Qtec
06-08-2004, 04:04 AM
June 8, 2004
Federal Reserve Says Banks Can Continue Overdraft Plans
By ALEX BERENSON
he Federal Reserve said yesterday that banks could continue controversial programs that consumer groups say function as high-cost loans used mainly by poor and middle-income people.
The programs enable, and in some cases encourage, customers with low balances to overdraw their checking accounts, allowing the banks to skirt credit laws and collect billions of dollars in fees. They are generally marketed as "overdraft privilege" or "bounce protection" and have grown very rapidly in the last five years, with at least 1,500 banks now offering them.
After studying the programs for more than a year, the Federal Reserve said in a statement that they should not be covered under truth-in-lending laws and did not propose any substantive restrictions on them. The Fed did propose some minor changes in the way the programs were marketed.
The Fed's stance was a defeat for consumer protection groups, which have campaigned against the programs.
The public now has 60 days to comment on the proposed changes, and then the Federal Reserve will consider issuing a final rule, a spokeswoman said.
Under the programs, the banks cover checks that would otherwise bounce, permitting people to overdraw their accounts with A.T.M. and debit cards. Although banks have always offered lines of credit to higher-income depositors with large balances, these programs are aimed at depositors with smaller balances and usually will not cover overdrafts of more than $500.
Each time a person overdraws his account, he is charged a fee of $15 to $35, and the overdraft must be paid back in a matter of days or weeks. Some programs also add a daily fee if the overdraft remains outstanding for more than a few days.
When the overdraft occurs as a result of a debit card or A.T.M. transaction, banks generally do not immediately inform their customers or give them the option to reverse a transaction. Instead, they mail a notice out. So a person who uses a debit card may incur several overdrafts before realizing what has happened.
The effective interest rates on the programs are enormous; someone who pays a $20 fee for a $100 overdraft that is outstanding for two weeks is paying the equivalent of an annual interest rate of 520 percent. Industry consultants who help banks create and market the programs have said that the fees are paid disproportionately by low- and moderate-income people.
I guess the banks, after losing loads of money on bad deals such as Enron etc, have to get their money from somewhere.
Q
Federal Reserve Says Banks Can Continue Overdraft Plans
By ALEX BERENSON
he Federal Reserve said yesterday that banks could continue controversial programs that consumer groups say function as high-cost loans used mainly by poor and middle-income people.
The programs enable, and in some cases encourage, customers with low balances to overdraw their checking accounts, allowing the banks to skirt credit laws and collect billions of dollars in fees. They are generally marketed as "overdraft privilege" or "bounce protection" and have grown very rapidly in the last five years, with at least 1,500 banks now offering them.
After studying the programs for more than a year, the Federal Reserve said in a statement that they should not be covered under truth-in-lending laws and did not propose any substantive restrictions on them. The Fed did propose some minor changes in the way the programs were marketed.
The Fed's stance was a defeat for consumer protection groups, which have campaigned against the programs.
The public now has 60 days to comment on the proposed changes, and then the Federal Reserve will consider issuing a final rule, a spokeswoman said.
Under the programs, the banks cover checks that would otherwise bounce, permitting people to overdraw their accounts with A.T.M. and debit cards. Although banks have always offered lines of credit to higher-income depositors with large balances, these programs are aimed at depositors with smaller balances and usually will not cover overdrafts of more than $500.
Each time a person overdraws his account, he is charged a fee of $15 to $35, and the overdraft must be paid back in a matter of days or weeks. Some programs also add a daily fee if the overdraft remains outstanding for more than a few days.
When the overdraft occurs as a result of a debit card or A.T.M. transaction, banks generally do not immediately inform their customers or give them the option to reverse a transaction. Instead, they mail a notice out. So a person who uses a debit card may incur several overdrafts before realizing what has happened.
The effective interest rates on the programs are enormous; someone who pays a $20 fee for a $100 overdraft that is outstanding for two weeks is paying the equivalent of an annual interest rate of 520 percent. Industry consultants who help banks create and market the programs have said that the fees are paid disproportionately by low- and moderate-income people.
I guess the banks, after losing loads of money on bad deals such as Enron etc, have to get their money from somewhere.
Q