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Please, let us keep our expensive overdraft loans, prodded consumers cry

Fred Williams

Overdraft loans on prepaid cards cost many times the interest rates charged on credit cards, even high-rate ones.

But the costly little loans can be hard to live without, according to a flood of comments from users of NetSpend cards.

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“Leave the prepaid cards alone,” Mary Hall wrote in a formal filing March 11. “We depend on them.”

Hall was among hundreds of NetSpend customers who — after prompting from the company — filed official comments in the past few weeks with the U.S. Consumer Financial Protection Bureau.  

Most of the bureau’s proposals get few comments from consumers, so the outcry from NetSpend users is remarkable.  So was their unanimity: All voiced support for NetSpend’s overdraft loans.

“They’ve got access to people, and they’ve used fear-mongering tactics,” said Lauren Saunders, managing attorney at the National Consumer Law Center. “They’ve got people hooked on overdraft.”

Many comments contained a note of desperation.

“I need overdraft protection,” Mildred Swan said. “I wish they would make the price to the amount of your direct deposit.” To be eligible for overdraft, card users must receive direct deposits of at least $200 a month, from which fees and repayments are deducted.

“I really do not want to lose my $10 cushion,” Kierra Brewster wrote. “I use this cushion often, sometimes it’s the only gas money I have.”

NetSpend, a unit of Total System Services Inc., allows up to $10 in overdraft without charge. After that, a $15 fee kicks in. Overdrafts are limited to three per month, with a dollar limit of $100. The maximum overdraft use, three loans totaling $100, amounts to at least 45 percent interest for the month, or an APR of 540 percent.

The consumer protection bureau’s proposal does not outlaw prepaid overdraft. Rather, it would impose new rules on the small-dollar loans, similar to the protections for credit card users. Overdrafts would get a 21-day grace period before incurring interest charges, for example. And the card could not immediately deduct fees and repayments from fresh deposits.

That’s wasn’t in the email that NetSpend sent to its overdraft users, company vice president Lisa Henken said.  The company’s view is that the CFPB’s proposed rule would make it impractical to offer the overdraft product.

NetSpend has 1.6 million cardholders with direct deposit, of whom about 100,000 use overdraft regularly, Henken said.  About 60 percent of overdrafts are fee-free, because cardholders repay the overdraft within a 24-hour grace period.  About 60 percent of accounts have one free overdraft per month, Henken said.  Users who rack up 12 fees within 12 months are given a cooling-off period during which they can’t overdraft.

“We want this to be a benefit for customers, not something that would get them into a cycle of debt,” Henken said.  Almost all overdraft users enroll in text message alerts that give them immediate updates on their balance.

Cardholders “can anticipate and avoid fees,” Total System Services Chief Executive Troy Woods told analysts in a January conference call. In the same call, Chief Financial Officer Paul Todd indicated that overdraft fees are a significant part of NetSpend’s business, at least as recently as 2012. In that year, the last time numbers were disclosed, the company said  7 percent of its revenue from general-purpose reloadable cards was related to overdrafts. That amounts to about $25 million, based on the company’s annual report.

In announcing the prepaid proposal, CFPB Director Richard Cordray said that some cards might drop their overdraft program in the face of the new rules. Consumer advocates won’t mourn for overdraft. Prepaid cards should be prepaid — period, they say. Racking up overdraft fees in one month leaves consumers less able to cope the next month without more borrowing. Most of the major prepaid cards don’t lend money.

But what about people who now count on overdraft loans to bridge their budget from one month to the next? “I’m a disabled person and the overdraft protection helps me survive and pay my bills,” NetSpend user Thomas Flack wrote in his comment to the consumer protection bureau. “I am on a fixed income, and it is a monthly struggle.”

At least the amounts people owe for overdraft are relatively small compared to people who must wean themselves from payday loans, Saunders said. “Sometimes you have to go cold turkey,” she said. NetSpend “could help people with payment plans,” to extinguish their debt less abruptly.  Breaking the habit of fee-laden debt will leave the overdraft users with more of their own money in their pockets.

See related: Overdraft programs on prepaid cards: Good deal or a debt trap?

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