wlmmyers
01-23-2003, 04:03 PM
Folks * Short notice, but we hope that you and/or your organization will
sign on to the letter below asking the Federal Reserve to clamp down on the
"bounced check protection" programs to pay overdrawn accounts that many
depositories are now using. Customers are often enticed by claims of “free
checking”, when in fact the bounced check fees make it anything but
free. The New York Times ran a great article about this today. It's
attached. The Fed’s comment request is on page 7 under Additional Issue at:
http://www.federalreserve.gov/boarddocs/press/bcreg/2002/20021126/attachment.pdf.
Comment deadline is Monday, January 27, so wrapping up sign-ons by COB
Friday, Jan. 24 is our goal.
Through a loophole in Federal Reserve rules, institutions do not have to
call these bounced check programs extensions of credit, and therefore don't
disclose that they are charging people 1,000% interest on the loans. Such
outrageous bounced check fees are a primary reason why checking account
holders turn to payday lenders. Newsweek ran an excellent piece about
these overdraft fees on Nov. 18, 2002, found at:
http://stacks.msnbc.com/news/832897.asp
We hope that you would be willing to sign on, either as an individual (with
the organization listed for identification purposes only) or as an
organization. Please respond to me at davidb@self-help.org, making clear
if you are signing on for your organization as a whole or just in your own
name (with your organization listed merely for identification
purposes). Of course, don't hesitate to email or call me (919 956-4495) or
Daryn Dodson at daryn.dodson@self-help.org or 919 956-4674 with any questions.
Thank you for your time and consideration!
David Beck, Self-Help
301 W. Main St. Durham NC 27701
ph(919)956-4495 fax 4605
www.self-help.org
>January 27, 2003
>
>Ms. Jennifer Johnson
>Secretary
>Board of Governors of the Federal Reserve System
>20th Street and Constitution Avenue, NW
>Washington, D.C. 20551
>
>Re: Bounced Check Protections/Overdrafts; Regulation Z;
>Docket No. R-1136
>
>Ladies and Gentlemen:
>
>We, the undersigned individuals and organizations representing _____
>million Americans, are pleased the Federal Reserve has requested comment
>on so-called bounced-check programs, because we believe these are among
>the most virulent forms of predatory lending in existence today. We have
>two specific suggestions regarding these programs:
>* Revise Regulation Z and fair lending regulations to require
> financial institutions to treat overdraft charges as extensions of
> credit; and
>* Revise Regulation DD to exclude from the definition of “free
> checking” those accounts that charge overdraft fees or increase
> the number of checks subject to NSF fees by paying larger checks
> first.
>
>Much has been written about “payday lending,” a highly abusive practice
>that federal bank regulators as well as many state regulators have begun to
>crack down on. Among other things, payday lending encourages lower
>income people to obtain an advance on their next paycheck, at APRs of up
>to 500% or more. Even worse, once an individual or family has obtained
>the first advance, they are caught in a vicious cycle of rolling over the
>advances, and often with no ability to end the cycle.
>
>Unlike payday lending programs, the extraordinarily high APRs in
>bounced check programs are never disclosed as such, and none of the other
>consumer credit protections are provided. Moreover, bounced check
>programs are aimed at the very same customers that payday lenders are
>seeking: low and moderate income account holders with little or no
>savings. The source of repayment is the same (the next paycheck), and the
>costs rival or exceed those of payday lending. In addition, with bounced
>check programs, the depositors face multiple costs in a payday cycle (that
>is, on each bounced check) rather than one-time costs (that is, on a single
>payday advance).
>
>Perhaps it would be useful to describe how these bounced check programs
>typically work. First, consulting firms aggressively sell the programs, with
>promises of significant profits. We’d urge the FRB staff to look at some of
>the firms’ own web sites, such as Strunk & Associates at
>http://www.strunklp.com.
