[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
OVERDRAFT PROTECTION: FAIR
PRACTICES FOR CONSUMERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 11, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-49
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38-389 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
CAROLYN B. MALONEY, New York, Chairwoman
MELVIN L. WATT, North Carolina PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York TOM PRICE, Georgia
BRAD SHERMAN, California RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania PETER T. KING, New York
MAXINE WATERS, California EDWARD R. ROYCE, California
JULIA CARSON, Indiana STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas WALTER B. JONES, Jr., North
CAROLYN McCARTHY, New York Carolina
JOE BACA, California JUDY BIGGERT, Illinois
AL GREEN, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota STEVAN PEARCE, New Mexico
RON KLEIN, Florida RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
C O N T E N T S
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Page
Hearing held on:
July 11, 2007................................................ 1
Appendix:
July 11, 2007................................................ 25
WITNESSES
Wednesday, July 11, 2007
Cunningham, Mary, President & CEO, USA Federal Credit Union, on
behalf of the Credit Union National Association................ 15
Feddis, Nessa, Senior Federal Counsel, American Bankers
Association.................................................... 11
Fox, Jean Ann, Director of Consumer Protection, Consumer
Federation of America.......................................... 17
Halperin, Eric, Director, Washington Office, Center for
Responsible Lending............................................ 5
Ireland, Oliver I., Partner, Morrison & Foerster LLP............. 7
Ludwig, Sarah, Executive Director, Neighborhood Economic
Development Advocacy Project................................... 13
Wu, Chi Chi, Staff Attorney, National Consumer Law Center........ 9
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn........................................ 26
Carson, Hon. Julia........................................... 29
Cleaver, Hon. Emanuel........................................ 30
Cunningham, Mary............................................. 33
Feddis, Nessa................................................ 40
Fox, Jean Ann................................................ 56
Halperin, Eric............................................... 67
Ireland, Oliver I............................................ 78
Ludwig, Sarah................................................ 89
Wu, Chi Chi.................................................. 94
OVERDRAFT PROTECTION: FAIR
PRACTICES FOR CONSUMERS
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Wednesday July 11, 2007
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2128, Rayburn House Office Building, Hon. Carolyn B.
Maloney [chairwoman of the subcommittee] presiding.
Members present: Representatives Maloney, Moore, Green,
Clay, Miller, Scott, Cleaver; Gillmor, Price, Hensarling, and
Garrett.
Chairwoman Maloney. This hearing will come to order.
I would like to welcome my colleagues and to welcome all of
the witnesses and thank them very much for being here today,
for their time and for their expertise, and for their
testimony.
As a New Yorker, I am keenly aware of the many services
financial institutions and credit unions provide their
customers.
Banking is my home town industry, from New York City, and I
want it to grow and prosper.
I appreciate that banking in the United States is more
accessible, affordable, and efficient than perhaps any other
place in the world.
In my view, banks should be able to charge for their
services, including the service of overdraft protection, but
consumers, individuals should have notice of this charge ahead
of time, and the opportunity to reject the transaction before
incurring the charge. It's that simple.
Hidden overdraft fees are unfair, and fairness is an
important component of a safe and sound banking system.
Customers should be told when they are about to take out
more money than they actually have, and customers should be
able to choose if they want overdraft protections or if they
would rather not pay the fees and not have the transaction.
Customers should be given information about how much
overdraft protection plans cost so that they have the
opportunity to compare the cost to other forms of overdraft
protection, such as linking their checking account to their
savings account or opening a line of credit.
These are commonsense, almost due process principles, and
they are the basis of the bill that I have reintroduced in this
Congress with Chairman Frank, H.R. 946, the Consumer Overdraft
Protection Fair Practices Act.
Not surprisingly, the data shows that consumers
overwhelmingly want what this bill provides. They want to know
if they are going to pay an overdraft fee, and to be able to
cancel the transaction if they do not wish to pay more.
According to a report released today by the Center for
Responsible Lending, overdraft fees accounted for $17.5 billion
in 2006, an increase of 75 percent from the $10 billion
annually that the CRL calculated banks made on overdraft fees
in 2004, and again, I am speaking about numbers that were in
the Center for Responsible Lending's report that they issued
today.
Again, my concern is not that banks shouldn't charge for
this service. I think they have every right to charge for
services that they provide the public. But consumers should
have the right to decline the service and the fee if they do
not wish to have this service.
This bill is modeled on my successful initiative to require
disclosure of ATM fees. Everyone is now perfectly comfortable
with the ATM notices that tell you that you may be charged a
fee for using the ATM.
Lots of us use ATMs happily every day. I am very
appreciative of the ability to withdraw money in Washington
from my New York account, and I feel the fee that I opt-in to
pay is very fair. Yet, it is my decision to do so.
When that legislation was first introduced, there was
tremendous opposition to it. What some in industry seem to be
saying is that they just do not want to tell the public how
much you have in your account, so they can't tell you if you're
going to be overdrawn or not. This strikes me as straining
credibility.
First, at most ATMs, you can ask for your balance. That's
part of the service that they provide.
Secondly, not so long ago, if a customer asked an ATM for
more money than they had in their account, the ATM machine
would simply say no and announce that you were about to
overdraw, and if you wrote a check for more than you had in
your account, it would bounce. This was a service that used to
be there, and many people still mistakenly think that it is
still the case.
What I basically want to say is that I believe very
strongly in notice, and in the free market process, but I feel
that consumers, customers should be notified about a fee or a
service and they should have a chance to decide whether they
want to pay that fee or have that service.
I feel that it is balanced and that it is fair, and I have
submitted this legislation, and I look forward to the comments
of my colleagues and the witnesses today on this particular
approach.
I thank you all for coming and I yield to my colleague, and
ranking member, Mr. Gillmor.
Mr. Gillmor. Thank you very much, Madam Chairwoman.
I want to thank the chairwoman for calling this hearing to
examine recent trends in the use of overdraft protection plans.
This is an issue that I think does deserve committee
consideration. Over the years, the financial services industry
has evolved dramatically. Consumers today are presented with
many options to manage their money.
Whereas just a decade or so ago, most bank accounts
required a maintenance fee, today the vast majority of banks no
longer charge one, and during this evolution, consumers were
also moved away from the historic overdraft protection in which
the bank offered overdraft coverage only to those customers
that it subjectively believed to be reliable.
Currently most consumers have the ability to have their
bank account protected in some form or another.
Also, some consumers, under recent Federal guidance, have
the ability to opt-out of this type of protection.
There is little doubt that some Americans are unable to
responsibly handle the financial services available to them.
That being said, I do not believe this is a reason to eliminate
products from the market.
The vast majority of consumers with overdraft protection on
their checking accounts use the protection occasionally or
never. It is a benefit to them.
A small minority of consumers, however, repeatedly use the
product as a short-term loan.
This is unfortunate and I think it calls for greater
consumer education to prevent that, and I look forward to
hearing from the industry what solutions are in place for those
consumers who fall into this habit.
