New
Mexico Public Interest Research Group
From: Ray Prushnok
Sent: Tuesday, July 27, 2004 1:02 PM
To: Comments; regs.comments@ots.treas.gov
Subject: No. 2004-30
July 27, 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 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
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 the 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 consumers 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 $100 overdraft 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 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 other similar credit
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% of consumers
aware
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 harms of
bounce
loans. 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
the banks can confirm funds availability. 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 loans fees. Ultimately,
the irresponsible actions of banks in offering bounce loans may lead
to more
unbanked consumers.
Sincerely,
Ray Prushnok
Consumer Advocate
New Mexico Public Interest Research Group
Albuquerque, NM
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