Congress will get another chance to limit checking account overdraft fees that continue to annoy customers and produce billions of dollars in revenue each year for banks and credit unions.
Reps. Carolyn Maloney, D-N.Y., and Maxine Waters, D-Calif., have introduced a bill that would limit the cost of overdraft fees and prohibit practices that increase the likelihood customers will overdraw their accounts.
“It protects banking customers from overdraft practices that the courts have found to be unfair, misleading, deceptive or fraudulent,” Maloney said. “And at a time when some many are still struggling, it will help to put an end to those unexpected $35 charges for a cup of coffee.”
Consumer groups believe the Overdraft Protection Act of 2013 would solve a lot of problems.
“It’s very clear that banks are gouging customers with incredibly high and outrageous overdraft fees that are not related to their cost,” said Ed Mierzwinski, consumer program director at U.S. PIRG. “The idea of a $35 fee for the privilege of overdrawing your account is good for the banks, but not for the consumer.”
According to a new report from Moebs Services, an economic research firm, financial institutions in the U.S. earned $32 billion in overdraft revenue last year, an increase of $400 million (or 1.3 percent) from 2011.
“Overdrafts have evolved from an ad hoc courtesy into a routinely administered, very high-cost, very short-term credit product,” said Rebecca Borne, senior policy counsel with the Center for Responsible Lending.
The nation’s bankers oppose the bill. They don’t believe it’s needed and they warn that more government regulation would only limit consumer choice.
“History has shown that when the government intervenes in how private markets price their services, there are unintended consequences that usually are adverse to consumers,” said Nessa Feddis, senior counsel at the American Bankers Association.
Key provisions of the bill
The Overdraft Protection Act would limit overdraft coverage fees in various ways. It would:
- Prohibit financial institutions from charging more than one overdraft fee per month or more than six each year.
- Require overdraft fees to be “reasonable and proportional” to the amount of the overdraft.
- Prohibit a fee if the overdraft results solely from a hold placed on an account that exceeds the amount of the transaction. Many merchants, such as hotels and gas stations, automatically place a hold on the money in your checking account when you pay with a debit card. At some gas stations that hold is $100 no matter how much you pump – something they don’t have to warn you about.
The bill would also ban the practice of posting checking account transactions in a way that maximizes overdraft fees. Some financial institutions routinely clear debits from highest to lowest dollar amount.
“That’s a big problem,” said Linda Sherry, director of national priorities at Consumer Action. “If you had one large check and several smaller debit card charges hit on the same day, they’ll clear the big check first. That drains a lot of money out of your account and could cause more of the little things to bounce. And the key here is you can be charged for each overdraft item, debits, checks or ATM withdrawals.”
Banks say customers want the biggest transactions paid first because they tend to be the most important, like the rent or mortgage payment. But a survey by the Pew Charitable Trusts shows just the opposite.
“Almost 90 percent of the people in our survey said they were somewhat or very concerned about bank reordering practices,” said Susan Weinstock, director of Pew’s Safe Checking in the Electronic Age Project.
Credit unions are also concerned about any new regulatory burden.
"This legislation seems to address a problem that doesn't exist in the credit union system," said Ryan Donovan, senior vice president of legislative affairs at the Credit Union National Association. "Because we are owned by our members, we are not out to abuse them."
Donovan believes the issue of overdraft charges is better handled by the Consumer Financial Protection Bureau rather than Congress.
Getting rid of customer confusion
If you try to make a point-of-sale payment with your debit card or withdraw money from an ATM when you don’t have enough money in your checking account, the transaction will be declined – unless you’ve signed up for overdraft coverage.
In that case, the bank or credit union will process the transaction and charge you an overdraft fee.
Consumer advocates believe many people don’t understand how this opt-in system works. A Pew study, which the banks challenge, found that 54 percent of the customers who had overdrawn their accounts said they did not realize they had signed up for an overdraft service that cost money.
“This just shows there is a very high level of confusion about how this works and why better consumer protections are needed,” Weinstock told me.
The banking industry insists customers are not confused. Feddis at the American Bankers Association said all the terms are spelled out before anyone signs up for the service.
“Customers receive a one-page consumer-friendly form that explains the price of the overdraft coverage, that there are better and cheaper options and the requirement to affirmatively opt in,” Feddis said. “And in the event they didn’t understand it, they will when the first overdraft charge occurs and they can opt out at any time.”
It doesn’t have to be this way. Since August of 2010, Bank of America has eliminated overdraft coverage on point-of-sale debit card payments. If there’s not enough money in the account, the transaction will be declined.
“We elected to eliminate that source of frustration for our customer and we think it was the right thing to do,” said Andrew Plepler, Bank of America’s global corporate social responsibility executive. “The feedback has been very positive. There are a lot fewer complaints about overdrafts.”
Plepler said they had expected customers to be upset when their transactions were denied. But that hasn’t happened. He believes the benefit of avoiding a surprise overcharge fee outweighs any short-term inconvenience of being unable to make a purchase or withdrawal.
“There’s certainly been a revenue hit for the bank,” he told me, “but we’re in the right place for the long term.”
The bottom line
This is Rep. Maloney’s second attempt to rein in overdraft charges. She could not get a similar bill passed last session and it’s clear this Congress is not in the mood to upset business. Yet, she remains confident.
“It’s common sense, it’s reasonable and it’s fair,” she said. “It’s time to put an end to these deceptive practices.”
Pew Factsheet: The Need to Address Excessive Bank Overdraft Fees
Center for Responsible Lending: Overdraft "Protection" A Racket; Not a Service
American Bankers Association: Overdraft Protection Services