By James Limbach
ConsumerAffairs.com
October 22, 2009
Consumer groups are throwing their support to a bill introduced by Senator Christopher Dodd that they say would "curb many of the abusive overdraft practices of banks and credit unions." Such practices, they maintain, strip nearly $24 billion annually from checking accounts -- primarily from Americans living paycheck-to-paycheck.
"We are pleased that this bill would put long-overdue brakes on abusive overdraft practices by banks and credit unions, practices that make holding on to and managing the money in their checking accounts difficult for many Americans," said the groups, which include the Center for Responsible Lending, Consumer Federation of America, Consumers Union and the National Consumer Law Center. "We urge Congress to pass the 'Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act' as soon as possible."
The FAIR Act that Dodd has proposed would require financial institutions to obtain explicit permission from all their customers before enrolling them in a system of fee-based overdraft coverage for debit card and ATM transactions.
The bill also offers additional, major reforms that the Fed has yet to adopt. In addition to requiring express consent -- which the groups contend should be an essential, baseline protection for any credit product -- the FAIR Act would:
• Require that an overdraft fee charged on any transaction be reasonable and that its size bear some relationship to the cost of covering the overdraft;
• Prohibit reordering of customer transactions to trigger otherwise avoidable overdraft fees;
• Limit the number of overdraft fees per person to six a year and no more than one a month. At that point, financial institutions would have to enroll the consumer in a lower-cost program or stop charging for covering overdrafts.
There's no doubt that consumers would benefit from the Dodd proposal, as evidenced by some recent complaints to ConsumerAffairs.com:
• Jarrod A. of New York City tells ConsumerAffairs.com that he has been charged over $350 in overdraft charges In six days by Chase Bank. "I received $175 in refunds," he writes, "only to see it taken back by over $300 in overdraft fees the next day." Jarrod says he is a grad student "and this has made me miss class, late for work and unable to make my next tuition payment."
• Frank J. of Stoughton, Mass., says Bank of America charged him over $300.00 in overdraft fees. "What they did," he tells ConsumerAffairs.com, "was start charging by not clearing deposits quickly. They then placed my largest debit card expenses first, then the smaller ones. In this way, they compounded the overdrafts from one to multiple." Frank says he got no satisfaction when he took his complaint to bank representatives.
• Benjamin C. of Wilmington, N.C., says he's tired of being charged $35 for overdrafts and that he would prefer the transaction be denied if his account is overdrawn. "I never signed up for an overdraft protection program," he tells ConsumerAffairs.com. "They did it automatically I guess."
Moebs Services, an economic research firm, estimates that banks stand to collect a record $38.5 billion in fees for customer overdrafts this year. The most cash-strapped customers are the hardest hit, with 90 per cent of overdraft fees coming from ten percent of checking account holders.
In introducing his bill, Dodd noted that consumers "are being hit with hundreds of dollars in penalties for overdrawing on their account by just a few dollars. Banks should not be trying to bolster their profits at the expense of their customers." Dodd says his legislation gives consumers control over their bank accounts -- "giving them the chance to choose whether they want overdraft protection, establishing strict limits on these fees, and shining more light on these practices."