With that, I yield back the balance of my time and I thank
you for calling this hearing.
Chairwoman Maloney. I grant 3 minutes to Congressman Green.
Mr. Green. Thank you, Madam Chairwoman, and I thank the
ranking member as well, and the witnesses who are appearing
today.
This is an important hearing, because it impacts a lot of
persons who obviously are not among those who have the most
money, because if they were, they wouldn't have some of these
fees attached to their accounts.
So I thank you for being here. I'm looking forward to what
you have to say in terms of testimony.
I approach this with an open mind and look forward to the
questions that will follow after we've heard your comments.
I yield back the balance of my time.
Chairwoman Maloney. The Chair recognizes Congressman Price
for 3 minutes.
Mr. Price. I thank the chairwoman, and I want to thank the
chairwoman and the ranking member for holding this important
hearing on really what I see as an important issue of overdraft
protection.
Thanks to thoughtful amendments to Regulation DD, and
interagency guidance since 2002, consumers are now provided
with uniform and adequate disclosure information concerning
bounced checks and courtesy overdraft protection services. This
has allowed consumers to continue to enjoy what has become an
increasingly fast, accessible banking system.
The benefits these programs provide is that consumers will
avoid a merchant's returned check fee and will stay in good
standing with those with whom they do business.
Many consumers already realize the importance of this
protection because most have been charged a fee by their bank
for inadvertently exceeding their overdraft limit, and I don't
believe it's necessarily limited to those with lower financial
means. I suspect that this runs the gamut across our society.
Many banks, as well as savings and loans and credit unions,
indeed offer courtesy overdraft protection or bounce coverage
plans so that the checks do not bounce, and individuals' ATM
and debit card transactions go through, and with these plans,
people obviously still pay an overdraft fee or bounce coverage
fee to the bank or credit union or savings and loan for each
item.
This is a service provided by the banks and the credit
unions to their valued customers, but it may be one that costs
them money. It certainly does cost them money, which is then
appropriately charged to the consumer.
We may hear today from some witnesses and other members
that there needs to be a legislative solution to overdraft
charges for consumers.
It strikes me that Congress needs to be very careful when
wading into the marketplace because overreaching on our part
with legislation would very possibly cause banks and credit
unions to stop offering overdraft protection as a product and I
doubt that anyone here today wants that.
I, for one, don't want to have to go back home to my
constituents and explain why their bank no longer is offering
them overdraft protection.
I do have a number of questions and I hope to be able to
stick around for the question and answer period, but one I'd
like to hear the entire panel's thoughts on, my understanding
is that under many loan terms, a failure to pay for which a
bounced check would qualify often makes the loan due.
For example, if you fail to make a car loan payment, that
would likely make the car loan due. Wouldn't that, isn't that
more expensive and burdensome to consumers than a market-driven
overdraft fee?
And I would ask you to consider giving an opinion about the
unintended consequences of meddling in this area.
I want to thank the entire panel for coming. I look forward
to your testimony and to the Q&A period, and I yield back the
balance of my time.
Chairwoman Maloney. The Chair recognizes Mr. Scott from
Georgia for 3 minutes.
Mr. Scott. Thank you.
This is a very important hearing. Overdraft fee protection
is very important, and we hear a lot of complaints about it
from consumers.
Banks have their challenges in terms of whether or not they
have the technology in place to do it at the right time and
under the right circumstances. And I understand the importance
of personal responsibility of one's financial life, very
important.
There are certain practices, however, occurring in the
industry that do seem to be misleading and could be interpreted
as being unfair.
For example, I think it would be good for us to discuss
today why most banks are not automatically warning, or rather
most banks are not allowing a transaction to go through when a
customer does not have the sufficient funds. That's sort of at
the core of the matter.
The bank knows there are not sufficient funds there. Why
would you let the transaction go through anyway, and especially
when we know that there's a fee being paid for that overdraft?
In other words, are we in the banking industry trying to
make money off of the fact that the person doesn't have the
money there, and the bank knows the person doesn't have the
money there, so why couldn't there be an automatic warning to
that effect?
And believe me, I'm not here to beat up on banks, because
they have their challenges, and for the most part really are
doing a very important job and providing an extremely important
service.
However, I do want to express concerns regarding the fact
that many banks have claimed one of their most profitable
services is, in fact, overdraft lending, especially just at the
residential mortgages.
This is an area that I think we really need to examine
very, very closely, for when a customer sees his statement that
says, ``Your funds have not yet cleared,'' this can be
frustrating, and further, receiving a clear answer from the
bank is often quite difficult.
So, Madam Chairwoman, I think this is a very important and
timely hearing, and I look forward to exploring that central
question further as we go forward, which I think gets to the
core of the matter.
Thank you.
Chairwoman Maloney. The gentleman's time has expired.
We have a distinguished panel today:
Mr. Eric Halperin, director of the Washington Office of the
Center for Responsible Lending;
Mr. Oliver L. Ireland, who is a partner of Morrison &
Foerster, and was formerly an attorney with the Federal
Reserve, the Associate General Counsel;
Ms. Chi Chi Wu, staff attorney for the National Consumer
Law Center;
Ms. Nessa Feddis, senior Federal counsel for the American
Bankers Association;
Ms. Sarah Ludwig, executive director of Neighborhood
Economic Development Advocacy Project--a New York based
organization that helps low and moderate income people with
their credit concerns;
Ms. Mary Cunningham, president and CEO, USA Federal Credit
Union, on behalf of the Credit Union National Association;
And Ms. Jean Ann Fox, director of consumer protection,
Consumer Federation of America.
I thank all of you for coming.
Mr. Halperin.
STATEMENT OF ERIC HALPERIN, DIRECTOR, WASHINGTON OFFICE, CENTER
FOR RESPONSIBLE LENDING
Mr. Halperin. Chairwoman Maloney, Ranking Member Gillmor,
and members of the committee, thank you for holding this
hearing and bringing to light an abusive banking practice that
now costs Americans $17.5 billion a year.
I serve as the director of the Washington office of the
Center for Responsible Lending, a nonprofit research and policy
organization that is committed to protecting family wealth.
We're also an affiliate of Self-Help, which has a nonprofit
loan fund and a credit union.
Today I will summarize CRL's research on overdraft loans
and offer our strong support for H.R. 946.
H.R. 946 will make a simple, yet powerful improvement in
the marketplace by giving consumers important information and
also providing them the opportunity to choose whether or not to
take out a high-cost overdraft loan.
Common banking practices now increase the number of
overdrafts rather than minimize them, and can cost account
holders hundreds of dollars in a matter of hours.
Under the old system, fees were primarily assessed to
discourage overdrafts. If a customer wanted their overdrafts
regularly covered, they arranged to have a line of credit or a
transfer from a savings account to cover those overdrafts. Now,
banks automatically enroll people in an overdraft loan program.
