DURHAM, N.C. – The proliferation of overdraft loan programs has caused some consumer groups concern. According to a study from the Center for Responsible Lending, 16% of overdraft loan users account for 71% of fee-based overdraft loan fees. Repeat users are more often low-income, single, nonwhite renters and use overdraft loans as an “expensive substitute” for a line-of-credit, the study said. Some might be paying fees that can be as costly as payday loans, the group found.

CRL's survey began with a nationally representative sample of 4,000 telephone interviews, however the sample size decreased to 112 when the focus was narrowed to repeat overdraft loan users. Earlier CRL research estimates that checking account customers pay more than $10.3 billion in overdraft loan fees every year. Approximately $7.3 billion is collected from repeat borrowers, rather than one-time users, the study showed. From 2003 to 2005, the number of financial institutions using a vendor-based overdraft loan program increased almost 80% to 3,500 institutions. CRL said although automating the programs has lowered the costs of making these loans, the average fee charged for overdrafts increased 24% from 1998 to 2006, to $26.90. Traditionally, depository institutions have selectively covered checks that exceed account balances as an occasional courtesy to depositors, CRL said. A customer or member who wanted and qualified for a formal program to protect against overdrafts was offered transfers from a line-of-credit, a credit card, or linked savings account. Those who did not qualify for such contractual programs and who demonstrated a pattern of overdrawing a checking account were typically counseled that future overdrafts would not be honored. Financial institutions returned the check to the presenter, charged a not sufficient funds fee, and/or closed the customer's account. “Today's customers are placed in overdraft loan programs, the most expensive credit program that the institution offers, often without their consent,” CRL said. Vendors and bankers say their overdraft loan programs appeal to a broad range of bank customers who occasionally use the service to cover a missed deposit or math error, according to CRL. For at least one vendor, the service appeals to consumers with $50,000 or more in annual household income and who have lived at their current address four-and-a-half years. They have an average of four years in their present job and 32% own their homes, the study said. “[Our] studies show [consumers] not only welcome [them] but are demanding such discreet, value-added programs,” the vendor said. In its research, CRL found the average non-repeat user of overdraft loan programs is 40 to 44 years old, has a household income of $35,000 to $40,000 and 71% own their own homes. “These users, however, account for a small minority of the overdraft loan fees paid each year,” CRL said. “The demographics of checking account holders who reported that they use overdraft loans repeatedly provide a clear contrast to the industry's description of the typical user.” The average repeat user is 35-39 years old and has a household income of $30,000 to $35,000, and only 61% of repeat users own their own homes, according to CRL's study. Repeat overdraft loan users are more likely to be unmarried and nonwhite. CRL has recommended a number of measures to equip customers and members with knowledge of overdraft loan programs. Among them, urging the Federal Reserve Board refuse to exempt such programs from the Truth in Lending Act, which requires institutions to disclose the annual percentage of loans. Borrowers should also “affirmatively and explicitly consent to participate” and repeated overdraft loans that result from more than one incident per quarter should be prohibited.

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