Bank of America, JPMorgan Chase are too Late in Moving to Curb Overdraft Fees

Two big U.S. banks are racing to get ahead of federal legislation cracking down on onerous overdraft fees.

Bank of America said last night that beginning Oct. 19 it won't charge an overdraft fee if a customer overdraws his or her account by a total of less than $10 in one day. The company also will charge fees on no more than four items per day and -- most important -- require customers to opt in for overdraft protection, rather than automatically enrolling them. JPMorgan Chase announced this morning that it's also revising its overdraft policy. The company is eliminating fees if a customer's account is overdrawn by $5 or less and reducing the maximum number of overdraft items from six to three. It also will no longer charge overdraft fees for debit cards unless a customer signs up for the program.

Thing is, they're too late. Overdraft bills are swiftly wending their way through Congress, and it's highly likely they'll make it into law.

In the House, Rep. Carolyn Maloney, D-N.Y., has proposed a bill that would extend the Truth in Lending Act to overdraft services, requiring banks to notify customers that an ATM withdrawal or other transaction will trigger a charge and allow them to cancel it. The measure would also prohibit lenders from delaying the posting of deposits to an account, or otherwise monkey around with the process, to maximize overdraft fees. In the Senate, Connecticut Democrat Chris Dodd said last week he plans to introduce a similar bill.

At a time when banks are widely loathed by the public, these bills are a political speeding bullet. For one, they're reasonable. Neither Dodd nor Maloney are proposing to abolish all overdraft fees, which would switch off a major source of revenue for banks. Rather, they want to halt repeat overdrafts, force banks to inform customers when they risk incurring a fee and generally give consumers more control over their participation in these programs. For another, polls suggest the proposed changes are enormously popular.

Politically and in terms of public perception, the banks also did themselves no favors by hiking overdraft fees, which are up four percent this year, while many of their customers were hurting financially. The way overdraft programs are structured is also problematic. Some 68 percent of the fee revenue banks generate by charging people for overdrawing their accounts comes from five percent of customers, according to consulting firm Celent. These customers, who tend to be lower-income, pay an average of $1,610 a year in these charges.

As a result, no lawmaker will want to openly oppose such commonsensical changes, especially with mid-term elections coming up next year. That was clear when a law (also sponsored by Maloney) was passed in May curbing credit card fees, with overwhelming support in Congress.