>
>Second, the banks typically identify segments of their customer base that
>are most likely to be in an overdraft situation, or may be encouraged to be
>in an overdraft situation. These are many of the same people sought out by
>payday lenders, and the bank recruits them with promises of “free
>checking.” The Federal Reserve’s own Regulation DD inadvertently
>encourages the bait-and-switch, since a checking account can be called
>“free” under Regulation DD so long as there is no minimum balance, and
>even though the account may be structured with the purpose of charging a
>huge amounts of fees. Indeed, note in the Strunk web site referred to above
>how the financial success of bounced check programs is typically linked to
>“free checking.”
>
>A bank maximizes the bounced check credit fees in at least three ways.
>First, it makes sure the program falls below the radar of Regulation Z and
>other consumer protection laws by arguing the programs are only
>incidental accommodations, and thus not “credit.” Second, the bank often
>sets its computer to pay larger checks first, thus depleting the consumer’s
>account as fast as possible and causing a fee on each subsequent check paid
>that day and in future days. If the program were intended as a true
>consumer accommodation, the logical approach would be to pay the lower
>amount checks first, and then pay the larger checks (maybe only one or
>two) as an overdraft. All of the checks would still be paid, but the cost to
>the consumer would be far less.
>
>Third, many banks now permit disbursement of cash at ATMs even when
>there are insufficient funds in the underlying accounts, and they do so
>without telling consumers they will have to pay a fee that, expressed as an
>APR, would typically be 1,000% or higher.
>
>Here is an example of how such an APR arises. Assume the customer’s
>account has an $80 balance and that the overdraft fee is $21 per overdraft
>(a conservative estimate, since many of the overdraft fees are now $25, $30
>or more per overdraft). The customer goes to an ATM and asks for $100
>in cash, which is paid, leaving a minus-$20 account balance. If the
>customer pays the $20 back together with the $21 overdraft fee at the end
>of one week, the annualized interest rate is 5,475%; if she pays it back at
>the end of two weeks, it is 2,738%. (An overdraft fee of $30 would result
>instead in APRs of 7,821 % and 3,911%, respectively.)
>
>Payday lenders never dreamed of such returns.
>
>Even if a customer repeatedly overdraws an account, most of these banks
>will continue to offer the “accommodation,” and they will do so even when
>the customer fails to repay the overdrafts within the permitted time
>periods.
>These are the customers who create the most fee income for the lender, and
>the ones who can least afford to.
>
>Most responsible banks in fact provide their customers, no matter what
>their income levels, with responsible overdraft programs. These banks
>provide overdraft as a true form of credit through a linked credit card or
>other line of credit, or through a savings account transfer. These
>legitimate
>programs are fully disclosed to consumers and, when the programs involve
>credit, they are subject not only to Regulation Z, but also Regulation B and
>other consumer protection laws. And, of course, these programs employ
>proper underwriting criteria to assure that consumers are not coaxed into an
>amount of credit above what they can properly handle.
>
>It is the banks with irresponsible programs that we are concerned about
>here, because they steer low and moderate income customers (that is, the
>most vulnerable part of their customer base) to free/fee checking, and then
>maximize the overdraft and other fee opportunities of these accounts.
>These programs constitute an insidious and rampant form of predatory
>lending, and this is an opportune time for the Federal Reserve to address
>the issue.
>
>We urge the FRB to recognize these bounced check programs for what
>they are - predatory consumer lending - and provide the appropriate
>protections under applicable laws. We believe that the FRB should amend
>Regulation Z to treat bounced check programs as extensions of credit, and
>we would urge that it similarly amend Regulation B and related fair lending
>regulations to cover these programs. Finally, we urge the FRB to address
>the egregious abuses that are taking place under Regulation DD’s outdated
>definition of “free” checking.
