What to do About Overdraft Protection
Overdraft protection continues to crop up as an issue that Congress is determined to deal with. The problem is there is very little consensus among financial institutions on what to do about what Congress says are abusive practices of overdraft protection.
The abuse is there. The Center for Responsible Lending says Americans are hit with $17.5 billion in overdraft fees each year, about $1 billion of that nails young people ages 18-24 who can least afford it.
This has been a difficult issue for many years. Here's the background. Overdraft protection, also known as courtesy pay and bounce protection, protects a consumer from bouncing a check and thus incurring a nonsufficient funds fee and possibly a fee from a creditor if the check was for say a credit card bill where a late fee could be in play. Advocates say it is a valuable product because it protects a consumer from getting dinged twice--once for the nonsufficient funds fee and once from the creditor's late charge. That is a valid point that is hard to argue. If a consumer loses track of their finances one month and is saved by overdraft protection, the service is very valuable.
The problem is there are people who are using overdraft protection all the time. For them, it's not the exception, but the rule. That brings into question whether it is a service for the consumer or a great moneymaker for the financial institution.
The abuse needs to be stopped, but I don't like some of how Congress is going after this. They have introduced a bill that would bring overdraft protection under Truth in Lending versus Truth in Savings where it is now. If overdraft were to go under Truth in Lending, financial institutions would be required to disclose the overdraft fee as an annual percentage rate. This makes very little sense. First, since you don't know when the consumer will make good on the overdraft, it's impossible to calculate a rate--you don't know the term. The bill would have to be amended to put set periods in place so financials would calculate an APR for one week, two weeks, a month, etc. That's doable, but not a regulatory burden that credit unions, already the most heavily regulated of financial institutions, need to deal with.
Overdraft protection is a fee because it is a set price for a specific action. It is not $25 on Monday and $35 on Tuesday, it is a set price per overdraft. If Congress wants to put an APR on an overdraft fee, why not put an APR on an ATM transaction? How would Bank of America's $3 foreign ATM fee look on a $20 withdrawal from an ATM? It would look outrageous, probably more outrageous than most overdraft fees, but it's almost as if you're borrowing $3 from BofA to use their machine to get to your own money.
My pal Jim Blaine of State Employees CU of N.C., as big a consumer advocate as you'll find, says if overdraft protection isn't a loan then how come payday loans are regulated under Truth in Lending and have annual percentage rates. What's the difference, he asks. The difference is payday loans are cash advances with options (albeit bad ones). For example, borrowers can let the loan "roll over" and renew it. You can't do that with an overdraft fee. I certainly don't want to get in an argument with Rhodes Scholar Blaine (and I'm not kidding, he is that smart), but the other difference is consumers are walking into those payday lending shops and either giving postdated checks or authorizations for electronic debits--they are actively entering into a contract. Properly used, consumers would rarely even know their overdraft protection was kicking in.
The current overdraft bill has other flaws, like the fact that for credit unions most fees would be over their 18% usury ceiling. This would put credit unions out of the overdraft business. I don't think the bill in its current form has a chance, but what bothers me is there is not enough talk among credit unions as to what the answer is.
This is a perfect issue for credit unions to show their white hat ways. The trade associations are opposing the bill and doing what they have to, arguing each point. That unfortunately is politics, and it's a shame they even have to argue whether overdraft falls under Truth in Lending or Truth in Savings or fight about the 18% usury ceiling. Credit unions are the good guys. They should be pointing out all the things they do to help members avoid overdraft fees. Mr. Blaine's credit union is a shining example. SECU of N.C. has a very successful payday alternative program that is saving his members a lot of money. One CEO tells me his CU does all it can to inform members about other options than overdraft, from getting permission to deduct from other accounts to lines of credit, to brochures about whether overdraft is right or wrong for them. He's often told from overdraft protection consultants about all the money he is leaving on the table. For him, it's not about the money.
This bill is an opportunity for credit unions to talk about their payday lending alternative programs, financial education efforts and overall lower fee structures than banks. Let's turn the legislative talk into a dialogue about how credit unions are here to help their members, not suck them dry on fees. Let's say to Congress, "your bill doesn't work for credit unions for these reasons, but also it's not credit unions that are the problem."
Should Congress pass a bill to stop overdraft protection abuse? Absolutely. Should credit unions be in that bill? Not necessarily, but asking for an exemption isn't practical. However, if credit unions want to be bullet proof in this argument, they should consider making overdraft protection an opt-in service for all members, have informative overdraft brochures available (doesn't cost much to have a brochure that can be downloaded as a PDF online from the CU's site), and develop payday lending alternative programs.
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