Bounce loans, the Fed rule and the unbanked

By Alan White

The Federal Reserve has proposed a rule to allow consumers to opt out of their bank's discretionary overdraft payment and fee harvesting programs, better known as bounce protection or bounce loans. In the past four or five years banks have adopted the practice of not only paying overdrawn checks at their discretion (and charging a fee of about $35) but also paying debit card purchases, and even ATM withdrawals, and charging the fee. Some banks add a $1 per day fee so long as the account remains overdrawn. Recently banks have started permitting overdrafts at ATMs, with a vague warning that "this withdrawal may result in an overdraft", and without mentioning the $35 fee. Some banks even include a discretionary overdraft limit in the consumer's balance on ATM receipts, misleading the consumer into incurring bounce fees. For more details on bank overdraft practices, read here and here.

At this week's Consumer Advisory Council meeting, industry representatives pushed back hard against the idea of requiring consumers to opt IN to bounce loans. The banks are unsure exactly how they would disclose their programs, because they assert that they retain the discretion whether or not to approve a particular overdrawn check, debit card payment or ATM withdrawal, so they make no contractual promises. It is indeed difficult to describe a contract term that allows one party to provide or not provide a service and price it at its whim.

Particularly compelling were the comments of credit counselors and financial educators, who complained that bounce fees and random overdraft policies make financial education for "unbanked" populations much more difficult. Many unbanked consumers are understandably wary of checking accounts, because of recent salient experiences they or their acquaintances have had paying bank fees. Teaching consumers how to use a checking account is now much more difficult because the tricks and traps keep proliferating. Reason enough to restrict or ban the practice, and force banks to offer the safer cheaper alternatives of linked savings accounts and lines of credit.

HT to Prawfsblawg for the graphic.

Comments

[Jennifer]

The banks are getting out of control and you have to keep on top of them. I deposited a sizeable Federal Income Tax return of approximately $1,800 and wanted the check to be deposited into a secondary account. I accessed on-line banking and saw the teller deposited the Federal check into the wrong account so I corrected the error with a transfer of funds. Sounds simple?

The bank tried to charge a $35 fee alleging the funds were not available for transfer. Needless to say I went right to the bank manager with concerns of predatory lending and I received a "courtesy credit".

At no time was I warned I would be charged a fee to make the transfer.

Even with on-line transfers or on-line transactions there should be some warning if the bank is going to charge a fee.

Also, when the terms of an account is randomly changed, I started incurring $15 monthly fees in January. The balance is well over the minimum required balances and I still can't getr an explanation of this monthly "service fee".

Eventually I will have the time and energy to go argue about it.