CU Trades Say Overdraft Programs Are Essential; Consumer Advocates Call Them Abusive
Critics say, “Overdraft acts as an instant loan, allowing consumers to transact when their balances are low."
Overdraft services are essential for some credit union members, trade groups said, asking the CFPB not to take any additional action to restrict them.
But the head of New York City’s Department of Consumer Affairs said the services amounts to just another type of predatory lending.
And a coalition of consumer groups said that overdraft programs allow financial institutions to prey on consumers.
The CFPB has been soliciting comments on whether to change its overdraft rule for ATM and debit card transactions. The rule was issued by the Federal Reserve Board in 2009 and the CFPB took over the rule when it was created.
The rule prohibits financial institutions from assessing a fee or charge on a consumer’s account for an ATM withdrawal or one-time debit card transaction unless they have given their consent to be charged.
Credit unions offer overdraft programs as a convenience to their members, Alexander Monterrubio, CUNA’s senior director of advocacy and counsel, said, in a comment letter submitted to the CFPB.
“When considering the issue of overdraft protection, the CFPB should keep in mind the personal choice consumers make when they opt into these services for the comfort of knowing a transaction, especially a necessary or emergency purchase, will be honored,” he said.
Monterrubio said that overdraft protection services serve as a lower-cost alternative to high-interest payday loans.
Andrew Morris, NAFCU’s senior counsel for research and policy, said that virtually all credit unions are willing to waive overdraft fees on a case-by-case basis.
He said that the bureau has downplayed the value of overdraft as a convenience or as an alternative to cash-advance and payday loans.
“Rather than seeking to limit or eliminate overdraft services, NAFCU believes that consumers would be better served if the Bureau provided the financial services industry with guidance and additional flexibility so that credit unions can create a diverse range of options that fit the various needs of members, whether it be convenience or borrowing,” he said.
However, Lorelei Salas, New York City’s commissioner of consumer affairs, said when it comes to overdraft, the harm outweighs the benefits.
“Overdraft acts as an instant loan, allowing consumers to transact when their balances are low,” she said, adding that the service frequently further drain a consumer’s financial resources.
“Alternative financial services are a more appealing option when checking accounts at mainstream financial institutions prove so costly,” she added, concluding, “No banking product should drive consumers to shadowy back-alley financial services.”
A coalition of consumer groups, including the Center for Responsible Lending, said that overdraft programs harm consumers and charge fees that are “grossly disproportionate to costs to financial institutions.”
The groups urged the CFPB to strengthen the rule, or at the very least, not to weaken it.