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Published: December 2010

FDIC deserves praise for work on overdraft practices, but needs to do more

Coalition: Overdraft

In a letter thanking the Federal Deposit Insurance Corporation (FDIC) for its attempts to curb abusive overdraft practices by banks, Consumer Action and its coalition partners also ask that the agency address remaining issues with overdraft protection, including excessive fees, manipulative transaction posting, and steering.

Below is the full text of the letter:

We, the undersigned civil rights, labor, consumer, housing, community, business, and sustainable and responsible investor groups, write to thank the FDIC for bringing attention to abusive overdraft practices. Your proposed guidance recommends common-sense actions banks should take to treat their customers more fairly, and it is consistent with your important efforts to bring unbanked and underbanked individuals into the banking mainstream. At the same time, we urge you to strengthen your proposal in several key respects in order to bring an end to excessive overdraft fees at FDIC-supervised banks.

Financial institutions earn $24 billion a year through high-cost overdraft programs. The FDIC’s proposal recognizes that high-cost, frequent overdraft fees can cause “serious financial harm” to lower or fixed income customers. Indeed, research has repeatedly found that overdraft fees disproportionately impact lower-income and non-white customers. And older Americans primarily dependent on Social Security pay $1 billion annually in overdraft fees. Ultimately, high cost overdraft fees drive many vulnerable consumers away from the banking system and into other predatory lending products.

The FDIC’s recommendations address several glaring problems with today’s overdraft programs, including excessive fees, manipulative transaction posting, and steering. This guidance stands in sharp contrast to the Federal Reserve’s new overdraft rules, which address only initial customer consent but fail to address the product itself.
We applaud the FDIC for recognizing that charging a customer more than six overdraft fees within a twelve-month period is excessive. At the same time, we urge you to explicitly tell banks the following: 1) they should provide every customer who wants overdraft coverage the lowest cost overdraft option the customer qualifies for – allowing many customers to avoid any high overdraft fees at all; and 2) they should not, under any circumstances, charge more than six overdraft fees within a twelve-month period.

We also applaud the FDIC’s proposal to require that banks 1) stop manipulating the order in which they post transactions to maximize fees and 2) avoid steering frequent overdrafters into high-cost programs while “obscuring” lower-cost alternatives. We commend the FDIC for cautioning that steering activity raises fair lending concerns and will be closely scrutinized. We urge you to make clear that such scrutiny will include close supervision of solicitations aimed at convincing customers to “opt-in” to debit card overdraft coverage; that any such solicitations should clearly disclose that having a debit card denied for lack of funds costs the customer nothing; and that the agency will take appropriate enforcement action against deceptive solicitations.

We will continue to urge the Federal Reserve, the Office of the Comptroller of the Currency, and the National Credit Union Administration to follow the FDIC’s lead in limiting the number of overdraft fees charged to six per year and addressing manipulative transaction posting. All the federal banking regulators should also take joint action to ensure that overdraft fees are reasonable and proportional to the institutions’ cost in covering those transactions.
We thank you again for addressing abusive overdraft lending. If implemented with our recommendations, your guidance could save American families millions in overdraft fees each year. We look forward to continuing to engage with you on this and other efforts to curb irresponsible small-dollar lending.

Lead Organization

Center for Responsible Lending

Other Organizations

Consumer Federation of America | National Consumer Law Center | Consumers Union | National Association of Consumer Advocates | U.S. PIRG

More Information

Comment Letter on FDIC's Proposed Overdraft Guidance

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