Payday loan masquerades as protection

This column originally appeared Feb. 2, 2003.

You consider yourself a savvy consumer, right?

You know how your credit record affects your interest rate on loans. You study the fine print on contracts. You've never patronized a payday lender - one of those fringe financial firms that charge annual rates of 300 to 1,000 percent or more for short-term loans.

Well, watch out. Fringe financing - or its better-dressed clone - may be coming soon to a bank near you.

It may already be there, in fact, under such cheerful aliases as Progress Bank's "Bounce Guard," National Penn's "Overdraft Plus," or Bryn Mawr Trust's "Courtesy Check Protection. " Abington Bank says it's considering a similar program. Even credit unions are interested.

Nationally, more than 1,000 banks offer "bounce protection" services, according to critics who say the programs have been urged on smaller banks by industry consultants as a strategy for boosting fee income.

Consumer advocates say bounce protection is little more than a gussied-up version of payday lending: It invites you to overdraw your account by check, ATM withdrawal or debit - card use. You're expected to pay back the money, plus a hefty fee, within a short period, typically two weeks to a month.

Viewed as loans, their interest rates can be astronomical, well into three- or four-digit territory. That's because you pay the bank's ordinary fee for an overdraft or bounced check - $30 or more at some banks - for each overdraft, no matter the size.

But you'll never see an "annual percentage rate" on bounce protection, because it exploits a Truth in Lending Act loophole to make it more palatable: The banks say bounce protection isn't a loan at all - they're simply covering your overdrafts as a courtesy.

The result is that they classify the entire cost as a fee, not as interest.

"This is not a contractual product," says Richard Fuchs, senior vice president at Bryn Mawr Trust. "We don't agree to pay the check. They don't agree to have us pay the check. It's a courtesy, not a loan."

But don't be fooled by such distinctions, or by bounce protection's resemblance to traditional versions of overdraft protection that Bryn Mawr and many other banks still offer, even as some also market bounce protection.

Both kinds spare you the embarrassment of having a check returned unpaid and the extra charges you might face from a merchant, because the bank will cover your spending despite an inadequate balance.

But traditional overdraft protection is a much better deal - if you can get it, by qualifying for a line of credit or opening a savings account at the same bank.

Though some versions are more consumer-friendly than others, all spare you from paying the full overdraft fee by letting you arrange to cover a shortfall with funds from one of those other accounts.

At Bryn Mawr, for traditional overdraft protection you pay interest on the credit you need - currently, about 9.25 percent a year - or a $5 fee to cover the overdraft from savings.

In contrast, if you rely on Bryn Mawr's Courtesy Check Protection, you'll pay the whole $25 fee each time.

Fuchs says bounce-protection customers benefit from the assurance that the bank will cover their occasional overdrafts, up to an average limit of about $500. He says the program automates what the bank always did anyway: decide to cover for a good customer's mistakes.

"We're certainly not encouraging people to overdraw their accounts," Fuchs says.

But even if Bryn Mawr isn't, that's exactly what some banks are doing, according to consumer groups that last week urged Federal Reserve officials to crack down on bounce-protection programs.

"Have you ever been shopping on the weekend and find a must-have item, but don't have the money in your checking account to cover your check? Have you ever had unplanned expenses between paydays?" asks one brochure they quote.

Though Fuchs says Bryn Mawr's version is homegrown, consumer advocates say consultants promote bounce protection as a way for banks to cash in on their least affluent customers. Some banks now offer it as part of "free checking" or other supposedly low-cost services.

The irony is that using a bank was supposed to spare such consumers the exorbitant costs of payday lenders and other services on banking's fringes.

But with bounce protection, fringe banking seems to have found a new home. And it's right there on Main Street.

Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.