. Addressing Frequency: Annual Limit on the Number of Fees.
S. 1799 would limit the number of overdraft fees an institution may
charge a customer to six per year. After six fees have been incurred,
the institution could only continue covering overdrafts for a charge if
the customer enrolls in a lower-cost alternative. The banking agencies
have long advised institutions to discourage excessive use of overdraft
programs, but this guidance has largely not been followed. \39\
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\39\ 2005 Joint Guidance; OTS Guidance, 70 Fed. Reg. 8428 (2005).
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This proposed limit recognizes that if a customer qualifies for a
lower cost form of overdraft coverage, the institution should provide
that coverage to the customer. If the customer doesn't qualify for
lower cost coverage, that customer certainly is not in a position to
shoulder more than six overdraft fees a year.
Banking regulators have also long discouraged practices analogous
to excessive overdraft loans. \40\ The repeat borrowing illustrated in
our case study above is analogous both to loan flipping of other high-
cost short-term loans, such as payday loans, loan flipping in the
mortgage context, and pyramiding late fees:
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\40\ See, e.g., OCC Advisory Letter on Abusive Lending Practices,
AL 2000-7, July 25, 2000; FDIC Financial Institution Letters,
Guidelines for Payday Lending, FIL 14-2005, February 2005; FDIC
Financial Institution Letters, Affordable Small-Dollar Loan Products,
Final Guidelines, FIL-50-2007, June 19, 2007.
Other high-cost, short-term loan flipping. Excessive
overdraft loans create a debt trap similar to that caused by
other high-cost, short-term lending. CRL's recent research
finds that over three-fourths of payday loan volume is
generated within 2 weeks of a customer's previous payday loan.
\41\ While technically a borrower typically closes an old
payday loan and opens a new one, effectively the borrower is
being flipped from one loan into another--unable to repay one
loan and meet essential expenses without taking out another
loan. \42\ Payday loans beget payday loans, much like overdraft
loans beget overdraft loans.
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\41\ Leslie Parrish and Uriah King, ``Phantom Demand: Short-Term
Due Date Generates Need for Repeat Payday Loans, Accounting for 76
Percent of Total Volume'', Center for Responsible Lending (July 9,
2009), available at http://www.responsiblelending.org/payday-lending/
research-analysis/phantom-demand-final.pdf.
\42\ The typical payday borrower pays an additional $45 in
interest every 2 weeks, with effectively no reduction in principal--
i.e., no benefit--and ultimately pays $450 in interest on a $300 loan.
Mortgage loan flipping, which has already been identified
as abusive. The repeated extension of overdraft loans is also
analogous to flipping borrowers from one mortgage loan to the
next. In the mortgage context, an originator sells the borrower
an unaffordable loan only to later refinance the borrower into
another unsustainable loan, extracting fees and stripping home
equity from the borrower in the process. Earlier this session,
the House of Representatives passed H.R. 1728, which would ban
this practice for mortgage loans. In the overdraft context,
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cash is similarly stripped from customers who are flipped.
Pyramiding late fees, which the FRB has prohibited as an
unfair practice. Pyramiding late fees occur when lenders apply
future payments to the late fee first, making it appear future
payments are delinquent even though they are, in fact, paid in
full within the required time period. As a result, lenders
charge additional late fees. \43\ These fees provide no benefit
to the consumer while driving them further into debt. \44\ For
customers who incur the majority of overdraft fees, they often
would have had sufficient funds in their account to meet future
expenses but for the excessive overdraft fees they have
incurred in previous periods.
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\43\ 12 CFR 227.15 (Regulation AA).
\44\ 16 CFR 444.
How regulators have addressed these analogous abuses informs what
is appropriate in the overdraft context. In 2005, the FDIC limited
excessive refinancings of payday loans by prohibiting the entities it
regulates from making payday loans to anyone who has had payday loans
outstanding for 3 months in any 12-month period. \45\ The FDIC guidance
encourages lenders to offer borrowers an alternative longer term
product at that point but notes that even if such alternative is not
available, ``an extension of a payday loan is not appropriate under
such circumstances.'' \46\ Assuming a 14-day pay period, this standard
limits the number of loans any borrower can have to six per year,
alleviating the debt trap while continuing to allow loans to the
occasional users. The FDIC further urges institutions to require
``cooling off'' or waiting periods between payday loans. \47\ The limit
on fees in S. 1799 is closely analogous to the FDIC's approach to
limiting payday loans and would address the debt trap caused by
overdraft loans in much the same way.