When a customer who is an overdraft loan program goes to
make a purchase, for example, in a store, for $20, with their
debit card, even if they only have $5 in their account, the
bank will now let that transaction go through, where in the
past they would have perhaps denied that transaction without
charging a fee. They do not warn. And then they extend the
customer a loan of $15, for a fee of $34. That loan is repaid
automatically when the customer's next deposit hits their
account.
As I mentioned this morning, we released a report putting
the cost of overdraft loans at $17.5 billion a year. In a
system that is enormously out of balance, that $17.5 billion in
fees is only for $15.8 billion in credit extended. The loan
fees are more than the amount that people are borrowing. And
most of that $17.5 billion is paid by low and middle income
families.
In a 2006 CRL report, we found that just 16 percent of the
overdraft users pay 70 percent of the fees. There is a small
group of users that pay almost all the fees, and those users
are more likely to be low and middle income families.
And it is no longer about the check, although these systems
started by primarily focussing on covering a paper check. Now,
ATM and debit card point-of-sale transactions account for
almost half of all transactions that trigger an overdraft.
This shift, a dramatic shift in the market, occurred since
2003 or 2004, when it was estimated that 80 percent of
financial institutions would not routinely cover overdrafts
through debit cards.
Debit card overdrafts are also extremely expensive for
consumers. Because the transaction amounts for debit card
purchases are often very small, consumers end up paying
approximately $2 in fees for every dollar of credit they get
when they do a debit card overdraft.
This accounts for $7.8 billion in fees paid per year, and
these fees are easily preventable, either with a warning or a
return to the system where those transactions were denied
without a fee being charged unless the consumer had chosen
ahead of time, affirmatively made the choice ahead of time to
enroll in a program such as a line of credit or a transfer from
savings that would allow their overdrafts to be covered.
H.R. 946 provides a straightforward and commonsense
solution to many of these abuses. Truth in Lending Act coverage
will give the consumers the important information they need to
make a decision.
Requiring that a consumer give their written consent to
participate in these programs will ensure that a consumer is
making the decision about participating in the most expensive
credit program that their bank offers.
Providing a warning at the ATM and on a debit card purchase
before an overdraft occurs will ensure that the consumer
decides whether they want to pay $33 for a cup of coffee.
And finally, prohibiting financial institutions from
manipulating the order of checks when they come into their
account, changing the order into the largest check clearing
first to the smallest, will prevent consumers from needlessly
paying overdraft fees merely because their bank changed the
order in which their checks were processed.
Thank you again for inviting us in to testify, and I look
forward to answering your questions.
[The prepared statement of Mr. Halperin can be found on
page 67 of the appendix.]
Chairwoman Maloney. Mr. Ireland.
STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER
LLP
Mr. Ireland. Thank you, Chairwoman Maloney, Ranking Member
Gillmor, and members of the committee.
My name is Oliver Ireland, and I'm a partner in the
financial services practice of Morrison & Foerster here in
Washington.
I have over 30 years experience in financial services
issues, over 25 of those years with the Federal Reserve system,
and 15 years as an Associate General Counsel with the Board
here in Washington. Since the year 2000, I've been in private
practice.
I have to say that the issue that has probably occupied
more of my attention during those 30 years than any other
single issue has been payment practices, including overdraft
practices, overdraft practices ranging from retail overdrafts
to overdrafts by banks at Federal Reserve banks and even
overdrafts by Federal agencies at Federal Reserve banks.
I share your aspirations, Chairwoman Maloney, for payment
systems that deal in real time, final funds, so everybody knows
what their account balance is and can make informed decisions
about it at the time they do a transaction.
Unfortunately, that's not the world we live in today. It's
not the world we've lived in in the past. And I think it's
still a ways away.
Overdrafts are a fact of life in the payment process.
Businesses incur overdrafts. Banks incur overdrafts. High and
low-income consumers incur overdrafts.
The banks I've talked to that offer overdraft services to
their customers tell me that those services are used across the
economic spectrum, that they're not concentrated in any
particular economic strata such as low or moderate income
consumers.
And as I indicated, even government agencies have been
known to overdraw their accounts for short periods of time.
Many of these overdrafts result because of imprecisions in
the accounting and posting process, mail delays, all kinds of
operational issues that arise in the payment process where
people think they have money or should have money by a given
point in time, but it's not yet available to cover payments.
Banks have been providing overdraft services and paying
overdraft services in order to deal with those kinds of
problems for decades, and the reason they've done that is the
importance of completing transactions in the real economy.
The consequences of a failed transaction are not apparent
to the bank who is processing the payment.
Nevertheless, those consequences can be orders of magnitude
larger than the amount of the transaction which itself may be
orders of magnitude larger than the overdraft that would be
created by completing the transaction.
So banks have historically endeavored to pay overdrafts for
their customers as a payment service associated with managing
transaction accounts for their customers.
To be sure, those products and that practice has been
abused in the past.
We have had dramatic examples of individuals who find out
that their banks will accommodate those overdrafts and use them
as a vehicle for short-term loans or even longer-term loans if
they can hold off the bank's collection efforts.
However, the principal focus of overdrafts in the banking
system has historically been the making and completion of
payments, rather than as a lending and credit vehicle.
Today the overdraft process has become automated. It used
to be a manual process. Payment processing itself is highly
automated and is highly efficient.
That automation in the overdraft process has made the
ability to complete payments through overdrafts available to
all bank customers or many bank customers that it was not
available to before, where it was limited to select groups that
may be known to individual bank officers.
There are also significant consequences to making mistakes
in the payment process.
For these reasons, and the degree of automation, the policy
options that are available for changing payment processes and
current payment procedures have to be considered very
carefully, and tend to be limited.
I can remember when I was at the Federal Reserve and we
were trying to put in effect our own overdraft payment process
for Fed Wire transactions, which are large dollar corporate
payments initiated by banks, and the Fed Wire software manager
would sit in the room and we'd come up with a policy program to
reduce overdrafts, and he'd say, ``You can't do it,'' he had to
veto, simply because the operation wouldn't support it.
Operations obviously can change.
Chairwoman Maloney. The Chair grants the gentleman 30
additional seconds. Your time has expired.
Mr. Ireland. Operations can change, but I think it's going
to be a difficult process.
I would like to say, however, that I do think you've
identified another important issue, and that is that fees for
overdrafts can, which have been imposed, can often exceed the
value of the service, and there needs to be some way to control
those fees.
Banking agency guidance today requires banks both to cap
the fees and to give customers an opportunity to opt-out of
overdraft payment.
Thank you. I'd be happy to answer any of your questions.
[The prepared statement of Mr. Ireland can be found on page
78 of the appendix.]
Chairwoman Maloney. Thank you very much.
Ms. Wu.
STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW
CENTER
Ms. Wu. Madam Chairwoman, Representative Gillmor, and
members of the subcommittee, thank you very much for inviting
me here today. I'm testifying on behalf of the low-income
clients of the National Consumer Law Center.
