Banks Give New Meaning to Protection Racket

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Payday loans have gotten a lot of bad press lately as state governments attempt to crack down on the “legal loansharking” outfits that make very short term loans with interest rates going as high as 500 percent. But a new study by Marc Anthony Fusaro, a professor of economics at East Carolina University, found that the overdraft loans given by banks these days make payday lenders look like a bargain. In their “bounce protection” programs, banks will cover checks and ATM withdrawals that exceed customers’ balances so they don’t incur fees from merchants for bounced checks. This “courtesy” service, which most customers never ask for, comes at a huge cost.

Insufficient fund fees have become a major cash cow for banks, particularly during the latest credit crisis. The Center for Responsible Lending has found that with an average fee of $34, overdraft protection loans generate more than $17 billion a year for banks. About half the fees are triggered when people use debt cards for a small purchase, which the bank allows even though they have no money in their account.

Fusaro looked at overdraft protection as a form of a short-term loan and found that people who occasionally bounce checks (between 1 and 10 times a year) pay interest rates exceeding 6,000 percent. Chronic bouncers in the study, who make up a small percentage of bank customers, paid more than $3,000 in fees annually for the privilege. The average size of the overdraft was pretty small, between $90 and $300. The most extreme case in the study was one poor soul who had a $3 overdraft outstanding for one day, which resulted in an intereste rate of 260,245 percent, a hefty surcharge for using a debt card for a latte.

While these small fees don’t translate into a ton of money for most consumers, they add up mightily for the banks, and over time, can help trap people in debt that’s hard to escape. The banks don’t make it easy, as they intentionally manipulate check-clearing to encourage people to bounce a lot of checks. (CRL says the software vendors who sell these systems to banks promise to increase revenue from overdraft fees by as much as 400 percent.)

Rep. Carolyn Maloney (D-NY) and Rep. Barney Frank (D-Mass.) introduced legislation last year that would put a halt to some of this by barring banks from manipulating check-clearing to increase fees and requiring banks to get written authorization from customers before enrolling them in the courtesy “protection” programs. The bill would also have required the banks to warn customers using debt cards that a purchase would trigger an overdraft fee, allowing them to cancel the purchase. Not surprisingly, the bill was shot down last fall by heavy lobbying from community bankers and appears to be going nowhere. Note to self: pay cash!

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WHO DOESN’T LOVE A POSITIVE STORY—OR TWO?

“Great journalism really does make a difference in this world: it can even save kids.”

That’s what a civil rights lawyer wrote to Julia Lurie, the day after her major investigation into a psychiatric hospital chain that uses foster children as “cash cows” published, letting her know he was using her findings that same day in a hearing to keep a child out of one of the facilities we investigated.

That’s awesome. As is the fact that Julia, who spent a full year reporting this challenging story, promptly heard from a Senate committee that will use her work in their own investigation of Universal Health Services. There’s no doubt her revelations will continue to have a big impact in the months and years to come.

Like another story about Mother Jones’ real-world impact.

This one, a multiyear investigation, published in 2021, exposed conditions in sugar work camps in the Dominican Republic owned by Central Romana—the conglomerate behind brands like C&H and Domino, whose product ends up in our Hershey bars and other sweets. A year ago, the Biden administration banned sugar imports from Central Romana. And just recently, we learned of a previously undisclosed investigation from the Department of Homeland Security, looking into working conditions at Central Romana. How big of a deal is this?

“This could be the first time a corporation would be held criminally liable for forced labor in their own supply chains,” according to a retired special agent we talked to.

Wow.

And it is only because Mother Jones is funded primarily by donations from readers that we can mount ambitious, yearlong—or more—investigations like these two stories that are making waves.

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