Banks' checking and debit overdraft policies draw scrutiny
Consumers cry foul, banks soften policies as Congress, Fed look on
Amid increased national scrutiny of bank overdraft policy, bankers, legislators and consumer advocates are scrambling to paint the best face -- or the worst -- on the increasingly controversial practice.
Overdraft fees occur when consumers try to write a check or use a debit card to withdraw more money than a checking account holds. Instead of bouncing the check or declining the card, banks instead pay the charge, up to a preset amount, and then charge a fee. The fees have risen in recent years to an average of $35, and banks have increasingly relied upon these overdraft plans as a revenue source -- often enrolling customers automatically and denying them the ability to opt out. According to Moebs Services, a financial institution research firm, banks are projected to take in $38.5 billion in overdraft fees in 2009, more than double the amount taken in 10 years earlier.
Other policies make the damage worse, such as cashing checks in an order that maximizes the number of overdraft fees generated, or charging a fee when the bank is holding enough money to cover the charge. The rising fees and other overdraft policies have made overdraft the latest whipping boy for an already beleaguered industry.
The heat over overdrafts has shot up in recent days. Among the developments:
- The American Bankers Association, an organization comprised of various national banks, released a survey that suggests a majority of Americans are unaffected by overdraft fees, and that most fees are paid by a system-abusing few. According to the ABA, 82 percent of those surveyed had not paid an overdraft fee during the past year. "Once again, consumers have shown they can manage their bank accounts well and avoid paying fees," said Nessa Feddis, ABA senior federal counsel and retail banking expert, in a press release. "Clearly, consumers who pay overdraft fees are the minority, and that number is shrinking."
The survey also examined consumer opinion about overdrafting. Of the consumers who paid an overdraft fee in the past year, 96 percent said "they were glad the payment was covered," according to ABA. The Center for Responsible Lending (CRL), a typically consumer-aligned financial services research and policy organization, released its own numbers, finding that about 80 percent of consumers would prefer to have their debit card transaction declined if it meant escaping an overdraft fee. Both organizations surveyed people who previously overdrafted, but CRL collected opinions only from those who overdrafted when using a debit card. ABA garnered views from people who overdrafted using any type of payment method, including checks.
- The ABA survey comes during the Federal Reserve Board's exploration of ways to adjust current overdraft regulations. The Fed proposed two possible changes last year, which would give consumers the option to enroll in their banks' overdraft programs or give customers an opportunity to opt out of the overdraft service. With the opt-in policy, banks would lose the ability to cover overdrafts automatically unless the consumer gives permission. The Fed is expected to reach a final decision on the regulations at the end of 2009, according to a Fed spokeswoman.
- U.S. Sen. Christopher Dodd, chairman of the Senate's banking committee, announced Sept. 18 that he will introduce legislation to rein in overdrafts. "Excessive, automatic overdraft fees are forcing many American families deeper into debt at a time when they are already struggling to make ends meet," said Dodd. "I am working on a bill to protect consumers from these fees." A similar bill was filed early this year in the House.
- This week, Bank of America, Chase and Wells Fargo announced they would alter their overdraft policies, slightly trimming back the trigger point for fees. BofA customers who overdraft an account by $10 or less in one day will not be charged a fee. Chase's and Wells Fargo's concession was $5 with no overdraft fees. Plus, the number of times you can overdraft in one day will be reduced to four times daily for BofA and Wells Fargo customers and three times a day for Chase customers. All three will offer the option to opt out of overdraft services. The changes are expected to take place Oct. 19 for BofA customers and early next year for Chase customers. Chase also will take the step to stop processing larger ATM and debit charges prior to less expensive charges first, which often forced an account holder into overdraft status more quickly. U.S. Rep. Carolyn Maloney of New York praised the banks, but added: "... what we need are consistent overdraft reforms for all Americans who have or open a bank account. My Overdraft Protection Act, H.R. 1456, would require all banks to allow consumers to ask for overdraft protection, require that consumers be notified when a transaction is about to incur an overdraft fee, and require that banks post the transactions chronologically." Sen. Dodd, on his website, stated that while these changes are positive, "the system has gotten completely out of whack. We are talking about abusive practices that never should have been instituted in the first place."
Taken together, the moves have placed overdraft protection in the center of the latest tug of war that pits consumer protection against banking practices.
A larger fight
Bankers lost one huge battle earlier in 2009 with the passage of the most sweeping credit card reform in decades, the federal Credit CARD Act of 2009. The fight over overdraft policies is itself part of a larger fight over President Obama's plan to create a new federal agency to watch out for consumers' interests in financial transactions, including overdraft fees, credit cards and mortgages.
That larger fight is being waged both in the corridors of Washington, D.C., and on national airwaves, as bank-related groups try to sway the public that more regulation would hurt ordinary consumers and small business owners.
The White House scoffs at the assertions. White House National Economic Council Director Lawrence Summers said in a Sept. 18 speech at Georgetown University, "Advertisements are being run on behalf of florists and other Main Street merchants suggesting that somehow we envision a regulator that would make it impossible for a florist to extend credit to one of their customers. I doubt very much that any florists are paying for those ads."
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