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\45\ FDIC Financial Institution Letters, Guidelines for Payday
Lending, FIL 14-2005, February 2005.
\46\ Id.
\47\ Id. The OCC, in its payday guidance, has noted that its
guidance addressing abusive lending practices more generally should
also be applied in the context of payday lending. That guidance
identifies the following indicators of abusive lending: pricing and
terms that far exceed the cost of making the loan; loan terms designed
to make it difficult for borrowers to reduce indebtedness; and frequent
and multiple refinancings. OCC Advisory Letter on Abusive Lending
Practices, AL 2000-7, July 25, 2000.
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Similarly, the FRB has long prohibited pyramiding late fees as an
unfair practice through its Credit Practices Rule, \48\ and it recently
reinforced its stance by prohibiting the same under TILA through its
recent HOEPA final rule. \49\
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\48\ 12 CFR 227.15(a).
\49\ The FRB noted that pyramiding late fees ``give rise to
charging excessive or unwarranted fees to consumers, who may not even
be aware of the default or fees . . . Once consumers are in default,
these practices can make it difficult for consumers to catch up.'' 73
Fed. Reg. 44569.
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C. Permitting Customers To Opt-In Is Crucial.
Consumers should be provided a meaningful choice about whether to
participate in fee-based overdraft programs. Automatically enrolling a
customer in the program, even if an institution allows the customer to
opt-out later (often after the damage has been done), does not provide
a meaningful choice.
An opt-in arrangement provides the customer a moment during which
he or she may evaluate the options available and affirmatively choose
the one most suitable. In its proposed rulemaking, the FRB recognized
the productive incentives an opt-in arrangement would offer: ``[Opt-in
would] provide an incentive for institutions to persuade consumers of
the benefits of the overdraft service and enable the consumer to make
an informed choice about the merits of the service before he or she
incurs any overdraft fees.'' \50\
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\50\ 74 Fed. Reg. 5225.
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While an opt-in requirement must be coupled with other substantive
protections, greater transparency will foster competition in the
marketplace, resulting in better choices for consumers. Allowing no
choice at all, or allowing automatic enrollment with only an
opportunity to opt-out, are anticonsumer, nontransparent practices that
have facilitated the race to the bottom in this area over the past
several years.
While the Federal Reserve's recent action will require ``opt-in''
on debit card and ATM transactions, codification of the protections
increases the likelihood they will endure over time. S. 1799 requires
institutions to obtain consumers' opt-in to overdraft fees on debit
card and ATM transactions. We support this requirement; we also support
an opt-in requirement for overdraft fees on checks and electronic
transfers. For a complete discussion of this issue, see our 2008 and
2009 regulatory comment letters. \51\
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\51\ CRL 2008 UDAP Comments at 25-27; CRL 2009 Regulation E
Comments at 8-18.
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VI. Conclusion
We support S. 1799 for comprehensively addressing the most abusive
features of today's overdraft programs. The bill would limit the high
costs of these fees, would cut down on the frequency which fees are
charged to those least able to shoulder them, and would require the
customer's express consent to overdraft fees on debit card and ATM
transactions.
Thank you again for the opportunity to testify today. I look
forward to your questions.
