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CONSUMER ACTION
1 August 2004
Jennifer J. Johnson
Secretary, Board of Governors
Of the Federal reserve system (12 CFR Part 230; Docket No. R-1197)
(Docket No. OP – 1198)
and
Office of Comptroller of the Currency (Docket No. 04-14)
Federal Deposit Insurance Corporation
Office of Thrift Supervision (No. 2004-30)
National Credit Union Administration
RE: Proposed
Rule – Regulation DD
And Overdraft Protection Guidance
On behalf of Consumer Action, a statewide consumer education and
advocacy organization serving the California consumer since 1971,
we are writing to express our opposition to the Federal Reserve Board’s
proposal to regulate bounce loans, or so-called “bounce protection”,
under the Truth in Savings Act (TISA). Bounce loans should be regulated
under the Truth in Lending Act (TILA). The Board and other federal
banking regulators should also take steps beyond the proposed guidance
to halt the other abuses of bounce loans, most particularly bank
advertisements for bounce loans that encourage customers to use overdrafts
as a credit source.
We cannot understand how the Board (along with all of the federal
banking regulators) can explicitly admit that bounce loans are credit,
then fail to regulate them under the key federal law governing credit
disclosures. Bounce loans are an extraordinarily expensive credit
product. For example, a $100overdraft will incur at least a $20 fee.
If the consumer pays the overdraft back in 30 days, the APR is 243%.
If the consumer pays the overdraft to bank in 14 days, which is probably
more typical for a wage earner, the APR is 520%.
It is because
of the expensive cost of bounce loans that consumers need to have
Annual Percentage Rate (APR) disclosures.
Without them,
consumers have no way to compare the cost of bounce loans and other
similar transactions, such as payday loans, pawnbroker loans, auto
title loans, overdraft lines of credit, and credit card cash advances.
Of all the high rate lenders, it is ironic that banks offering the
most expensive form of credit can avoid the need to disclose the
single and most critical piece of credit information. Contrary to
the board’s suggestion, consumers do find APR disclosures useful,
with one study finding over 80% consumer awareness of APRs and 60%
finding TILA disclosures helpful. More detailed comments submitted
by the National Consumer Law Center and others, which we endorse,
contain suggestions for how to disclose the APR in a meaningful manner.
As for the proposed guidance issued by the federal banking regulators,
it does not go far enough in protecting consumers from the harm that
bounce loans can create. The banking regulators must implement stronger
protections for consumers, and those protections must be legally
enforceable by both regulators and the consumers who are harmed by
bounce loans. There is no private right of action in TISA as there
is in TILA.
Stronger protections are necessary to prohibit banks from marketing
bounce loans as a credit source, essentially encouraging consumers
to write bad checks for their credit needs, and without a firm commitment
to cover them. These consumers, often low-income and vulnerable,
are likely to use bounce loans repeatedly and become trapped in a
cycle of debt. Conversely, banks often do not seek affirmative consumer
assent when imposing bounce loans, and consumers are charged these
expensive bounce fees without their consent or any prior warning.
The banking regulators must mandate that positive consumer opt-in
is required for any form of credit, including bounce loans.
Stronger protections
are also needed to restrict bounce loans made accessible through
automated teller machines
(ATMs) and debit card
transactions. There is simply no justification for allowing a consumer
to overdraw an account for a transaction that is on-line, real time,
for which banks can confirm the availability of funds. The bank’s
purported reasons why bounce loans benefit consumers—saving
them from merchant penalties, late charges and embarrassment—are
completely inapplicable to ATM and many debit transactions.
Note that we are not opposed to overdraft programs in general. We
are only opposed to bounce loans that are exorbitantly expensive,
that are not accompanied by APR disclosures, that are imposed without
affirmative consumer consent, or that are advertised to consumers
as an easy source of credit.
Without TILA coverage and stronger consumer protections, bounce
loans will ultimately undermine years of efforts to bring unbanked
consumers into the financial mainstream. Previously, consumer advocates
and Treasury had agreed that bank accounts are safer and cheaper
than going to check cashers or keeping large amounts of cash at home.
Given the risk of incurring multiple overdrafts through unfair bounce
loan products, we can no longer make that claim with as much certainty---going
to a check casher might just be cheaper and safer than risking expensive
bounce loan fees. Ultimately, the irresponsible actions of banks
in offering bounce loans may lead to even more unbanked consumers.
Comments submitted by: Consumer Action
717 Market Street, Suite 310
San Francisco, California 94103
Ken McEldowney, Executive Director
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