Payday Loans Cheaper Than Overdrafts: Federal Government Reported
12-07-08RTO Online - The rent to own industry's trade website
12-07-08RTO Online - The rent to own industry's trade website
"The study concluded that a typical bank customer repaying a $20 overdraft in two weeks would incur a $27 overdraft fee (the survey median) at an APR of 3,520 percent."
The Federal Deposit Insurance Corporation (FDIC) published the results of a two year study on the use of overdraft programs operated by FDIC-supervised banks. The study found that a typical NSF check can result in overdraft fees and interest in excess of 3,500 percent APR. In addition, the study found that customers in low-income areas (median annual income of less than $30,000) were nearly twice as likely to incur these charges.
The FDIC study reinforces the payday loan industry's position that short-term cash advance loans are significantly less expensive than traditional bank overdraft fees. The study also found that, unlike payday loan companies that offer on-demand products, most banks (75.1 percent) automatically enrolled customers in overdraft programs that carry APRs and other fees far more expensive than the typical cash advance loan.
The FDIC study concluded that a typical bank customer repaying a $20 overdraft in two weeks would incur a $27 overdraft fee (the survey median) at an APR of 3,520 percent. A customer repaying a $60 ATM overdraft in two weeks would incur an APR of 1,173 percent and a customer repaying a $66 check overdraft in two weeks would incur an APR of 1,067 percent. Surprisingly, the study also concluded that the faster a customer repays an overdraft, the higher the resultant APR.
Consumer advocacy groups like the Center for Responsible Lending (CRL) have lobbied to ban payday lending, leaving consumers with no option other than to pay overdraft fees to banks and credit unions. CRL and others recently led the charge to pass HB 545, a law effectively banning payday lending in Ohio. Rent-A-Center led a coalition of companies in an unsuccessful attempt to block HB 545 . In 2006, Ken Compton, CEO of Advance America, said, "Contrary to the CRL's spin, responsible uses of the payday product provides consumers firm footing to overcome unexpected financial circumstances,"
The FDIC study reinforces the payday loan industry's position that short-term cash advance loans are significantly less expensive than traditional bank overdraft fees. The study also found that, unlike payday loan companies that offer on-demand products, most banks (75.1 percent) automatically enrolled customers in overdraft programs that carry APRs and other fees far more expensive than the typical cash advance loan.
The FDIC study concluded that a typical bank customer repaying a $20 overdraft in two weeks would incur a $27 overdraft fee (the survey median) at an APR of 3,520 percent. A customer repaying a $60 ATM overdraft in two weeks would incur an APR of 1,173 percent and a customer repaying a $66 check overdraft in two weeks would incur an APR of 1,067 percent. Surprisingly, the study also concluded that the faster a customer repays an overdraft, the higher the resultant APR.
Consumer advocacy groups like the Center for Responsible Lending (CRL) have lobbied to ban payday lending, leaving consumers with no option other than to pay overdraft fees to banks and credit unions. CRL and others recently led the charge to pass HB 545, a law effectively banning payday lending in Ohio. Rent-A-Center led a coalition of companies in an unsuccessful attempt to block HB 545 . In 2006, Ken Compton, CEO of Advance America, said, "Contrary to the CRL's spin, responsible uses of the payday product provides consumers firm footing to overcome unexpected financial circumstances,"
Other key FDIC findings include:
- 90 percent of banks surveyed allow NSF transactions to be completed without informing the consumer that funds are insufficient - even though the information is immediately available. Less than 8 percent of banks inform consumers that funds are insufficient before transactions are completed, offering the customers an opportunity to cancel the NSF transaction and avoid a fee.
- Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs.
- Almost 9 percent of consumer accounts had at least 10 NSF transactions during a 12-month period. 4.9 percent had 20 or more NSF transactions. Customer accounts with 20 or more NSF transactions were charged $1,610 per year in NSF fees on average.
- 90 percent of banks surveyed allow NSF transactions to be completed without informing the consumer that funds are insufficient - even though the information is immediately available. Less than 8 percent of banks inform consumers that funds are insufficient before transactions are completed, offering the customers an opportunity to cancel the NSF transaction and avoid a fee.
- Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs.
- Almost 9 percent of consumer accounts had at least 10 NSF transactions during a 12-month period. 4.9 percent had 20 or more NSF transactions. Customer accounts with 20 or more NSF transactions were charged $1,610 per year in NSF fees on average.
Key findings from the survey of 462 FDIC-supervised banks are as follows:
1. The majority (86.0 percent) of banks operated at least one formal overdraft program, either automated, linked accounts, or lines of credit (LOC). Large banks (defined as those with at least $1 billion in assets) tended to offer a fuller menu of overdraft programs. The share of all banks offering automated overdraft programs was 40.5 percent, but large banks were also significantly more likely to operate automated overdraft programs (76.9 percent), suggesting that a significant share of customer transaction accounts operated under automated overdraft programs.