APPENDIX A: Regulators Fail To Curb Abuses
Regulators first identified overdraft practices as a problem as
early as 2001, when the OCC noted the ``complete lack of consumer
protections'' associated with these programs. Since then, overdraft
practices have grown exponentially worse. While regulators have taken
no meaningful steps to rein in abuses, Americans have paid well over
$100 billion in overdraft fees. \52\
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\52\ Determined as follows:
2009 $20.0B (per CRL's projection for 2009, Overdraft Explosion,
through September)
2008 $23.7 (per CRL 2009 report, Overdraft Explosion)
2007 $20.6 (assumes midpoint between 2006 and 2008 figure)
2006 $17.5 (per CRL 2007 report, Out of Balance)
2005 $14.0 (assumes midpoint between 2004 and 2006 figure)
2004 $10.3 (per CRL 2005 report, High Cost and Hidden From View)
Total $106.3 B (Conservative estimate as it does not include any
fees paid in 2001, 2002, or 2003)
2001--OCC Interpretive Letter discusses numerous concerns about
automated overdraft programs, noting ``the complete lack of
consumer safeguards built into the program,'' including a lack of
limits on the number of fees charged per month; similarities
between overdraft fees and other ``high interest rate credit''; and
the failure of banks to meet the needs of repeat overdrafters in a
more economical way. \53\
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\53\ OCC Interpretive Letter #914 (August 3, 2001), available at
http://www.occ.treas.gov/interp/sep01/int914.pdf. The OCC raised
compliance issues with respect to TILA, TISA, EFTA, ECOA, and
Regulation O (extensions of credit to bank insiders).
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2002--The FRB issues a preliminary request for comment on overdraft
programs. \54\
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\54\ 67 Fed. Reg. 72620 (2002).
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2005--The FRB affirmatively exempts overdraft loans from the
protections of the Truth in Lending Act when it chooses to address
overdraft programs under the Truth in Savings Act instead. \55\
Overdrafts continue to be made without consumers' explicit consent
and with no cost-of-credit disclosures to allow comparisons of
overdraft fees to less costly options.
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\55\ 70 Fed. Reg. 29582 (May 2005).
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2005--Regulators issue joint guidance, which reflects several of the
OCC's 2001 concerns. But rather than explicitly prohibiting any of
these practices as unfair and deceptive, the guidance only provides
``Best Practices.'' When asked whether this guidance would be
treated as law, regulators responded: ``The best practices, or
principles within them, are enforceable to the extent they are
required by law.'' \56\ But the regulators required none of them by
law, and the guidance has largely been ignored in the years since.
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\56\ Id.
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2007--Despite its joint guidance acknowledging that overdrafts are an
extension of credit, the OCC asserts in Miller v. Bank of America
that its regulations allow banks to seize exempt benefits such as
Social Security to pay overdraft loans and fees, claiming that they
are not ``collect[ing] a debt.''
2008--Regulators issue a proposal under their authority to address
unfair and deceptive practices (UDAP). The proposal covers all
transaction types (checks, electronic payments, debit card and ATM)
but proposes only that consumers have the right to ``opt-out'' of
high-cost overdraft programs--not that institutions must obtain
consumers' explicit consent before enrolling them. Regulators later
withdraw the proposal.
2009--The FRB issues a rule addressing consent to overdraft fees on
debit card and ATM transactions. Its provides no additional
substantive protections, such as a limit on excessive fees or a
requirement that fees be reasonable and proportional to the cost to
the institution of covering the overdraft.
Ongoing--Best Practices Guidance continue to be largely ignored by
institutions and the regulators alike. The OCC's Compliance
Handbooks make no reference to overdraft programs at all, \57\ much
less to Best Practices.
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\57\ There is little evidence to suggest that the OCC has
instructed its examiners to even evaluate overdraft practices--much
less attempted to encourage best practices. A search of the OCC's
Compliance Handbook for depository services finds no reference to the
guidance and a search of the OCC's ``Other Consumer Protections''
Compliance Handbook finds no reference to overdraft protection, or,
indeed, to the FTC Act's UDAP provisions at all. Moreover, the OCC's
message to its banks' customers has essentially been that the banks can
do as they please. For example, the OCC's online consumer reference
``HelpWithMyBank'' has a FAQ on its overdraft section concerning
transaction posting order (generally manipulated by banks to maximize
overdraft fees) that validates the banks' own claim that they can post
transactions in whatever order they please. http://
www.helpwithmybank.gov/faqs/banking_overdraft.html#drop08.
Additionally, Consumer Federation of America's 2009 survey of overdraft
fees at the 16 largest banks finds that their average fee is $35,
compared to $27 at FDIC-regulated institutions. 2009 CFA Survey. Eleven
of the sixteen largest banks are OCC-supervised.