Madam Chairwoman, thank you for holding this hearing and
for introducing H.R. 946. This bill will go a long way in
addressing the abuses of overdraft loan programs, and
unfortunately, these abuses are many.
One of the abuses is that overdraft loans are one of the
few forms of involuntary credit. They are ``crammed,'' or
imposed on consumers who have not requested them. Consumers who
don't want this form of credit are forced to actively contact
their banks to opt-out.
Some consumers may not be aware, until they overdraw their
account, that they're accessing a high-cost credit product,
especially true in the ATM or debit card context, where
transactions that would overdraw an account were previously
declined and no fee was imposed.
Now, Mr. Ireland talked about how overdrafts are
unavoidable, and implying so even in the ATM and debit card
context.
There may be accidental overdrafts, but what is the
egregious and unconscionable practice is when a bank
intentionally programs their computers to approve an ATM or
debit card withdrawal when they know the transaction will
overdraw the account.
And to show that is happening, here is a statement from
Bank of America in 2005:
``In our ongoing efforts to make banking easier with us,
our goal is to authorize more transactions made using your ATM
or check card, even if it creates an overdraft on your
account.''
This is not accidental. This is deliberate.
Now, there has been an issue raised as to whether overdraft
loans are a form of credit. They are unquestionably a form of
credit. They are credit as defined under the Truth in Lending
Act, the right to incur debt and defer its payment.
When a bank lets a consumer use the banks' funds to pay for
an overdraft and then requires the consumer to repay the bank,
it's granting the right to incur debt and defer its payment.
Regulator after regulator, from the OCC to State banking
departments, including the Federal Reserve Board, have stated
that overdraft loans are a form of credit, and even the Fed
Wire overdrafts that Mr. Ireland talked about are considered a
form of credit.
Furthermore, when banks ``cram'' these overdraft loans onto
banking accounts, it's a default product. They typically don't
engage in any underwriting.
Unlike traditional, affordable lines of credit, banks don't
assess a consumer's ability to pay. They make sure these
programs are profitable by charging huge fees, providing huge
profit margins as well as covering any alleged risk.
Now, despite the fact that overdraft loans are credit,
banks don't need to make Truth in Lending disclosures. You see,
in 1969, the Federal Reserve Board exempted overdraft fees from
the definition of finance charge.
This exemption was reasonable, maybe, in 1969, when all we
had was the traditional bankers' courtesy of occasionally
paying an overdraft on an ad hoc basis as a customer
accommodation. But banks have exploited this exemption,
creating high-cost, automated credit programs while avoiding
Truth in Lending disclosures.
Now, the Fed had the opportunity to close this gaping
loophole and require Truth in Lending disclosures. Instead, the
Fed chose to regulate them under the less effective Truth in
Savings Act, which undermines the Truth in Lending Act's core
purpose in promoting the informed use of credit.
Without the APR disclosure required by Truth in Lending,
consumers have no way to compare an overdraft loan to other
credit transactions, such as a payday loan, an auto title loan,
or a credit card cash advance.
Under the Fed's regulation, the disclosed APR for a typical
payday loan is 400 percent, but for an overdraft loan program,
the lender can disclose that the account is actually earning
interest under Truth in Savings.
And under Truth in Lending, as well as for all practical
purposes, ATM and debit cards that access overdraft loans are
transformed into super-expensive credit cards.
For example, this is a typical debit card. It even has a
MasterCard logo on it. If my bank allows me to use its money to
pay for purchases, what makes it different from other credit
cards in my wallet, except for the steep fee?
Now, by the way, I've heard some argument that it would be
difficult to calculate an APR because the bank doesn't know how
long in advance the loan is outstanding for.
But you have the same issue with credit cards fees, like
cash advance fees, and Congress built into the Truth in Lending
Act a way disclose an APR for credit card fees.
In fact, H.R. 946 actually deals with this issue and
requires overdraft loan fees to be disclosed using a fee-
inclusive APR similar to credit cards.
Finally, I want to talk about how overdraft loans can cause
financial hardships when they seize Social Security or other
Federal payments to repay them.
Federal law is supposed to protect these benefits, and
indeed, the only creditors that can touch them are the U.S.
Government itself and banks when they take or offset protected
Social Security and other benefits to pay for overdraft loans
and fees.
H.R. 946 would address many of the problems discussed today
and prohibit the cramming of overdraft loans by requiring banks
to obtain real consent. It would require Truth in Lending
disclosures and it would require banks to warn consumers and
give them an opportunity to cancel before an ATM or debit card
transaction will overdraw an account.
We thank you for the opportunity to testify and look
forward to working with the chairwoman and other members of the
subcommittee on H.R. 946. Thank you.
[The prepared statement of Ms. Wu can be found on page 94
of the appendix.]
Chairwoman Maloney. Ms. Feddis.
STATEMENT OF NESSA FEDDIS, SENIOR FEDERAL COUNSEL, AMERICAN
BANKERS ASSOCIATION
Ms. Feddis. Thank you.
Madam Chairwoman and members of the subcommittee, my name
is Nessa Feddis, and I am the senior Federal counsel for the
American Bankers Association. I am pleased to be here today to
represent the ABA on the issue of overdraft policies and
practices of banks.
As you note, Madam Chairwoman, the American consumers enjoy
the most affordable, efficient, and accessible banking in the
world. Consumers can open a checking account with a small
deposit and have access to an entire menu of payment services
at little or no cost. They can write checks, use debit cards to
withdraw cash or make purchases, pay bills, and make funds
transfers day or night, around the globe.
In the best of all worlds, people would only write a check
or make an electronic payment when there are sufficient funds
in their account. Of course, this isn't a perfect world. For
this reason, banks have traditionally accommodated customers
when they inadvertently overdraw their account. Consumers value
banks' practice of paying overdrafts. Indeed, they expect it.
They avoid the embarrassment, hassle, costs, and other
adverse consequences of having a payment returned or a
transaction denied. Returning a payment for a merchant, for a
mortgage company, a credit card company, usually means the
consumer pays additional fees charged by the person receiving
the payment.
Consumers also value having debit card transactions
approved even when there are insufficient funds. For example,
many consumers would rather their deposit institution authorize
the debit transaction than face the consequences of not being
able to pay for a meal they've just consumed or the groceries
that have already been rung up and bagged.
Consumers are in control and can avoid overdraft fees.
Keeping track of transactions is critical to overdrawing an
account. This, of course, is not always a pleasant task, and
most of us would like to avoid it altogether, but doing so is
an important responsibility of using a transaction account.
The bottom line is that consumers are in the best position
to know what their actual balance is. Only they know which
checks that they have written, automatic payments they have
authorized, and debit transactions they have approved.
However, even if individuals do not keep an accurate, up to
date record of their transactions, it's easy for them to check
their balance. They can check their balances by phone, at the
ATM, online, or using the Internet browser on a phone or other
handheld device.
