Congressional Leaders Propose Bank Overdraft Smackdown

A raft of consumer horror stories about bank overdrafts has spurred two key legislators to propose law to prohibit a variety of overdraft practices that consumers say allow banks to unjustly inflate their fees.

Senate Banking Committee Chairman Chris Dodd, D-CT, and Rep. Carolyn Maloney, D-NY, introduced the Fairness and Accountability in Receiving Overdraft Coverage Act--dubbed FAIR--earlier this week in both the House and the Senate.

The bill would:

• Require customer consent before a bank can enroll customers in an overdraft protection program for ATM and debit card transactions.
• Limit the number of overdraft fees banks can charge to one per month and six per year.
• Require fees to relate to the actual cost of processing the overdraft.
• Stop "reordering" of transactions to rack up extra fees.
• Require customers notification of overdrafts by email, text or traditional mail.

Banks commonly automatically enroll their customers in overdraft protection programs today and often bar customers from opting out. Many consumers don't understand that these overdraft protection plans can allow small debit card transactions to be "approved" for an account with insufficient funds. Thus, a $4 coffee costs an additional $35 in overdraft fees.

In addition, banks often clear transactions from highest to lowest, which consumers argue unjustly boosts the number of overdraft fees they're subjected to in any given day. To crib myself (in Banks Force Consumers Into Overdrafts), here's how it works:

You use your debit card four times during the day, buying a $2 cup of coffee; a $5 sandwich; spend $25 on gas for your car and $30 for a few groceries. All these things happen early in the day when you know you have at least $100 in your account because you checked your balance on line before you went shopping. Late in the day, you pay the gardener $100, knowing that you're getting paid in the morning.

You don't expect the gardener to rush into the bank. He does. Your mistake. You think, "Okay, stupid me. The gardener cost me $135 this month because I'll have to eat an overdraft fee." Ah, no, naive consumer. You'll face four overdraft fees, making your momentary $62 overdraft a $140 bonanza for the bank.

How did that happen? Your multiple debit card transactions and the check all "clear" at the end of the day. It doesn't matter that the four small transactions happened early in the day and the gardener cashed your check 5 minutes before the bank closed. The bank can see the times, but has a policy of clearing checks and debits based on size, not when they happened.

Banks have argued that "reordering" helps consumers because it reduces the chance that their big and important checks, such as mortgage and car payments, will bounce. But consumers maintain that the policy is used to boost fees.

Moeb's Services, a bank research and consulting firm, says that banks will collect $38.5 billion in overdraft fees this year, with 90% of the fees coming from just 10% of bank customers.

Several large banks--J.P. Morgan Chase, Bank of America and Wells Fargo, recently announced changes to their overdraft policies that would incorporate some of the law's proposals. However, Maloney and Dodd argue that law is needed to make the policies uniform and comprehensive.