When the Consumer Financial Protection Bureau visited New York City on Feb. 22, a roundtable discussion with bankers and consumer advocates began a day of focused discussion of bank products that cost customers billions per year in unfair fees. In his opening remarks, CFPB Director Richard Cordray called for a "candid discussion" and noted how less than 10 percent of checking account customers bear the brunt of more than 80 percent of all overdraft fees charged by banks.
Director Cordray announced new a new initiative wherein the agency will examine the practice of reordering customer transactions to boost overdraft fees. CFPB will also look at disclosures and marketing, particularly with an eye toward impact on the low-income and young consumers.
Roundtable participant Rebecca Borne, senior policy counsel with the Center for Responsible Lending, advised that overdraft fees are the number one reason bank customers lose their checking accounts.
"We are so pleased that there is finally a regulator, the CFPB, whose primary responsibility and commitment is to ensuring that reasonable rules of the road are in place to reform harmful and reckless financial practices" said Borne. "Today's typical bank overdraft practices remain in dire need of that reform."
Sarah Ludwig, executive director of the New-York based Neighborhood Economic Development Advocacy Project, drew a connection between costly overdraft fees and the emergence of bank payday loans. As lenders sat nearby, Ms. Ludwig presented a letter with signatures from more than 250 national, state and local organizations from across the country calling for immediate federal action to stop bank payday loans.
The list of supporters included representatives of religious, civil rights, labor, higher education, fair housing, consumers and community activists. Together, these organizations warned against the looming prospect of overdraft fees worsening consumer financial circumstances once bank payday loans are made. The letter and its full list of signers is available at: http://rspnsb.li/vdfUSO
In part the letter advised, "Ultimately, payday loans erode the assets of bank customers and, rather than promote savings, make checking accounts unsafe for many customers. They lead to uncollected debt, bank account closures, and greater numbers of unbanked Americans. All of these outcomes are inconsistent with consumer protection and harm the safety and soundness of financial institutions."
The letter was also mailed to three other federal regulators: Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
Currently, Wells Fargo Bank, US Bank, Fifth Third Bank and Regions Bank use a system previously developed by storefront payday lenders. As banks market the loan as a short-term cash advance for checking account customers, the predatory product typically leads to a long-term cycle of high-cost debt – just like a storefront payday loan.
Banks offering payday loans repay themselves first. The entire loan and its accompanying fee are taken directly from the account as soon as a customer's paycheck or benefits check is deposited. Typically, banks charge $10 per hundred borrowed; with an average loan of only 10 days, the annual percentage rate for bank payday loans is 365 percent. According to research the Center for Responsible Lending, bank payday borrowers are in debt an average 175 days of the year. Social Security recipients are especially vulnerable, making up one quarter of bank payday borrowers.
Once bank payday loans are repaid, the likelihood of accounts falling short of funds for regular purchases runs high for customers with little or no cushion in their checking accounts. With an average overdraft fee of $34, multiple fees can be charged to these customers without their knowledge – until after fees are assessed when a bank statement arrives.
The connection between bank payday and overdraft fees is akin to that of the knee bone's connection to the leg bone – financially they affect the same consumer. No one needs or wants a product that devastates their finances and builds debt instead of wealth. Consumer lending shouldn't make anyone financially crippled.
Charlene Crowell is a communications manager with the Center for Responsible Lending