[Congressional Record (Bound Edition), Volume 151 (2005), Part 17]
[Extensions of Remarks]
[Pages 23524-23525]
[From the U.S. Government Publishing Office, www.gpo.gov]




          JOHN LaFALCE CONTINUES WORK FOR CONSUMER PROTECTION

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                        Monday, October 24, 2005

  Mr. FRANK of Massachusetts. Mr. Speaker, my predecessor as the 
ranking Democrat on the Financial Services Committee, John LaFalce, 
continues to be a very informed, thoughtful advocate of consumer 
protection within the context of a well-functioning financial system.
  On October 11, he wrote to the various bank regulators in support of 
legislation introduced by myself and Representatives Maloney, Sanders, 
Lee and McCarthy, H.R. 3449, dealing with abuses in overdraft 
protection.
  Mr. LaFalce's thoughtful analysis of the problem and the reasons for 
addressing it are very persuasive, and because this is an important 
issue that we are addressing, I ask that his comments to the Federal 
regulators be printed here.

       The Federal banking agencies recently issued guidelines for 
     the operation of overdraft protection programs, and the 
     Federal Reserve Board recently revised its Regulation DD with 
     respect to the advertising of overdraft protection programs. 
     Although well-intentioned, these new guidelines fall far 
     short of what is needed in this area, and in many ways the 
     recent regulations by the Fed only make matters worse.
       I call H.R. 3449 to your attention because I believe that 
     the problems it deals with are enormous, and can and should 
     be dealt with, promptly, by regulation. I shall highlight 
     some of the more significant problems dealt with by H.R. 3449 
     and urge the bank regulators to address those problems.


  I. BANK CUSTOMERS GENERALLY DO NOT KNOW OF OR CONSENT TO EXPENSIVE 
                           OVERDRAFT PROGRAMS

       Overdraft protection has been demonstrated to be the most 
     expensive form of consumer credit, with effective rates of 
     interest far higher than even payday loans. Unlike other 
     forms of consumer credit, however, upfront information about 
     the overdraft programs has not been mandated under Regulation 
     Z because of an arcane exception for banks covering their 
     customers' incidental overdrafts. As a result of this 
     exception, the logic of which no longer applies to today's 
     automated overdraft protection programs, banks have been able 
     to create a very high-cost, short-term credit product without 
     any obligation to inform consumers of how the overdraft 
     protection works and the actual credit costs involved.
       Furthermore, many and probably most consumers are 
     automatically and unknowingly being placed into the bank's 
     most expensive overdraft program, when there are often other 
     better and far less costly alternatives. While consumers may 
     wish to take advantage of an overdraft program, they deserve 
     the opportunity to learn about the program other than through 
     the imposition of the most expensive of overdraft fees, and 
     they surely should be informed of less costly alternatives, 
     and given a choice amongst those alternatives.
       H.R. 3449 would ensure that consumers know they are signing 
     up for overdraft protection and the actual costs of utilizing 
     the overdraft coverage by requiring: specific written consent 
     by the consumer to the program; disclosure of the fee for the 
     overdraft service; disclosure of the types of transactions 
     that will trigger the fee; disclosure of the time period in 
     which the consumer must cover the overdraft; and disclosure 
     of the circumstances under which an overdraft will not be 
     honored.
       The bank regulators should require such consent and 
     disclosure, including information concerning any less costly 
     alternatives offered by the bank, such as overdraft lines of 
     credit or automatic cash transfers from linked accounts. 
     Almost without exception, banks are not doing this.


