Consumer Law

Bounce loans, the Fed rule and the unbanked

By Alan White

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.

Full post as published by CL&P Blog on June 20, 2008 (boomark / email).