Customers who find it challenging to manage their accounts
have other options available to them. Many simply maintain a
cushion. Others establish a line of credit or arrange for
overdrafts to be covered by automatic transfers from a savings
account or to a credit card account.
In addition, most banks permit customers to opt-out of
having overdrafts authorized or paid.
Banks will also often waive the fee for an initial or
occasional overdraft. After the first incident, however, the
consumer is then aware that debit card transactions, for
example, may cause an overdraft.
Of course, consumers dissatisfied with their bank's
services have many other banks to choose from in a very
competitive industry.
The banking industry and regulators have been and will
continue to be responsive to consumer concerns about overdraft
fees.
ABA, in March 2003, in a letter to members, urged caution
with regard to overdraft practices, and following that,
published extensive guidelines for best practices.
In addition, in 2005, the banking agencies adopted their
overdraft protection program guidance, which the industry
adopted and fully supports.
The Federal Reserve Board went further to address concerns
about consumer understanding of the cost of overdrafts by
amending the Truth in Savings Act's Regulation DD.
We believe that the industry's initiative, along with the
industry's guidance, and important changes to Regulation DD,
have addressed concerns about overdraft protection programs.
Madam Chairwoman, the ABA appreciates the opportunity to
present our views on this subject. We believe that overdraft
accommodation services are important to our customers and we
will continue to work, as we've done in the past, to make sure
that customers understand the responsibilities for tracking
accounts, the fees associated with overdrafts, and the
strategies to avoid them.
I will be happy to answer questions that you or the
subcommittee members may have.
Thank you.
[The prepared statement of Ms. Feddis can be found on page
40 of the appendix.]
Chairwoman Maloney. Thank you so much.
Ms. Ludwig.
STATEMENT OF SARAH LUDWIG, EXECUTIVE DIRECTOR, NEIGHBORHOOD
ECONOMIC DEVELOPMENT ADVOCACY PROJECT
Ms. Ludwig. Chairwoman Maloney, Ranking Member Gillmor, and
members of the subcommittee, thank you for holding today's
hearing.
My name is Sarah Ludwig, and I'm executive director of
NEDAP, the Neighborhood Economic Development Advocacy Project,
which is based in New York City.
NEDAP believes that everyone has the right to live in a
decent, safe, and thriving community, and that fair access to
credit and financial services is key to ensuring a community's
vitality and economic inclusion for all its residents.
I'm here today to tell you about NEDAP's on-the-ground
experience working with low-income New Yorkers who have been
harmed by abusive overdraft loans.
Through our extensive community financial education
programs, as well as our consumer law hotline, we encounter
people with problems with overdraft protection every day.
I will also share with you New York State's recent
experience with respect to deregulating bounce protection for
State-chartered institutions and underscore why it is so
crucial for Congress to enact legislation like H.R. 946.
In the 11 years since NEDAP was founded, we've observed a
dramatic shift in the nature and delivery of financial services
in New York City and around the country.
New York City neighborhoods that were historically cut off
from access to fair and affordable financial services are now
flooded with solicitations for high-cost, often fringe and
predatory financial services and credit.
We've all seen the advertisements: ``Bad credit? No
problem.'' ``Need cash fast? Call us.''
NEDAP therefore dedicates considerable resources to
educating lower-income consumers on how to avoid abusive credit
and asset stripping products and services, and how they can
make sound financial choices and understand their rights as
financial services consumers.
It used to be a no-brainer for us to recommend to people
who don't have bank accounts that they should go out
immediately and get a bank or credit union account, but bounce
protection blurs the lines between mainstream and fringe
banking, and it can be a financial land mine for people living
on limited means.
Seeing the hardship that abusive overdraft protection has
caused so many of our workshop participants and so many of our
consumer law hotlines, NEDAP is now hard-pressed to recommend
categorically that people open bank accounts. Too many people
end up learning that their account has bounce protection the
hard way, after they've overdrawn and fees have mounted.
Routinely, they don't know that they have an overdraft
protection feature on the account. They didn't apply for it.
It's not disclosed, as it would be under H.R. 946.
Many people believed they had sufficient funds in their
account, understandably, because the transaction, either at the
ATM or the point of sale, was approved.
Many families have told us their accounts were closed
because they could not afford to pay hefty bounce protection
fees, which bear no relation to the amount overdrawn or to the
risk to the financial institution.
When bounce protection is triggered and an account is
closed ultimately, if that happens, the information is reported
to Check Systems, which is a reporting agency that tracks and
sells information on a person's bounced checks, their debts
owed to a bank, and any other so-called account mishandling.
Check Systems functions effectively as a bank account
blacklist, and NEDAP can cite numerous examples of low-income
New Yorkers who are now blocked from opening a bank account
because of past difficulties they've had with bounce
protection, and it is next to impossible for account holders to
opt-out of bounce protection or to get a bank to remove it if
they request it.
In my written testimony is a case example that I won't go
into right now, but it's of a client of ours named David A.,
and I'll tell you just broadly that he is a man who is deaf,
whose sole source of income is Supplemental Security Income,
SSI, and he triggered bounce protection 2 years ago with a
charge of $3.44 that he was unaware of, and didn't know until
many weeks later, after he had a spiral of overdrafts, that he
had in fact triggered this provision that he didn't know that
he had. After many months of difficulty, he ended up with $1.83
in his account and the account was closed for failure to
maintain a positive balance.
His account contained only his SSI benefits, income that
should be statutorily protected and should not have been
debited from his account to set off the overdraft charges.
Again, this is more detailed in the written testimony.
NEDAP supports passage of a law like H.R. 946, which would
set a strong and sorely needed Federal standard.
In 2005, the New York State Banking Board deregulated our
State's longstanding prohibition against bounce protection as a
defensive measure to retain State chartered banks that
reportedly were threatening to give up their State charter and
go for a national one so that they, too, could offer this
lucrative product.
Then-Superintendent Diana Taylor explained the New York
State Banking Department's impending deregulation this way, and
I quote:
``The ability of the federal banking regulators to preempt
state law has increasingly meant that state regulators must
choose between allowing their banks to do whatever federal
regulators allow national banks to do or face the prospect that
banks in the state will achieve the same result by simply
switching to the federally regulated or national charter.''
Chairwoman Maloney. The Chair grants the gentlelady 30
additional seconds. Your time has expired.
Ms. Ludwig. Thank you.
H.R. 946 would halt this race to the bottom at the State
level and fill the Federal regulatory vacuum we now face.
In sum, during the debate over whether New York State
should allow bounce protection a couple years ago, industry
representatives stated that account holders were in fact
clamoring for overdraft protection--I'm not talking about lines
of credit, but the bounce protection and the courtesy
overdraft--and that banks that offered it were simply
responding to consumer demand.
But they failed to produce any evidence to substantiate
that consumers were clamoring for this bounce protection or
this courtesy overdraft. On the contrary, whenever we explain
it to people at consumer workshops, they tell us that they
consider it an exploitative product, one to be avoided at all
costs.