 II. THE REGULATORS HAVE LITTLE OR NO DATA TO QUANTIFY THE PREVALENCE, 
   MAGNITUDE, OR NATURE OF THIS PROBLEM AND SHOULD COLLECT THIS DATA

       On February 17 and 18, 2005, Sanford C. Bernstein & Co. 
     released a study indicating that it was not uncommon for 
     banks to have a large percentage of their pre-tax income 
     attributable to fees. For example, at Wells Fargo and 
     Wachovia it was 25%, at Mellon it was 30%, at Bank of America 
     it was 33%, at AmSouth it was 42%, at Washington Mutual it 
     was 51%, and at TCF Financial it was 82%. They also concluded 
     that there is a criminal risk in actively marketing bounce 
     protection programs.
       On May 2, 2005, a Business Week article indicated that 
     ``overall, banks raked in $32 billion in account service fees 
     last year, up from $21 billion in 1999.'' They further stated 
     that ``fees have become such a powerful source of profits 
     that they exceed earnings from mortgages, credit cards and 
     all other lending combined.'' Additionally, the article 
     refers to a banking analyst at Sanford C. Bernstein & Co. who 
     said that ``the poorest 20% of the country's 135,000,000 
     checking customers generate 80% of the $12 billion in annual 
     overdraft fees.''
       On May 5, 2005, the American Banker reported that in a 
     study by one bank it was discovered that individual 
     ``customers are spending thousands of dollars on overdraft 
     fees each year. One retail customer paid $6,800.00 in the 
     fist eleven months last year. At roughly $25.00 an overdraft, 
     that works out to an average of about 22 bounced checks per 
     month. The top business customer paid $8,825.00 in fees. The 
     smallest total racked up by any of the 300 customers it 
     analyzed was about $900.00 a year, or roughly three non-
     sufficient fund charges a month, assuming a $25.00 average.''
       On May 26, 2005, the Center for Responsible Lending issued 
     a report conservatively estimating that ``borrowers pay more 
     than $10 billion dollars in overdraft loan fees per year.'' 
     They actually believe the ``current amount of overdraft loan 
     fees could be as large as $22.7 billion.''
       On June 9, 2005, the Consumer Federation of America issued 
     a report indicating that:
       (1) ``At least 27 of the 33 institutions surveyed (81.8 %) 
     have courtesy overdraft provisions written into the fine 
     print of their account agreements that say that the bank may 
     or may not, at its discretion, cover debits to checking 
     accounts that would overdraw the account. All of these banks 
     allowed depositors to overdraw their accounts at the ATM, 26 
     (78.8 %) allow overdrafts at point-of-sale debit transactions 
     at merchants, and 17 (51.5 %) allow overdrafts from automated 
     or scheduled electronic payments.''
       (2) ``Twelve of the banks (36.4 %) charge additional fees 
     for not repaying the overdraft within a certain period. These 
     sustained overdraft charges begin on average after the fifth 
     day the account is deficient. Seven banks charge an average 
     $5.57 per-day sustained overdraft fee and five banks charge 
     an average $27.50 single sustained overdraft fee.''
       (3) ``Contractual overdraft protection is cheaper than 
     discretionary courtesy overdraft.'' The fee for a link to a 
     savings account averaged $7.38; a link to a credit card 
     averaged $10.00; links to lines of credit averaged $5.20; and 
     the automatic courtesy overdraft averaged $28.57.
       The five federal banking regulators have a need to know 
     what is happening in the institutions they are regulating. To 
     do that, these agencies should have financial institutions 
     report, on a going-forward basis by month or quarter:
       (a) The number of customers charged these fees, 
     distinguishing between accounts where the overdrafts are 
     rejected and unpaid versus accounts where the overdrafts are 
     covered via overdraft protection (and excluding linked credit 
     and deposit accounts, since they are reported elsewhere);
       (b) Total fee income, again distinguishing between the 
     total fees on overdrafts that are unpaid (i.e., true NSF 
     fees) versus the total fees on overdrafts that are covered 
     via overdraft protection;
       (c) The average number of days overdraft protection funds 
     are outstanding before being repaid; and
       (d) The total overdraft amounts which are classified past 
     due, in default or written off during the relevant period. 
     Financial institutions in fact have all of this information, 
     so it should not be a hardship for them to provide this 
     information in call reports. This data will give the 
     regulators important information about the programs and 
     potential safety and soundness exposures.