>
>Sincerely,
>
>[name, title, organization, location]
David,
Usually, I want to jump right in and share the good work that you are
doing. In this case I'm not so sure. In our world, we suffer substantial
losses from unrecoverable overdrafts. Our functional cost analysis show
that our checking accounts are an expensive source of funds, even including
overdraft fees. We could avoid some problems by screening members through
ChexSystems, but we don't because of the ill treatment that process gives
low income depositors. We offer a competitive Line of Credit, but some
members are not eligible. Some write their own "loans" with overdrafts,
and, not surprisingly, many of those "loans" are never repaid. As for
disclosure, we clearly disclose our overdraft fee, and we present the
options (don't write checks without funds, transfer from savings, open an
LOC). Our examiners once floated the idea that overdrafted accounts were
illegal loans. After batting the idea around in the regional office, they
came back with a recommendation that we close overdrafted accounts more
quickly. I have a feeling there is something I'm missing. Does Self Help
Credit Union offer checking accounts with no overdraft fees? If you do,
I'd like to understand how you make money.
Bill Myers
>Bill - I'm not sure I've done a great job explaining this, but I think the
>"missing link" is the shear amount of money that some lenders are
>charging on overdrafts and the enticements to overdraw. The NY
>Times had a good article today that I've attached, going into how
>this is playing out. If the article answers your question and you can
>capsulize it, I'd love to see your response, b/c I'm getting similar
>questions and am not fielding them very effectively, I'm afraid. David Beck
> David,
> Thank you for the Times article and your thoughts concerning
> Insufficient Funds and Overdraft fees charged by banks.
> I don't disagree that the costs of overdrawing an account are
> expensive, and that some institutions are pushing the limits on
> appropriate fee levels. However, both the article and your email
> seemed more upset by the method of advertising, not actual disclosure.
> I do take exception to the concept that this can be solved through the
> type of additional regulatory burden proposed in the letter you ask us
> to sign on to. The probable impact of such a change would likely be
> to dry up overdraft extensions of credit for the people we want to
> help, not to lower the cost of it. What's more, the checks would
> incur the same charges, only they'd be returned instead of paid. If
> there's no extension of credit, then there is no Annual Percentage
> Rate to compute. The cost of exception handling of NSF/OD items is
> very real, so this isn't entirely about profits for most banks.
> Finally, this is a bit like laying face down on the freeway, then
> being upset when the next vehicle along runs over you. There are very
> few people who aren't aware that you have to have money in your
> account adequate to cover any checks you write. They also receive the
> required disclosures that outline the fees that will be charged when
> or if they write checks that exceed their balances. This is really a
> voluntary, self-imposed charge. If you can't afford to buy it, don't
> order it.
> Your anger at the impact of these charges is appropriate, but the
> remedy, in my opinion is misdirected. Why not focus on financial
> literacy education for the consumer at all levels? They are already
> receiving mandated disclosures from the banks when they open their
> accounts. Banks are already arguably the second most regulated
> industry in this country, behind the nuclear power industry. What
> about working with the consumer to help them begin taking
> responsibility for their actions?
> Robert L. McKean, President/CEO
> Albina Community Bank
> 2002 NE MLK Jr. Blvd
> Portland, Oregon 97212
Bob - thanks for you thoughtful response. We might just have to
agree to disagree here but I think the NY Times pretty much nailed it
and the Fed is looking at this b/c these advances purport to protect
borrowers from bouncing checks but in fact are so exhorbitantly
priced that they amount to payday-like loans. The fact that they are
marketed as a way to maximize fees I think underlines the intent, in
many cases. That is not to say that borrowers are not culpable or
that lenders shouldn't continue to charge borrowers some
reasonable amount for a program that covers borrowers with
insufficient funds. But what we're trying to address is far beyond the
pale of charging a reasonable fee for a reasonable service, in my
view.
Re: borrower education, I'm all for it, but I'm afraid it's pie in the sky
when you look at national literacy rates, much less financial literacy
rates. And it's just not realistic for better financial literacy to
overcome the marketing barage we all are subjected to.
Of course, I'm glad to discuss further and appreciate your
thoughtfulness.
