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Consumer Overdraft Protection Act Has its Flaws
 William H. Strunk, Chairman & CEO
Strunk & Associates, LP
I am writing to express my deep concerns regarding H.R. 946, the Consumer Overdraft Protection Fair Practices Act. While we applaud the good intentions of the bill and its authors and express our willingness to engage in a dialogue to improve the legislation, we must oppose the bill in its current form.
Strunk & Associates, L.P. (“Strunk”) has responsibly and ethically advised its financial institution clients in structuring consumer-sensitive and fully compliant overdraft payment services since 1993. Implemented pursuant to existing regulatory guidelines and best practices, overdraft protection programs provide real value to consumers as well the financial institutions who serve them.
Public Perceptions. Undeniably, legislative concern with overdraft protection products has been driven by recent media coverage portraying all overdraft programs as predatory and exploitive. As most of your readers know, this grossly misrepresents these financial products and our industry. As others note, overdraft protection products are simply the modern version of banks’ traditional practice of paying consumer check and debit card overdrafts as an accommodation to their customers. Furthermore, it rightly places the administrative burdens and benefits of dealing with insufficient funds transactions upon the bank and the customer, not upon the patchwork of merchant policies that inevitably leads to excessive and duplicative fees and negative consumer credit reporting. Thankfully, the media’s perception is not shared by the general public, which remains supportive of overdraft protection products. In a recent Ipsos-Reid poll conducted for the American Bankers Association, 88 percent of those who paid an overdraft fee in the last year were glad their bank covered their overdraft. And for good reason.
The Facts. This 88 percent support for overdraft protection is not based on mere speculation, but is instead rooted in the fact that overdraft protection products save consumers (i) money, (ii) hassle and (iii) damaged credit ratings.
Our, and industry experience show very clearly that bank’s discretionary overdraft payment practices actually save consumers much more than they pay to their banks - in fees they otherwise would have to pay to merchants, retailers and other payees of insufficient funds transactions, including typical “returned item fees,” “late fees,” “penalty fees” and “fines.” While the media decried the fact that consumers paid $17.5 billion in overdraft protection fees during 2006, we estimate that the same insufficient funds transactions without overdraft protection products would have cost the public something close to $30 billion. Finally, when a consumer is protected by ours or similar products, the need to navigate a maze of merchants and 3rd party collection agents, to resolve the problem and the risk of negative credit reporting are reduced or eliminated, especially when the overdraft occurs while paying a mortgage or other critically important debt.
Fees and Interest Rates. Our position is that overdraft protection services -- as with the traditional predecessor services we seek to consolidate and replace -- is a fee service inappropriate for annual percentage rate (“APR”) calculations. While we believe that every consumer who uses an overdraft protection product should understand its terms and that all plan disclosures should be unambiguous and clear, we believe that the information necessary to attach a meaningful APR to the service simply does not exist at the outset of the transaction, and that an APR in this instance artificially inflates the rate, diminishes its usefulness to consumers as comparative tool, and ultimately misleads consumers instead of enhancing understanding.
Deception a Bad Business Model. Any business model that is based on taking advantage of unsuspecting consumers of modest means, or any other means, is a fundamentally flawed and self-defeating strategy. It just doesn’t make any sense.
Take Action. We urge responsible officers of banks take immediate action by calling representatives from their state who serve on the Committee to (i) express the above and your particular concerns with H.R. 946, and (ii) ask that the Committee cease action on H.R. 946 until the General Accounting Office completes its study on overdraft protection. This study, requested by H.R. 946 sponsor and Consumer Credit Subcommittee Chairwoman Carolyn Maloney (D-NY), would provide a sound starting point for policymaking that protects both consumers and the institutions that serve them. To those who have already made contact with these officials, we thank you and ask that you let us know if we might be of assistance with your individual efforts.
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