[[Page 23525]]




  iii. banks are advertising ``free'' checking accounts while making 
     enormous fees on overdraft programs; this should be restricted

       According to one of the largest overdraft protection 
     program vendors in the country, banks profit from overdraft 
     protection whether or not the program itself is advertised. 
     This is because profits are made from customer usage, whether 
     the usage is planned or purely inadvertent. Not surprisingly, 
     banks are pairing their overdraft protection programs with 
     accounts that have strong consumer appeal, such as the so-
     called free checking accounts.
       The Fed's recent revisions to Regulation DD and its related 
     staff commentary were intended to rein in deceptive 
     advertising of overdraft programs but had the perverse effect 
     of creating an incentive to further hide the program from 
     consumers. This is because the reforms mandated by the final 
     rule, including the need to disclose the total monthly and 
     annual overdraft fees incurred by the individual customer, 
     are triggered only if the consumer is told about the program 
     in advance. So long as a bank does not advertise the 
     overdraft feature, the bank can fully promote its transaction 
     accounts as being ``free'' and, just as perniciously, can 
     avoid showing the total monthly and annual costs of overdraft 
     fees in the periodic statement. Thus, the Fed's new rules 
     that become effective in July 2006 will, in effect, create a 
     safe harbor for banks to legally entrap customers.
       H.R. 3449 would close this loophole and further prevent 
     other deceptive marketing practices by prohibiting: 
     advertisements of an account as ``free'' or ``no cost'' if 
     the account includes overdraft protection; the marketing of 
     overdraft protection as a short-term credit service; 
     statements that the bank will cover any and all overdrafts if 
     the bank, in fact, reserves the right not to do so; and 
     statements that a negative account balance may be maintained, 
     if the consumer, in fact, has to promptly cover the 
     overdraft.
       The bank regulators should make these prohibitions 
     effective by regulation.


   iv. atm machines do not always distinguish between actual account 
               balances and overdraft protection amounts

       Customers are vulnerable to overdraft fees when accessing 
     their funds from ATMs. While there are guidelines 
     constraining this practice, banks have not been required to 
     provide any sort of warning that a requested withdrawal would 
     result in an overdraft of the customer's account. Some banks 
     have gone well beyond relying upon a customer's ignorance of 
     their actual balance, intentionally causing their customers 
     to believe they have more funds in their accounts than 
     actually is the case. For example, there are instances where 
     banks have programmed their ATMs to show the actual account 
     balance plus the available overdraft coverage as the balance 
     available to the customer. This trick causes customers, 
     particularly those with the lowest balances and who probably 
     are the most financially vulnerable, to inadvertently 
     overdraft their accounts and incur one or more overdraft 
     fees.
       H.R. 3449 would ensure that consumers who may overdraft 
     their accounts at an ATM are given a chance to avoid 
     overdrafting their accounts by requiring banks: to inform the 
     consumer that a requested transaction will result in a 
     specified overdraft fee, and to give the consumer an 
     opportunity to cancel the requested transaction; and to 
     disclose only the actual dollar balance in the account in 
     response to a balance inquiry.
       The bank regulators should adopt either the requirements of 
     the HR. 3449 or their own guidelines as effective 
     regulations.


  v. overdraft protection for debit cards may constitute the largest 
                     abuse and should be restricted

       The ordinary consumer probably writes far fewer checks and 
     makes far fewer cash withdrawals from ATMs per month than the 
     number of times he or she uses a debit card, for a debit card 
     is often used daily and frequently.
       In one day, for example, a debit card might be used for 
     breakfast, lunch or dinner; at a grocery store, the cleaners, 
     the gas station, the book store, the florist shop, the 
     movies, etc. If overdraft fees were applicable, at $30.00 per 
     overdraft, nine transactions would incur $270.00 in fees in 
     one day.
       Further, unlike checking accounts or ATMs, there is little 
     likelihood of keeping an accurate account of one's cash 
     balance. Hence, the potential for large overdraft fees from 
     the use of debit cards is enormous.
       There is no known data on this, for the regulators do not 
     collect data. However, anecdotal information indicates that 
     overdraft programs attached to debit cards may well be the 
     most profitable source of fee income for banks, and the 
     program that most preys upon consumers.
       H.R. 3449 falls short here. It simply calls for the Fed to 
     study the feasibility of informing customers of a potential 
     overdraft, but study is not needed to tell us that strong 
     regulation in this area would result in vendors developing 
     practical and cost-effective solutions.
       The bank regulators should either prohibit overdraft 
     protection programs in connection with point of sale debit 
     cards, or restrict the number of overdrafts to one per 
     billing cycle with immediate and appropriate notification 
     upon that single event.