David Beck
---
<html><font size -mail <a href
This post transferred from the cdb-l mailing list
sign on to the letter below asking the Federal Reserve to clamp down on the
"bounced check protection" programs to pay overdrawn accounts that many
depositories are now using. Customers are often enticed by claims of “free
checking”, when in fact the bounced check fees make it anything but
free. The New York Times ran a great article about this today. It's
attached. The Fed’s comment request is on page 7 under Additional Issue at:
http://www.federalreserve.gov/boarddocs/press/bcreg/2002/20021126/attachment.pdf.
Comment deadline is Monday, January 27, so wrapping up sign-ons by COB
Friday, Jan. 24 is our goal.
Through a loophole in Federal Reserve rules, institutions do not have to
call these bounced check programs extensions of credit, and therefore don't
disclose that they are charging people 1,000% interest on the loans. Such
outrageous bounced check fees are a primary reason why checking account
holders turn to payday lenders. Newsweek ran an excellent piece about
these overdraft fees on Nov. 18, 2002, found at:
http://stacks.msnbc.com/news/832897.asp
We hope that you would be willing to sign on, either as an individual (with
the organization listed for identification purposes only) or as an
organization. Please respond to me at davidb@self-help.org, making clear
if you are signing on for your organization as a whole or just in your own
name (with your organization listed merely for identification
purposes). Of course, don't hesitate to email or call me (919 956-4495) or
Daryn Dodson at daryn.dodson@self-help.org or 919 956-4674 with any questions.
Thank you for your time and consideration!
David Beck, Self-Help
301 W. Main St. Durham NC 27701
ph(919)956-4495 fax 4605
www.self-help.org
>January 27, 2003
>
>Ms. Jennifer Johnson
>Secretary
>Board of Governors of the Federal Reserve System
>20th Street and Constitution Avenue, NW
>Washington, D.C. 20551
>
>Re: Bounced Check Protections/Overdrafts; Regulation Z;
>Docket No. R-1136
>
>Ladies and Gentlemen:
>
>We, the undersigned individuals and organizations representing _____
>million Americans, are pleased the Federal Reserve has requested comment
>on so-called bounced-check programs, because we believe these are among
>the most virulent forms of predatory lending in existence today. We have
>two specific suggestions regarding these programs:
>* Revise Regulation Z and fair lending regulations to require
> financial institutions to treat overdraft charges as extensions of
> credit; and
>* Revise Regulation DD to exclude from the definition of “free
> checking” those accounts that charge overdraft fees or increase
> the number of checks subject to NSF fees by paying larger checks
> first.
>
>Much has been written about “payday lending,” a highly abusive practice
>that federal bank regulators as well as many state regulators have begun to
>crack down on. Among other things, payday lending encourages lower
>income people to obtain an advance on their next paycheck, at APRs of up
>to 500% or more. Even worse, once an individual or family has obtained
>the first advance, they are caught in a vicious cycle of rolling over the
>advances, and often with no ability to end the cycle.
>
>Unlike payday lending programs, the extraordinarily high APRs in
>bounced check programs are never disclosed as such, and none of the other
>consumer credit protections are provided. Moreover, bounced check
>programs are aimed at the very same customers that payday lenders are
>seeking: low and moderate income account holders with little or no
>savings. The source of repayment is the same (the next paycheck), and the
>costs rival or exceed those of payday lending. In addition, with bounced
>check programs, the depositors face multiple costs in a payday cycle (that
>is, on each bounced check) rather than one-time costs (that is, on a single
>payday advance).
>
>Perhaps it would be useful to describe how these bounced check programs
>typically work. First, consulting firms aggressively sell the programs, with
>promises of significant profits. We’d urge the FRB staff to look at some of
>the firms’ own web sites, such as Strunk & Associates at
>http://www.strunklp.com.