The industry representatives failed to explain why, if
consumers are so eager to have the product, it's tacked onto
accounts without consumers' knowledge or consent, and why if
they have consumers' best interests in mind, they market free
checking accounts with bounce protection so aggressively to
young people and others with low incomes whom they count on to
overdraw.
I look forward to answering any questions that you may
have.
[The prepared statement of Ms. Ludwig can be found on page
89 of the appendix.]
Chairwoman Maloney. The gentlelady's time has expired.
Ms. Cunningham.
STATEMENT OF MARY CUNNINGHAM, PRESIDENT/CEO, USA FEDERAL CREDIT
UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION
(CUNA)
Ms. Cunningham. Chairwoman Maloney, Ranking Member Gillmor,
and members of the subcommittee, thanks for holding this
hearing on H.R. 946. My name is Mary Cunningham, and I actually
work for a financial institution that handles these programs--I
am president and CEO of USA Federal Credit Union in San Diego.
I am here on behalf of CUNA, which is the Nation's largest
credit union advocacy organization representing over 90 percent
of the Nation's 8,800 State and Federal credit unions.
We are predominantly a military based credit union,
servicing 60,000 members. We operate a network of 23 branches,
including 11 branches in Japan and Korea, all located on
military installations.
We provide a wide variety of financial services to meet the
needs of our unique market, including low-cost payday loan
alternatives, affordable mortgage products, small business
services, this overdraft protection service, as well as many
other things for the members.
Madam Chairwoman, credit unions have long been involved in
providing some form of overdraft or bounced check protection.
However, these programs vary, due to the unique fields of
memberships of credit unions. Many of these programs have
changed over time in response to the members' needs and usage.
Shortly after introducing our program in the fall of 2003,
early results were, in fact, troubling; 26 percent of those
using privilege pay were less than 25 years of age. For a
military credit union, we considered this to be disturbing
news.
Forty-four percent of our users accessed the service
between two and five times per month. Thirty-seven percent of
these users were chronic overdrafters prior to implementation
of the product. Once implemented, an additional 28 percent
became chronic abusers.
We also learned that roughly 75 percent of all of our
overdrafts resulting in privilege pay were triggered by ATM
activity.
Credit unions have a rich history of providing a fair deal
to consumers--low rates on loans, high savings rates, and
modest fees. But instead of privilege pay being used as we had
intended, a number of our members chose to use it as a no-
qualifying line of credit.
For a member who lives paycheck-to-paycheck, these fees add
up very quickly. Once a member maxed out his privilege pay
limit, the next paycheck was automatically spent once
deposited, thereby creating a downward spiral for the member.
When that happens, we are no longer offering the fair deal.
We're adding to his problems.
To be fair, we've also received testimonials from members
who were very grateful that the math errors in their checkbook
didn't result in the embarrassment and expense of a returned
check.
So our challenge was this: How do we offer a sensible
product that members can rely on to save them the embarrassment
of having a check returned, while at the same time ensuring
that controls are put in place to help members to help
themselves?
We made several modifications to our product, many of which
mirror the main points in your proposed legislation.
Number one, our privilege pay product is offered to members
at the time the checking account is opened, along with the
transfer from savings option and the overdraft line of credit
loan option.
The member is informed that they will qualify for privilege
pay after 30 days in good standing and aggregate deposits of at
least $750, unless they choose not to have the service.
Your bill would require members to proactively enroll in a
program. They would be provided disclosures. Credit unions
would agree with this.
Number two, we follow a practice of liberally refunding
fees while educating the members about the service. We also
encourage members to opt-out if they decide they don't want the
service. Free financial counseling is also made available.
Number three, part of that education consists of explaining
to members how the clearing process works. At our credit union,
all items are cleared in ascending order by dollar amount with
the smallest dollar amount being cleared first. We always post
credits to the accounts first, and then debits. This helps to
minimize the fees. Your bill would prohibit financial
institutions from manipulating the process of posting these
items to generate overdrafts and fee incomes. Credit unions
would agree.
Number four, we also inform the member that our system
first attempts to transfer from savings, then to a line of
credit overdraft loan, and then finally, to privilege pay as a
last resort.
While these programs are offered at the time the checking
account is established, none are overtly marketed to members,
which is consistent with your bill. Once again, credit unions
would agree.
Number five, when the member makes a withdrawal at an ATM,
the actual balance is disclosed, not the available balance
through privilege pay. We did ask our processor if a notice
could be provided at the ATM warning the member that they were
triggering privilege pay, but we were told this was
unavailable.
While I agree with your bill's recommendation that such a
notice should be provided, I will tell you that few credit
unions operate their own ATM networks, and would be unable to
ensure compliance on their own, so I would encourage sufficient
time for phasing in this provision to enable third party
providers to make the necessary adjustments.
Finally, your bill attempts to ensure that fees for
privilege pay be conspicuously disclosed in a separate periodic
statement with the calculation of the APR. Credit unions would
agree and clearly support disclosure of all costs related to
these programs.
However, depending upon how that fee is defined and
included in the APR calculations, it could easily exceed the
credit union's statutory 18 percent--
Chairwoman Maloney. The Chair grants the gentlelady an
additional 30 seconds.
Ms. Cunningham. --rate ceiling, and this would force most
credit unions to stop providing this service.
My written testimony would outline alternatives for your
consideration.
In summary, Madam Chairwoman, we view privilege pay as one
of those programs that, like many things in life, can be a
wonderful tool if the consumer uses it in the appropriate way,
but also like many things, when taken to excess, it can
certainly do damage to the consumer and add to their financial
burdens.
From our perspective, your bill would protect the interests
and pocketbooks of consumers. Credit unions share this goal and
applaud your efforts.
Thank you very much. I'm available for questions.
[The prepared statement of Ms. Cunningham can be found on
page 33 of the appendix.]
Chairwoman Maloney. Thank you.
Ms. Fox.
STATEMENT OF JEAN ANN FOX, DIRECTOR OF CONSUMER PROTECTION,
CONSUMER FEDERATION OF AMERICA
Ms. Fox. Chairwoman Maloney, Ranking Member Gillmor, and
members of the subcommittee, I'm Jean Ann Fox, director of
consumer protection for Consumer Federation of America, an
association of 300 consumer groups who represent 50 million
consumers.
I appreciate this opportunity to speak in support of H.R.
946, the Consumer Overdraft Protection Fair Practices Act.
I make three main points in my testimony:
One, consumers strongly oppose bank overdraft practices,
according to national polls that CFA has conducted;
Two, big banks charge high fees, they use tactics to cause
more overdrafts, and they structure fees to trap consumers in
debt;
And three, the Federal Reserve is failing to protect
consumers from abusive overdraft loans.
We're not talking about your traditional overdraft
protection that consumers apply for and qualify for, and that
use the consumer's own money to cover the occasional overdraft.
