WASHINGTON -- A new bill before the House of Representatives would significantly regulate and limit the way credit unions and other financial institutions offer the depositors overdraft protection programs.
H.R. 946 would amend the Truth in Lending Act to include overdraft protection program, requiring that they not be put into place unless there were a series of disclosures made to depositors and permissions granted.
During a July 11 hearing about the practice, Eric Halperin, director of the Center For Responsible Lending's Washington, D.C. office, such measures are necessary because the programs, which are frequently in place now abuse consumers and often leave depositors worse off than they were before.
"Today, however, banks commonly enroll their checking account holders in a high-cost fee-based system automatically, with no chance to opt out, at the time they open a checking account," Halperin wrote in prepared testimony.
"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 their next deposit, the bank debits the account in the amount of the loan plus a fee, which now averages $34.
"For low-income account holders who have no cushion of cash in their bank account, this $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."
Halperin also argued that the differences in the way financial institutions treat deposits and a withdrawal heightens the problem. Check 21's check imaging provisions is sharply cutting the amount of time it takes for a check to be drawn against a depositor's account, but many financial institutions still hold the account holders deposits for as long as possible.
The Center For Responsible Lending is an affiliate of the $286 million Self Help Credit Union, headquartered in Durham, North Carolina.
The proposed law would put the protection back into overdraft policy by requiring financial institutions to fully inform account holders of the costs of fee-based overdraft systems, including their interest rates, Halperin argued.
Account holders would have to give specific written consent in order for financial institutions to enroll them in such a costly and problematic system. Banks and credit unions would have to warn account holders before making them a high-cost loan for an electronic transaction, and permit them to choose another payment option that will not cause an overdraft.
Testifying on behalf of CUNA at the hearing, Mary Cunningham, CEO of the $704 million USA Federal Credit Union headquartered in San Diego, related her credit union's experience with an overdraft protection program that some of its members loved and other members appeared to be misusing. See related story on this page.
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