>
>Second, the banks typically identify segments of their customer base that
>are most likely to be in an overdraft situation, or may be encouraged to be
>in an overdraft situation. These are many of the same people sought out by
>payday lenders, and the bank recruits them with promises of “free
>checking.” The Federal Reserve’s own Regulation DD inadvertently
>encourages the bait-and-switch, since a checking account can be called
>“free” under Regulation DD so long as there is no minimum balance, and
>even though the account may be structured with the purpose of charging a
>huge amounts of fees. Indeed, note in the Strunk web site referred to above
>how the financial success of bounced check programs is typically linked to
>“free checking.”
>
>A bank maximizes the bounced check credit fees in at least three ways.
>First, it makes sure the program falls below the radar of Regulation Z and
>other consumer protection laws by arguing the programs are only
>incidental accommodations, and thus not “credit.” Second, the bank often
>sets its computer to pay larger checks first, thus depleting the consumer’s
>account as fast as possible and causing a fee on each subsequent check paid
>that day and in future days. If the program were intended as a true
>consumer accommodation, the logical approach would be to pay the lower
>amount checks first, and then pay the larger checks (maybe only one or
>two) as an overdraft. All of the checks would still be paid, but the cost to
>the consumer would be far less.
>
>Third, many banks now permit disbursement of cash at ATMs even when
>there are insufficient funds in the underlying accounts, and they do so
>without telling consumers they will have to pay a fee that, expressed as an
>APR, would typically be 1,000% or higher.
>
>Here is an example of how such an APR arises. Assume the customer’s
>account has an $80 balance and that the overdraft fee is $21 per overdraft
>(a conservative estimate, since many of the overdraft fees are now $25, $30
>or more per overdraft). The customer goes to an ATM and asks for $100
>in cash, which is paid, leaving a minus-$20 account balance. If the
>customer pays the $20 back together with the $21 overdraft fee at the end
>of one week, the annualized interest rate is 5,475%; if she pays it back at
>the end of two weeks, it is 2,738%. (An overdraft fee of $30 would result
>instead in APRs of 7,821 % and 3,911%, respectively.)
>
>Payday lenders never dreamed of such returns.
>
>Even if a customer repeatedly overdraws an account, most of these banks
>will continue to offer the “accommodation,” and they will do so even when
>the customer fails to repay the overdrafts within the permitted time
>periods.
>These are the customers who create the most fee income for the lender, and
>the ones who can least afford to.
>
>Most responsible banks in fact provide their customers, no matter what
>their income levels, with responsible overdraft programs. These banks
>provide overdraft as a true form of credit through a linked credit card or
>other line of credit, or through a savings account transfer. These
>legitimate
>programs are fully disclosed to consumers and, when the programs involve
>credit, they are subject not only to Regulation Z, but also Regulation B and
>other consumer protection laws. And, of course, these programs employ
>proper underwriting criteria to assure that consumers are not coaxed into an
>amount of credit above what they can properly handle.
>
>It is the banks with irresponsible programs that we are concerned about
>here, because they steer low and moderate income customers (that is, the
>most vulnerable part of their customer base) to free/fee checking, and then
>maximize the overdraft and other fee opportunities of these accounts.
>These programs constitute an insidious and rampant form of predatory
>lending, and this is an opportune time for the Federal Reserve to address
>the issue.
>
>We urge the FRB to recognize these bounced check programs for what
>they are - predatory consumer lending - and provide the appropriate
>protections under applicable laws. We believe that the FRB should amend
>Regulation Z to treat bounced check programs as extensions of credit, and
>we would urge that it similarly amend Regulation B and related fair lending
>regulations to cover these programs. Finally, we urge the FRB to address
>the egregious abuses that are taking place under Regulation DD’s outdated
>definition of “free” checking.