   VI. MANY BANKS AND BANK VENDORS MANIPULATE PAYMENT PROCESSING TO 
                          MAXIMIZE FEE INCOME

       Many and perhaps most banks have programmed their computers 
     to process customer payments in a manner designed to maximize 
     overdraft fees; i.e., post the largest transaction first. In 
     fact, many vendors' contracts often take a smaller percentage 
     of each overdraft charge, provided the bank will pay the 
     largest checks first, and then base their compensation on the 
     amount of increase in fee income. This is all the more 
     offensive given that, with overdraft protection, no checks 
     get bounced, so processing the largest checks first is simply 
     price gouging. To date, only the OTS has called for an end to 
     this practice.
       H.R. 3449 ensures that banks do not manipulate transaction 
     processing in order to maximize the number of overdraft fees 
     imposed on consumers, prohibiting both the delay of the 
     posting of the deposits in an account and the posting of 
     checks in an order designed to trigger one or more 
     overdrafts.
       The regulators should examine the contracts between the 
     banks and the vendors to determine whether the compensation 
     is based upon a percentage increase in fee income and whether 
     the vendors are agreeing to take a reduction in their per 
     overdraft compensation if the banks will permit them to 
     manipulate the posting of checks to increase the number of 
     overdrafts charged.
       The bank regulators should adopt the provisions of H.R. 
     3449 by regulation, and should prohibit contracts between 
     banks and vendors containing compensation provisions based 
     upon increases in fee income. Those practices are unsafe, 
     unsound, unfair, and deceptive.


  VII. THE FEDERAL REGULATORS PUBLISHED AN EXCELLENT AND LITTLE KNOWN 
     PAMPHLET DEALING WITH OVERDRAFT FEES THAT SHOULD BE ACTED UPON

       A pamphlet virtually unknown to consumers, entitled 
     ``Protecting Yourself from Overdraft and Bounced-Check 
     Fees,'' and published by the five Federal regulators, states 
     that there are ``other ways of covering overdrafts that may 
     be less expensive.''
       First, very few customers know this. Second, most banks do 
     not want their customers to know this or to choose a less 
     expensive option (that is why it is usually only the ``most 
     expensive'' option that is made automatic). Third, in my 
     experience, few bank tellers or bank managers are aware of 
     the various options, or of the fees associated with each 
     option.
       H.R. 3449 calls upon the Fed to study the feasibility of 
     consumer surveys and market testing programs.
       I believe the bank regulators should simply engage in a 
     ``mystery shopping'' program to establish the knowledge (or 
     lack thereof) of bank personnel and to observe their actual 
     practices. Once the agency does this, it will better 
     understand the imperative to require a bank, upon account 
     opening, to disclose the various options and fees, and have 
     the customer select and consent to the option of their 
     choice.


                            VIII. CONCLUSION

       H.R. 3449 succinctly highlights the major problems with 
     overdraft protection programs. Nothing here, however, 
     requires a legislative solution. I urge the regulators, 
     therefore, to take the lead by implementing regulatory 
     solutions, as articulated above, and that incorporate many of 
     the provisions of H.R. 3449.
       Further, much can be done to reshape the industry by 
     enforcing even the limited existing rules and regulations. 
     Strong enforcement actions against the more egregious actors 
     could set the tone for more responsible overdraft programs. 
     So far, the OCC is the only agency to bring an ``unfair and 
     deceptive'' action against any bank; I encourage every 
     regulator to use this tool where appropriate.

                          ____________________