Voluntary Limits on Usury Shouldn’t Undercut Overhaul

I agree with today’s New York Times editorial which cautions against excessive celebration of the recently announced changes in overdraft policies at two of the nation’s largest banks. Yes, these policy changes, which among other things allow customers to turn off the ability to overdraw their accounts on debit cards, certainly moves things in the right direction. But there are miles to go.

It has always seemed to me that these fees were designed to create a new profit center for banks. Small overdrafts are be met with larger fees. Essentially, the bank is charging its customers for making a loan, but at really outrageous terms. Worse still, the terms of the loan are not disclosed until well after the ATM or point-of-sale transaction has occurred. An FDIC study found that someone who overdraws their account by $20 is charged a median overdraft fee of $27. This would incur an annual APR of 3250 percent if they repaid the loan in two weeks. Like I said, this is outrageous and there ought to be a law.

This is some of the context of the recent discussion on Capitol Hill about how to regulate financial products. I believe there is much to be said for the Administration’s approach of creating a Consumer Financial Protection Agency to oversee and regulate exactly these types of issues—with the consumer and not the banks in mind.

Tim Fernholz of the American Prospect helpfully links to a letter first flagged by Noam Schieber, of the The New Republic, that is being circulated by a set of law professors who feel the same way. They argue in favor of creating an oversight agency adesigned explicitly to protect consumers. It is a compelling read and they use footnotes and legal citations to boot!