Congress looks to cut bank overdraft fees
Wednesday, November 4, 2009
Consumers will likely pay almost $40 billion (with a b) in bank overdraft fees this year. Most banks automatically enroll customers in overdraft “protection” programs, which if nothing else protect bank profits. Many consumers are unaware they have this “protection”–until they get hit with the fee.
Banks are happy to let their customers withdraw money from an ATM or use a debit card to make a purchase even if the transaction would overdraw their account, or the account is already overdrawn. And why wouldn’t they be happy to do it, when consumers can be hit with a fee of $25 to $35 for each overdraft transaction?
Until recently, most banks declined debit transactions that would overdraw an account. Then they found a way to make a hefty profit.
Banks maximize the profit by rearranging the order in which transactions are processed. Rather than debit the account as each transaction is made, they process transactions starting with the largest amount, ensuring the maximum number of overdraft transactions.
Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, has proposed legislation that would give consumers more information to help them avoid overdraft fees. Among other things, his bill would require banks to get customer consent before enrolling them in an overdraft program for ATM and debit card transactions; require customers be warned if an ATM or teller transaction will overdraw their account; and limit overdraft charges to no more than one a month and no more than six a year. Banks would also be unable to send negative information to consumer credit report agencies when an overdraft fee is paid.
Dodd’s proposal comes in the wake of the announcement of a series of nationwide class action lawsuits against five major banks over what the plaintiffs’ attorneys describe as “the banking industry’s abusive and excessive overdraft fee policies and practices.” Lead counsel Bruce Rogow said, “Charging a $35 overdraft fee when a college student uses her debit card to buy a cup of coffee is unconscionable.”
“These overdraft fee policies disproportionately affect young people, the elderly and the poor, who are most likely to maintain low account balances,” according to plaintiffs’ counsel Michael Sobol of Lieff Cabraser Heimann & Bernstein, LLP.