Your legislation will stop banks from operating as payday
lenders, trapping their most vulnerable customers in a debt
spiral while charging astronomical interest rates on short-term
loans to consumers. A $100 overdraft repaid in 2 weeks at a $35
typical overdraft fee translates to 910 percent annual
interest.
Consumers think that bank practices with overdraft loans
are unfair. Almost 70 percent of consumers in a national poll
told us that it is unfair for banks to permit overdrafts
without obtaining their customers' consent. Eighty-two percent
of consumers in the poll said it is unfair for banks to permit
overdrafts without any notice at the ATM, and 68 percent of
them--excuse me--63 percent of them said it was very unfair.
Over 80 percent of the largest banks in the country have
fine print in their account agreements that permit overdrafts
for a fee. The 10 largest banks charge fees ranging from $20 to
$35.
The current average is $33.75 per overdraft, once you've
done it more than a couple of times during a year. These fees
have gone up over $5 in the last 2 years, so fees are on the
increase.
Bankers claim that fees are set high in order to deter
misuse of bank accounts, but bankers have given their customers
permission, and encourage them to overdraw their accounts,
which removes this justification for such high fees.
Banks also charge tiered fees, which adds to the debt trap
for consumers. For example, Bank of America charges $20 for
each of up to 5 overdrafts in a single day in the 12-month
period. After that, if you overdraw, you'll pay $35 each for up
to 5 overdrafts in a day, and it's easy to have 5 overdrafts if
you've used your debit card as you've gone through the day.
Many banks also charge sustained overdraft fees so that
after you've been overdrawn for a few days, you'll start paying
by the day. For example, First Third Bank charges $33 when you
overdraw, and $6 a day until that overdraft is repaid.
Banks continue to come up with more ways to charge
overdraft fees. Bank of America just notified its customers
that starting in August, customers will be charged for
prospective overdrafts when pending debit transactions tied up
customers' funds currently available in their bank account.
Bankers also manipulate the order of processing deposits
and withdrawals in order to maximize the number of transactions
that trigger an overdraft fee.
CFA's 2005 study of the 33 largest banks found that almost
three-quarters of large banks either process withdrawals
largest to smallest or reserve the right to do so. This
processing order can result in multiple fees for consumers who
are living paycheck-to-paycheck.
For example, one bank's customer had a $100 check clear
that he hadn't expected to go to the bank. It caused 8 small
transactions totaling $50 to overdraw and triggered $264 in
overdraft fees. If that bank had cleared smallest to largest,
he would have only paid one $33 fee.
Bankers justify their high to low check clearing practice
by claiming that consumers want the largest payment to be
processed first because it might be the mortgage or an
important payment, so we asked consumers a few years ago
whether they agreed with the bankers, and only 13 percent of
them did.
In our poll, 65 percent of--
Chairwoman Maloney. The gentlewoman's time has expired.
I grant the gentlelady 30 additional seconds.
Ms. Fox. --our consumers think it's extremely unfair for
banks to clear their transactions high to low.
I promised you a third point.
We believe that the Federal Reserve has failed to protect
consumers from high-cost overdraft loans by failing to cover
them in Truth in Lending and the other regulators have only
enacted voluntary best practice guidelines that fail to protect
consumers.
We support your bill, and thank you for the opportunity.
[The prepared statement of Ms. Fox can be found on page 56
of the appendix.]
Chairwoman Maloney. Thank you. Without objection, all
members' opening statements will be made part of the record.
And I would like to note that we've been called for a vote.
It's estimated that this voting series will last one hour.
So I yield to my colleague, Ranking Member Gillmor, to
begin the questioning.
Mr. Gillmor. I thank the chairwoman for her courtesy.
In terms of, I think it was Ms. Ludwig said on education,
and that's part of what you do, I think that is a very
important thing, and if you had good consumer education, I
think a lot of these problems would go away.
I recently convened a meeting of a large group of Ohio
financial institutions, regulators, and consumer groups to talk
about the serious foreclosure problems we have in Ohio, and the
conclusion of that meeting really surprised me, because all
three of those groups said that the single most important thing
you could do to prevent foreclosures would be better education,
that those consumers who were counseled adequately before they
got in the deal, didn't have foreclosures.
And the other thing that came out was that disclosure is
sometimes nondisclosure. They have so much disclosure in
mortgages that it amounts to nondisclosure, because nobody
reads an inch of paper, so it's not effective. So I just
brought that up to follow up on what you had said.
Let me ask Ms. Feddis, you state in your testimony that
consumers want their overdraft checks paid and not returned to
the merchant. Do you have any statistics or any proof on that?
Ms. Feddis. Well, the Center for Responsible Lending back
in February came out with a report that showed that 94 percent
of people do want their overdrafts paid.
The question was: Say you make a purchase and did not have
enough in your checking account to cover it. Given the
following choices, how would you want your bank to handle your
overdraft? And it listed, you know, give me an overdraft line
of credit, and 94 percent of people wanted their overdrafts
covered.
Mr. Gillmor. You also touched on in your testimony, and I
want to follow up, in Ms. Fox's written testimony she said,
``Deliberate bank practices and advances in technology make it
harder than ever for consumers to keep track of the balance in
their bank accounts to avoid overdrafts.''
Would it also be true that those same advances make it
easier for consumers to get real-time account updates, either
by phone or by the Internet or even at their ATM machines?
Either you or Ms. Feddis or both.
Ms. Fox. I'm glad to answer the question.
Consumers may be able to call or use the Internet to access
their account balance, but the changes in technology that are
causing problems for people is how fast money flies out of
their checking accounts.
A paper check is converted into electronic withdrawal at
the cash register and the money is out of your bank before you
get out the door of the store, or your check is converted to an
electronic withdrawal that you mail in to pay some of your
bills. So money flies out of people's bank accounts.
When they pay with a debit card, some retailers put a hold
on some of the money in their account for a few hours up to a
few days, which can cause you to overdraft because you think
you have money when, in fact, somebody else has a claim on it.
The deposits that people make are still walking into their
accounts at 1990's speed, because the check hold periods, the
deposit hold periods have not been shortened to reflect
increases in electronic processing. So there are a lot of
things that are changing in the banking environment that make
it hard for consumers to manage.
Mr. Gillmor. Did you want to comment, Ms. Feddis, on that
question?
Ms. Feddis. Yes. I think that, just to talk a little bit
about the payment systems, and transactions, we're not, as Mr.
Ireland said, we're not at real time.
The way most transactions are processed is using a batch
processing method, and that is, after hours, the bank puts in
all the deposits that have come in for the day and then they do
the withdrawals.
So the balance, there's a working balance, shall we call
it, which is the balance that the bank is working with and the
consumer is working with, and while it's not perfect, it is
something the consumer can use to better understand what their
balance is and whether they're going to overdraw.
