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Watch that Overdraft! New Federal Law and Deceptive Bank Practices Make for Costly Bounce “Protection”

– The Chicago-based Woodstock Institute today released a report
describing the perils of bounce protection, a loan program offered by
all of Chicago’s seven largest banks. The report, Banking on Bounced
Checks: Federal Proposal on Bounce Protection Still Exposes Consumers
to Hidden Bank Fees, calls for stricter regulation of bounce
protection, and gives recommendations to consumers on how to avoid
stiff fees and unclear disclosures from their banks.

protection, also known across the banking industry as “bounced check
loans” or “overdraft protection,” was originally intended as a
last-ditch effort to avoid an overdrawn checking account and the
embarrassment of a bounced check. Nowadays, this “courtesy service” has
evolved into a much different product: many banks have applied it to
ATMs and credit cards, making overdrafts more likely. The problems will
be exacerbated when the federal Check 21 Act goes into effect on
October 28; this Act will result in the clearance of personal checks in
less than one day, making costly overdrafts more frequent.

Key conclusions of the report include:

·         Bounce protection is effectively a short-term loan program. Many banks now encourage
consumers to write checks that overdraw the balance in an account, and
suggest to them without, in fact, any guarantee that the checks will be
honored. The overdraft fees are, in effect, an interest rate.
Overdraft/non-sufficient funds fees typically are $25 to $35 per
transaction. Many banks will even charge an additional “extended”
overdraft fee, usually a $5 to $6 charge for each day the account
remains overdrawn.

APRs for bounce protection at Chicago area banks are excessively high.
The study includes a survey of bounce protection procedures at
Chicago’s seven largest banks, and presents the fee schedule at each of
them.  In a scenario that involves a $200, 14-day loan made up of
five overdraft debits, APRs at these seven banks range from 1,629
percent to 3,441 percent, with a mean of 2,424 percent. For this loan,
consumers would pay between $125 and $264 in fees. With rates this
high, bounce protection is akin to payday lending.

Banks use dishonest practices to increase the number of
overdraft/non-sufficient funds fees. The report itemizes these
practices. For example, many banks now display a “cash available”
figure rather than an “account balance” at ATM terminals and on
periodic statements. This “cash available” figure is the sum of the
account balance and the overdraft limit, which misleads the consumer
into supposing (s)he has more money in the account than is the case.

Banks use deceptive advertising to encourage bounce protection and thus
increase fees. No longer does the term “overdraft” connote harmfulness.
Banks will use taglines like “Did that last check catch you off-guard?
Don’t worry, we’ve got you covered.” In this way, consumers are almost
invited to incur exorbitant fees.

Bounce protection procedures
are made intentionally unclear so that consumers can’t compare it to
other products. In fact, many banks don’t even tell their customers
they have bounce protection. Currently, banks aren’t required to tell
accountholders the types of transactions covered, the amount of the
overdraft limit, and the order in which checks are processed. Some
banks process the largest checks first to maximize the number of checks
bounced and the amount of fees charged. Woodstock Institute and several
other consumer groups are asking the Federal Reserve Board to regulate
bounce protection under the Truth In Lending Act to make these
procedures more clear, and to impose additional consumer protections.

costs of bounce protection are excessive,” said Malcolm Bush, President
of Woodstock Institute. “What’s worse, banks go out of their way to
hide the costs.”

The report closes with advice to the consumer on how to avoid this risky program.

The full version of the report is available for download:

icon Reinvestment Alert 27 – Increase in Bank Branches Shortchanges Lower-Income and Minority Communities
Institute, founded in 1973, is a nationally-recognized resource on
credit and capital needs of low-income and minority communities. The
Institute engages in applied research, policy development, and
technical assistance to promote community economic development.