George S. May Business Blog

Senator Chris Dodd determined to take on banks and their “unfair” overdraft fees

Democratic Senate Banking Committee Chairman, Chris Dodd, is officially my hero. Last Friday, he announced that he is working on a bill to protect banks from hitting their customers with excessive checking account overdraft fees. In summary, he has three techniques that the banks use, in which he plans to tackle:

Mr. Dodd looks to stop banks from:

a) Knowingly allow small debit transactions that cause overdrafts.

b) Changing the order of cleared checks and debits to maximize the number that cause overdrafts.

c) Imposing overdrafts on deposited, but “unavailable” funds, even for long-term customers.  

Here is the full story from United States Senate Committee on Banking, Housing and Urban Affairs:

WASHINGTON – Today, Senate Banking Committee Chairman Chris Dodd (D-CT) announced he is working on a bill to protect Americans from excessive checking account overdraft fees. 

“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.”

So-called “overdraft protection programs” enable customers to overdraw their accounts, without their knowledge, when they use checks, electronic transfers, debit card purchases, and ATM withdrawals.  Account holders are often enrolled in the programs without their consent and many banks will slap customers with fees of upwards of $30 for this “courtesy” even if their account is only overdrawn by a few cents. 

Some banks maximize penalties by processing the largest purchases a customer makes first, draining accounts faster and creating the potential for multiple fees on multiple smaller purchases.  Even on point of sale transactions, such as debit card or ATM transactions, banks do not notify the customer when they are withdrawing against insufficient funds.   As a result, customers can unknowingly be charged hundreds of dollars in fees for only overdrawing their account on a few small purchases.

It is a service most customers do not know they have and may not want.  According the Center for Responsible Lending (CRL), 80% of consumers would rather have their transaction denied than have it covered in exchange for a fee. 

Dodd’s bill will require customers to “opt-in” to these programs, prohibiting banks from charging consumers overdraft fees without their consent.      

Reports continue to indicate that banks are charging customers record amounts in overdraft fees.  The Financial Times reported 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 10 percent of checking account holders.  According to the Center for Responsible Lending, banks collect nearly $1 billion per year in overdraft fees from young adults and $4.5 billion from senior citizens.

Earlier this year, Dodd sent a letter to Federal Reserve Chairman Ben Bernanke urging him to act as soon as possible to protect consumers from abusive overdraft fees.  Dodd called on the Fed to finalize a proposed rule that would curb the use of excessive and unfair fees when consumers overdraw their bank accounts, and further pressed the Fed to implement an “opt-in” approach to overdraft fees, similar to the “opt-in” approach to over-the-limit fees for credit cards that Dodd included in the Credit CARD Act.

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