---

---

Published: June 2008

Overdraft loans target low-income and fail to offer informed choice

A survey by the Center for Responsible Lending has found that most consumers want a choice about being enrolled in overdraft programs and that most would prefer their banks issue a "denial of funds" rather than an expensive overdraft loan. It also found that low-income consumers are often the target of these loans.

Download a copy of the survey entitled "Consumers Want Informed Choice on Overdraft Fees and Banking Options"

The Center for Responsible Lending has published a survey of nearly 2,000 nationally representative checking account customers, conducted by Opinion Research Corporation. The survey finds:

• More consumers are enrolled in the most expensive overdraft option, and low-to moderate-income consumers pay the bulk of the charges.

• Nearly nine of ten respondents want the option to choose whether their checking account will include a fee-based overdraft loan feature.

• Respondents overwhelmingly prefer that debit card purchases be declined at the checkout if these would otherwise result in an overdraft fee.

BACKGROUND

Most major financial institutions automatically enroll customers in a fee-based overdraft loan program without their express consent when they first open a checking account. Under these systems, the bank or credit union generally pays the customer’s checks, debit card transactions, and ATM withdrawals when the customer’s account lacks sufficient funds. When the customer's next deposit is made, the financial institution debits the amount of the overdrafts, plus a fee averaging $34 for each incident.

Overdrafts are increasingly triggered by small dollar debit card transactions; on average, the typical debit card transaction that spurs a $34 overdraft fee is for a $20 purchase. Thus, when a consumer is overdrawn, their debit card functions as an extremely high-cost credit card. Overall, consumers pay $17.5 billion in overdraft fees for $15.8 billion extended to them in credit every year.

These fee-based overdraft loan programs caught the attention of Congress in 2007, which held a hearing on abusive overdraft practices and introduced legislation (HR 946) to reform the most egregious of these practices. CRL is conducting a series of consumer surveys to help inform policy and regulatory changes on overdraft protection.

This report details findings from the most recent survey conducted from January 3-6, 2008.

Working with the Opinion Research Corporation’s national CARAVAN telephone survey, CRL conducted a representative survey of 2,000 respondents. Of the 2,000 people contacted, 1,741 (87 percent) had a checking account at some point over the past year. These checking account customers were asked about their experiences with and preferences regarding overdraft practices.

KEY FINDINGS

1. More consumers are enrolled in the most expensive overdraft option.

Nearly a third of respondents (31 percent) reported that they were enrolled in a fee-based overdraft loan program in which the bank automatically covers overdrafts in return for a $34 fee. Respondents earning less than $50,000 a year were more likely to be in a fee-based overdraft loan program compared to higher-income respondents.

In contrast, nearly a quarter (23 percent) link to a savings account from which money can be transferred if they become overdrawn. Only 15 percent of checking account holders have a linked line of credit or credit card, which are generally far less expensive alternatives. Linked credit cards or lines of credit generally carry an APR of 18 to 30 percent. To borrow $20 from a linked line of credit to cover an overdraft, a consumer would pay only about 30 cents,5 compared to the $34 overdraft fee in a fee-based overdraft loan program.

2. A core group of consumers account for the majority of overdrafts.

The current survey finds that a core group of accountholders have multiple recent overdraft incidents. In this case, just a quarter of all respondents report having at least one overdraft incident over the past six months. Respondents earning below $50,000 annually reported the most overdraft incidents.

In addition, as noted above, consumers with incomes lower than $50,000 not only reported more overdrafts, they were also far more likely to report being enrolled in a fee-based overdraft loan program, in comparison to higher-income respondents. A previous CRL survey found that just 16 percent of respondents enrolled in fee-based overdraft loan programs had two or more overdrafts over a six-month period, yet they paid 71 percent of total overdraft fees. These consumers with multiple overdrafts were more likely to be lower-income, non-white, single, and renters when compared to the general population. The current survey has nearly identical findings, with 16 percent of respondents again incurring multiple overdraft incidents over a six-month period, and paying 71 percent of overdraft fees.

3. Consumers want the option to choose whether an overdraft loan program is included with their account.

Consumers overwhelmingly want to choose whether they are enrolled in an overdraft loan program when they open a checking account. Among those with a preference, 88 percent of overall respondents and 91 percent of respondents enrolled in a fee-based overdraft loan program want a choice. The preference is particularly strong among those who have overdrawn their account at least once in the preceding six-month period, 94 percent of whom would prefer to have a choice.

4. Consumers do not want their bank to cover small debit card purchases for a $34 fee.

Checking account holders were asked to imagine that they were completing a $5 purchase at a checkout counter using their debit card. When asked if they would prefer to continue with their transaction if it would result in an overdraft (and an accompanying $34 overdraft fee), the vast majority (80 percent) reported that they would prefer that the bank simply decline the transaction.

This question was asked again replacing the $5 purchase with a $20 or $40 purchase (the average debit card transaction resulting in an overdraft is for a $20 purchase). Again, respondents overwhelmingly preferred to have the transaction declined, rather than pay a $34 fee, with 79 and 77 percent having this preference, respectively. Roughly three-quarters of consumers who have recently overdrawn their account also prefer that a debit card transaction be declined if it would otherwise result in an overdraft. Results for respondents enrolled in fee-based overdraft loan programs are similar to those for consumers overall.

These results refute claims from representatives of financial institutions, who say that consumers would rather their debit card transactions be approved—even when it would result in an overdraft fee being charged—than face the embarrassment of being declined at a checkout counter.

CONCLUSION

Overdraft protection has devolved from an occasional courtesy extended to customers who might otherwise bounce an important payment, to an automatic fee-based overdraft loan program allowing the smallest of debit card transactions to be approved for a hefty $34 fee. Consumers are often automatically enrolled in this system when signing up for checking accounts rather than being offered lower-cost alternatives, such as a linked line of credit.

Findings from this and other CRL surveys consistently show that consumers want the ability to make an informed choice and have more control over how financial institutions handle possible overdrafts. Overwhelmingly, they do not want banks to approve the vast majority of overdrafts, in which the fee far outweighs the actual credit extended.

For More Information

Center for Responsible Lending

---

Download File

No Download Available

Category

Banking   ♦   Consumer Protection   ♦