2. The number of FDIC-supervised institutions providing automated programs has grown rapidly over the past several years. Most banks (69.4 percent) initiated their automated overdraft programs after 2001. Large banks were more likely (55.4 percent) to have had an automated overdraft program in place in 2001.
3. Most banks (75.1 percent) automatically enrolled customers in automated overdraft programs, although customers were usually permitted to affirmatively opt out of the program. Survey comments indicated that in some cases, customers were not given the choice to opt in or out of the automated program.
4. By contrast, almost all banks (94.7 percent) treated linked-account programs as opt-in programs, requiring that customers affirmatively request to have accounts linked. In addition, customers have to apply and qualify for an overdraft LOC program, so these programs typically operate on an opt-in basis.
5. Most banks (73.0 percent) established credit limits for automated overdraft customers in written policies, consistent with the bank's lending program. Automated overdraft credit limits stipulated in these policies ranged from $85 to $10,000, and the median credit limit was $500.
6. Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About one-fourth of the surveyed banks (24.6 percent) also assessed additional fees on accounts that remained in negative balance status in the form of flat fees or interest charged on a percentage basis.
7. Fees assessed for linked-account and overdraft LOC programs were typically lower than for automated overdraft programs. Almost half of the banks with linked-account programs (48.9 percent) reported charging no explicit fees for the service. The most common fee associated with linked-account programs was a transfer fee; where charged, the median transfer fee was $5. The primary cost associated with overdraft LOC programs was the interest charged on funds advanced, usually accruing at an annual percentage rate (APR) of around 18 percent.
8. The majority (81.0 percent) of banks operating automated programs allowed overdrafts to take place at automated teller machines (ATMs) and point-of-sale (POS)/debit transactions. However, most banks whose automated overdraft programs covered ATM and POS/debit transactions informed customers of an NSF only after the transaction had been completed (88.8 percent of banks for POS/debit transactions and 70.7 percent of banks for ATM transactions). A minority of banks (7.9 percent for POS/debit and 23.5 percent for ATMs) did inform consumers that funds were insufficient before transactions were completed at these locations, offering the customers an opportunity to cancel the NSF transaction and avoid a fee.
9. A significant share of banks (24.7 percent of all surveyed banks and 53.7 percent of large banks) batched processed overdraft transactions by size, from largest to smallest, which can increase the number of overdrafts.
10. More than half of banks with automated overdraft programs (54.2 percent) reported that they relied on a third-party vendor to implement or manage the program. Small banks (those with less than $250 million in assets) were more likely to rely on vendors and third parties for automated overdraft program implementation and management. Most banks using vendors to manage their automated overdraft programs (70.6 percent) also reported that they paid third-party vendors a percentage of the fees generated by the program, typically 10 to 20 percent of additional fees generated.
11. The banks earned an estimated $1.97 billion in NSF-related fees in 2006, representing 74 percent of the $2.66 billion in service charges on deposit accounts reported by these banks in their Reports of Conditions and Income (Call Reports).3 Total NSF-related fee income accounted for roughly 6 percent of the total net operating revenues earned by the banks. Banks operating automated overdraft programs earned $1.77 billion in NSF fees in 2006, accounting for 90 percent of total NSFrelated fee income earned by the entire study population.
12. Banks that operated automated overdraft programs had higher NSF-related fee income (measured as a share of operating revenues) compared with other banks. In addition, banks whose automated program covered ATM and/or POS/debit transactions and banks that batch processed transactions largest-to-smallest reported higher fee income than those that did not have these features.
13. Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs, compared with consumer complaints from less than 1.0 percent of banks offering linked-account programs and 1.5 percent of banks offering overdraft LOC programs. Complaints about automated overdraft programs were more common for large institutions than for small institutions (21.7 percent versus 10.6 percent).
14. Automated overdraft programs operated by banks were characterized as either "promoted" or "nonpromoted." The survey results revealed important differences in bank marketing and disclosure practices between automated and nonautomated overdraft programs. However, in most cases survey disclosure results regarding automated overdraft programs applied only to promoted programs. Although banks that operated nonpromoted automated overdraft programs accounted for a minority (8.5 percent) of banks, these banks were typically large and accounted for more than half (51.7 percent) of the transaction account dollars held by all banks.
1. The majority (86.0 percent) of banks operated at least one formal overdraft program, either automated, linked accounts, or lines of credit (LOC). Large banks (defined as those with at least $1 billion in assets) tended to offer a fuller menu of overdraft programs. The share of all banks offering automated overdraft programs was 40.5 percent, but large banks were also significantly more likely to operate automated overdraft programs (76.9 percent), suggesting that a significant share of customer transaction accounts operated under automated overdraft programs.