At the end of the day, only the consumer knows their
balance. Only they know what checks they've authorized, what
automatic payments they've scheduled, or even what debit cards
that they have authorized. The transactions may not have come
into the bank yet, and then when they finally do come in, it
could cause an overdraft, but the bank won't necessarily know
it at the time of the transaction.
Mr. Gillmor. Just one more question, and that's on the
issue of fees.
I think there's a feeling among some that the fees tend to
be higher with the bigger banks than the smaller banks, because
they make a bigger effort to collect non-interest income.
So I want to just ask Ms. Fox and Mr. Ireland if you have
anything that substantiates that statement that I just--
Ms. Fox. Yes, sir. We surveyed the 33 largest banks in
2005. They control the majority of deposit dollars.
Their average overdraft fee is higher than the average in,
for example, bankrate.com, a fee survey which covered a lot
more banks.
And when we went back and compared the 10 largest banks
overdraft fees for just 2 years ago and today, it has gone from
$28 and about 40 cents up to $33.75, so they're higher than the
small banks and they're growing fast.
Mr. Gillmor. My time has expired, but maybe Mr. Ireland has
a comment.
Mr. Ireland. I'd just like to caution against looking at
nominal fees as indicative of the bank's practice. Banks
frequently waive fees and assess fees on a discretionary basis.
And so whether or not that fee is charged for all
transactions is also a component in the actual charge that the
bank imposes on the consumer, and just looking at the
statistics that were quoted won't tell you that component.
I am not aware that on an overall basis, there's a marked
difference between larger banks and small banks in that area.
Chairwoman Maloney. The gentleman's time has expired.
We will not be coming back after this vote. It's an hour
period for a vote, followed by a Democratic caucus, so members
will be offering questions in writing.
I would just like to offer Mr. Halperin the opportunity to
respond to Mr. Gillmor's question, since your report was
mentioned, and then I would like to ask Mr. Ireland or Ms.
Feddis, if there were no cost issues and no technological
issues, would you still oppose giving consumers a warning at
the ATM or point of sale that they would overdraw their account
and that there would be a fee?
But first, Mr. Halperin, I think, since your study was
mentioned, you should be given an opportunity to respond to it.
Mr. Halperin. Thank you, Chairwoman Maloney.
Well, in response to that question, the question that was
asked to consumers was, ``If you had a choice of having your
overdraft covered or not, what would you prefer?''
And if Ms. Feddis had kept reading down the answers, what
would have been apparent is the vast majority of consumers
would have preferred their overdrafts covered by a line of
credit or a cash advance from a credit card if they had to have
it covered from a credit product rather than a transfer from a
saving account, not the fee-based overdraft programs that we're
talking about today.
And we also asked consumers, ``If you're at the checkout
counter and you had a choice between--you had to make the
choice ahead of time whether your transaction would always go
through and you'd be charged a fee with your debit card or
would it always be denied and you'd be charged no fee,'' 61
percent of consumers always wanted it denied.
And then the final piece of information on consumer
preference, which I think is important to have out today, is we
asked consumers that, ``If you were at an ATM and you received
a warning that you were going to overdraft, would you accept
that fee all the time, never, or would it depend?'' And 84
percent of consumers said they would always reject the
transaction at the ATM and not take money out if they were
going to be charged a fee.
Thank you.
Chairwoman Maloney. Ms. Feddis and Mr. Ireland.
Ms. Feddis. One thing about surveys is we tend to respond
to them in what we would hope to do rather than what we would
actually do.
I think most people, if you said, ``Are you going to eat
the fruit or the ice cream with the chocolate syrup,'' we'd
say, ``Oh, no, the fruit,'' but then when it was put in front
of us, we might actually falter. And with ATM transactions and
overdrafts, that's exactly what we found.
A couple of banks have piloted programs where they make the
disclosure at their own ATM, because they can't do it
elsewhere, and one bank reported that three-quarters of people
proceeded with the transaction.
Now, that's different from a point-of-sale transaction,
where I think we would find a larger percentage approving the
transaction, because at that point, you've already consumed the
meal, the groceries are bagged, the kids are crying, the ice
cream is melting, the barber has already cut your hair. You
want them to proceed with the transaction.
Plus, unlike an ATM transaction, it's not an anonymous
transaction. You're actually looking at somebody in the face
and saying, ``Oops, I don't have enough money.'' And it's
embarrassing.
And so in many cases, while we would hope never to overdraw
our account, we do.
But on your other question--
Chairwoman Maloney. So if you would clarify, from what
you're saying, I don't want to put words into your mouth, but
it appears that you would not object to notice to consumers to
allow them to make a decision whether they want to pay a fee or
not or--
Ms. Feddis. We would not, absent the prohibitive costs, we
would not, but of course--we would not object to the
disclosure, no, we would agree that disclosure would be better.
Chairwoman Maloney. So then, do you support the bill?
Ms. Feddis. Again, it goes down to the cost prohibitiveness
of the technological challenges. I don't know how much time you
have. I don't want to--
Chairwoman Maloney. So if there were no cost issues, and
there were no technological challenges, then you would support
the bill?
Ms. Feddis. As long as there were some exceptions. There
are still exceptions, for example, there are some places where
it probably isn't feasible.
Let's use the example of some emerging developments where
consumers could use their--
Chairwoman Maloney. Just a yes or no. If there were no cost
issues--
Ms. Feddis. With some exceptions--
Chairwoman Maloney. --and no technological problems, you
would support the bill, the notice to consumers?
Ms. Feddis. The notice to consumers, we would support, so
long as there were some exceptions, for like the process just
announced in New York with the New York and New Jersey PATH
railway, where it's a tap and go card. You probably couldn't
have a screen. You wouldn't want the delays, because that would
halt traffic. So you'd have to have some flexibility.
Chairwoman Maloney. Mr. Ireland, would you like to comment?
Mr. Ireland. I'm in favor of informed choice for consumers,
and if I could get there without costs and operational
problems, I'd love to get there.
There are--the world we live in has costs and operational
problems.
Some of them are--you know, the subway system potential as
to how you're going to exercise the choice in the line, and the
balance issues are going to be ongoing, and even if you know
the balance, quite frankly, I'd go beyond the bill, even if you
know the balance now and you're going to do an ATM transaction,
you ought to know how that's going to affect other transactions
in process, so you can choose which one you want to do.
If we could get there, I'd love it.
Chairwoman Maloney. I thank everyone for their testimony.
I'm afraid I'm going to miss a vote if I don't leave. I've
really enjoyed learning from you today, and I look forward to
continuing this dialogue.
And I would like to note for the record that members may
have additional questions for this panel which they may wish to
submit in writing, and without objection, the hearing record
will remain open for 30 days for members to submit written
questions to these witnesses and to place their responses in
the record.
Again, I thank you for your expertise and your time, for
being here today, and for your testimony.
Thank you. The hearing is adjourned.
[Whereupon, at 3:09 p.m., the hearing was adjourned.]
A P P E N D I X
July 11, 2007
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