Much is being written about financial consumer rights in general and “predatory lending” practices by certain financial institutions aimed at military personnel and their families in particular. Most notable is the 2005 Military Lending Act that succeeded in outlawing payday lending to military personnel and their families near military bases. This legislation came about as a result of very strong and active support from DoD because of their concerns about the negative impact of payday lending on troop readiness.
We at the Armed Services YMCA (ASYMCA) are concerned with the total well-being of military personnel and their families. As we all know, financial literacy and good financial management are essential elements for our constituents to effectively negotiate the rigors of deployment and the unique challenges military life can bring. It is no secret that financial disruptions and ineffective money management are often at the core of family distress. While we recognize that financial management is above everything else a personal responsibility, we also recognize that unfortunately there are in fact financial institutions on military bases that have exorbitant fee policies that are not in the best interest of military personnel and their families.
One such fee policy is overdraft charges more commonly referred to as “bounced check or NSF fees.” Overdraft abuses related to debit card purchases and ATM withdrawals are particularly harmful for at least two reasons; first, overdraft fees triggered by these transactions, which could easily be denied at the terminal, often take consumers completely by surprise. Second, an overdraft fee charged on a typical debit card purchase is vastly disproportionate to the amount of the overdraft itself. The Federal Deposit Insurance Corporation released a survey in January 2008 that broke down the average cost of overdraft fees to consumers and found that a typical $27 overdraft repaid in two weeks incurred an APR of 3,520 percent. Imagine the impact on a military mom buying a box of diapers or a cup of coffee without knowing her balance…
Overdraft charges represent one of the biggest slices of the short-term unsecured credit market. It is bigger than credit card over-the-limit penalties, and much bigger than payday loans, bringing in $34.7 billion in revenue for banks and credit unions in 2008, compared with $7.3 billion for payday lenders. We at ASYMCA are neither “anti-bank” nor “pro-consumer.” We take what we consider to be a reasoned and measured approach that calls upon both parties to be responsible and accountable. In that regard, we are calling on both base commanders AND military families to become aware of and educated about potentially egregious on-base overdraft policies and call for their end. Below is a list of questions and responses that are relevant for open and honest dialogue.
What do you consider to be industry “best practices” as they relate to overdraft fees, and on what do you base that belief?
Desired policy: In February 2005 the OCC, Federal Reserve, FDIC and NCUA issued a definitive guidance entitled, Joint Guidance on Overdraft Protection Programs that outlines clearly and definitively standards for determining deceptive practices by banks relative to overdraft programs.
Does the institution offer a lower-cost form of overdraft coverage, such as a line of credit at a reasonable interest rate? Does it present this option to customers before offering to enroll them in fee-based overdraft coverage and enroll everyone who qualifies for it in this lower cost option?
Desired policy: Yes. Institutions should offer lower-cost forms of overdraft protection and enroll everyone who qualifies for it in this lower cost option and ensure that customers are educated about the product.
Does the institution charge overdraft fees on debit card and ATM transactions?
Desired policy: No. These transactions should simply be denied at the point-of-sale for no charge.
Does the institution clear debit transactions in order from highest to lowest, which maximizes overdraft fees?
Desired policy: No. Institutions should clear transactions in real-time or in order from lowest to highest so that overdraft fees are not maximized.
Does the institution limit the number of overdraft fees a customer can incur in a given period?
Desired policy: Yes. Institutions should limit the annual number of times overdraft fees are charged per customer to six. At that point, institutions could continue covering overdrafts but only if they enroll the customer in a lower cost form of coverage like an overdraft line of credit. If they do not qualify for a line of credit, overdrafts should simply be denied.
What percent of the institution’s total revenue is derived from fees charged to customers, as opposed to revenue earned via the customary deposits and lending business of banking institutions?
Desired Policy: Any dependence on fees that exceeds 10% of total revenue highlights a serious problem, and the institution should know that its customers are keenly aware of what is, and what is not, a healthy business model. Many of the banking institutions now servicing our military and their families depend on the fees component of total revenue up over 70%, even 80%.