2. The number of FDIC-supervised institutions providing automated programs has grown rapidly over the past several years. Most banks (69.4 percent) initiated their automated overdraft programs after 2001. Large banks were more likely (55.4 percent) to have had an automated overdraft program in place in 2001.
3. Most banks (75.1 percent) automatically enrolled customers in automated overdraft programs, although customers were usually permitted to affirmatively opt out of the program. Survey comments indicated that in some cases, customers were not given the choice to opt in or out of the automated program.
4. By contrast, almost all banks (94.7 percent) treated linked-account programs as opt-in programs, requiring that customers affirmatively request to have accounts linked. In addition, customers have to apply and qualify for an overdraft LOC program, so these programs typically operate on an opt-in basis.
5. Most banks (73.0 percent) established credit limits for automated overdraft customers in written policies, consistent with the bank's lending program. Automated overdraft credit limits stipulated in these policies ranged from $85 to $10,000, and the median credit limit was $500.
6. Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About one-fourth of the surveyed banks (24.6 percent) also assessed additional fees on accounts that remained in negative balance status in the form of flat fees or interest charged on a percentage basis.
7. Fees assessed for linked-account and overdraft LOC programs were typically lower than for automated overdraft programs. Almost half of the banks with linked-account programs (48.9 percent) reported charging no explicit fees for the service. The most common fee associated with linked-account programs was a transfer fee; where charged, the median transfer fee was $5. The primary cost associated with overdraft LOC programs was the interest charged on funds advanced, usually accruing at an annual percentage rate (APR) of around 18 percent.
8. The majority (81.0 percent) of banks operating automated programs allowed overdrafts to take place at automated teller machines (ATMs) and point-of-sale (POS)/debit transactions. However, most banks whose automated overdraft programs covered ATM and POS/debit transactions informed customers of an NSF only after the transaction had been completed (88.8 percent of banks for POS/debit transactions and 70.7 percent of banks for ATM transactions). A minority of banks (7.9 percent for POS/debit and 23.5 percent for ATMs) did inform consumers that funds were insufficient before transactions were completed at these locations, offering the customers an opportunity to cancel the NSF transaction and avoid a fee.
9. A significant share of banks (24.7 percent of all surveyed banks and 53.7 percent of large banks) batched processed overdraft transactions by size, from largest to smallest, which can increase the number of overdrafts.
10. More than half of banks with automated overdraft programs (54.2 percent) reported that they relied on a third-party vendor to implement or manage the program. Small banks (those with less than $250 million in assets) were more likely to rely on vendors and third parties for automated overdraft program implementation and management. Most banks using vendors to manage their automated overdraft programs (70.6 percent) also reported that they paid third-party vendors a percentage of the fees generated by the program, typically 10 to 20 percent of additional fees generated.
11. The banks earned an estimated $1.97 billion in NSF-related fees in 2006, representing 74 percent of the $2.66 billion in service charges on deposit accounts reported by these banks in their Reports of Conditions and Income (Call Reports).3 Total NSF-related fee income accounted for roughly 6 percent of the total net operating revenues earned by the banks. Banks operating automated overdraft programs earned $1.77 billion in NSF fees in 2006, accounting for 90 percent of total NSFrelated fee income earned by the entire study population.
12. Banks that operated automated overdraft programs had higher NSF-related fee income (measured as a share of operating revenues) compared with other banks. In addition, banks whose automated program covered ATM and/or POS/debit transactions and banks that batch processed transactions largest-to-smallest reported higher fee income than those that did not have these features.
13. Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs, compared with consumer complaints from less than 1.0 percent of banks offering linked-account programs and 1.5 percent of banks offering overdraft LOC programs. Complaints about automated overdraft programs were more common for large institutions than for small institutions (21.7 percent versus 10.6 percent).
14. Automated overdraft programs operated by banks were characterized as either "promoted" or "nonpromoted." The survey results revealed important differences in bank marketing and disclosure practices between automated and nonautomated overdraft programs. However, in most cases survey disclosure results regarding automated overdraft programs applied only to promoted programs. Although banks that operated nonpromoted automated overdraft programs accounted for a minority (8.5 percent) of banks, these banks were typically large and accounted for more than half (51.7 percent) of the transaction account dollars held by all banks.
Complete Story: http://rtoonline.com/Content/Article/dec08/FDIC-Overdraft-Payday-Loan-Study-120708.asp
In States like Ohio who is the friend to the Consumer?
1 comment:
Thank you for taking the time to discuss this important study. I hope it will help critics of the payday lending industry to understand the value and importance of short-term credit options. The opinions of millions of hard-working payday advance customers have been lost in the debate over payday lending. Their voices are overshadowed by critics who have never actually used the service. These customers are real people who use payday advances to solve real problems. We deserve choices and do not want the government or anyone else taking these choices away. We should be able to make our own financial decisions.
So thank you for taking the time to explain the results of the study as I really think it does a great job of showing how the alternatives are actually MORE costly, despite what critics claim.
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