>
>Sincerely,
>
>[name, title, organization, location]
David,
Usually, I want to jump right in and share the good work that you are
doing. In this case I'm not so sure. In our world, we suffer substantial
losses from unrecoverable overdrafts. Our functional cost analysis show
that our checking accounts are an expensive source of funds, even including
overdraft fees. We could avoid some problems by screening members through
ChexSystems, but we don't because of the ill treatment that process gives
low income depositors. We offer a competitive Line of Credit, but some
members are not eligible. Some write their own "loans" with overdrafts,
and, not surprisingly, many of those "loans" are never repaid. As for
disclosure, we clearly disclose our overdraft fee, and we present the
options (don't write checks without funds, transfer from savings, open an
LOC). Our examiners once floated the idea that overdrafted accounts were
illegal loans. After batting the idea around in the regional office, they
came back with a recommendation that we close overdrafted accounts more
quickly. I have a feeling there is something I'm missing. Does Self Help
Credit Union offer checking accounts with no overdraft fees? If you do,
I'd like to understand how you make money.
Bill Myers
>Bill - I'm not sure I've done a great job explaining this, but I think the
>"missing link" is the shear amount of money that some lenders are
>charging on overdrafts and the enticements to overdraw. The NY
>Times had a good article today that I've attached, going into how
>this is playing out. If the article answers your question and you can
>capsulize it, I'd love to see your response, b/c I'm getting similar
>questions and am not fielding them very effectively, I'm afraid. David Beck
> David,
> Thank you for the Times article and your thoughts concerning
> Insufficient Funds and Overdraft fees charged by banks.
> I don't disagree that the costs of overdrawing an account are
> expensive, and that some institutions are pushing the limits on
> appropriate fee levels. However, both the article and your email
> seemed more upset by the method of advertising, not actual disclosure.
> I do take exception to the concept that this can be solved through the
> type of additional regulatory burden proposed in the letter you ask us
> to sign on to. The probable impact of such a change would likely be
> to dry up overdraft extensions of credit for the people we want to
> help, not to lower the cost of it. What's more, the checks would
> incur the same charges, only they'd be returned instead of paid. If
> there's no extension of credit, then there is no Annual Percentage
> Rate to compute. The cost of exception handling of NSF/OD items is
> very real, so this isn't entirely about profits for most banks.
> Finally, this is a bit like laying face down on the freeway, then
> being upset when the next vehicle along runs over you. There are very
> few people who aren't aware that you have to have money in your
> account adequate to cover any checks you write. They also receive the
> required disclosures that outline the fees that will be charged when
> or if they write checks that exceed their balances. This is really a
> voluntary, self-imposed charge. If you can't afford to buy it, don't
> order it.
> Your anger at the impact of these charges is appropriate, but the
> remedy, in my opinion is misdirected. Why not focus on financial
> literacy education for the consumer at all levels? They are already
> receiving mandated disclosures from the banks when they open their
> accounts. Banks are already arguably the second most regulated
> industry in this country, behind the nuclear power industry. What
> about working with the consumer to help them begin taking
> responsibility for their actions?
> Robert L. McKean, President/CEO
> Albina Community Bank
> 2002 NE MLK Jr. Blvd
> Portland, Oregon 97212
Bob - thanks for you thoughtful response. We might just have to
agree to disagree here but I think the NY Times pretty much nailed it
and the Fed is looking at this b/c these advances purport to protect
borrowers from bouncing checks but in fact are so exhorbitantly
priced that they amount to payday-like loans. The fact that they are
marketed as a way to maximize fees I think underlines the intent, in
many cases. That is not to say that borrowers are not culpable or
that lenders shouldn't continue to charge borrowers some
reasonable amount for a program that covers borrowers with
insufficient funds. But what we're trying to address is far beyond the
pale of charging a reasonable fee for a reasonable service, in my
view.
Re: borrower education, I'm all for it, but I'm afraid it's pie in the sky
when you look at national literacy rates, much less financial literacy
rates. And it's just not realistic for better financial literacy to
overcome the marketing barage we all are subjected to.
Of course, I'm glad to discuss further and appreciate your
thoughtfulness.
David Beck
---
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This post transferred from the cdb-l mailing list