Overdraft Bank Fees: Representatives Want Law to Protect Consumers

According to a recently released study by economic research firm Moebs Services, U.S. consumers paid $32 billion in overdraft fees in 2012, a 1.3 percent, or $400 million increase over the total paid in 2011.

That news has led the call on Capitol Hill for a new overdraft protection act, to protect consumers from having to pay excessive fees when their checking account is overdrawn.

More than 40 representatives are co-sponsoring HR 1261, which was introduced by Representatives Carolyn Maloney (NY-Dem) and Maxine Walters (CA-Dem), both members of the House Financial Services Committee. The proposed bill would codify a ruling that was put into effect by the Federal Reserve Board in 2010, and limit the number of times and the amount of overdraft fees that could be charged to a customer’s account.

The 2010 ruling required banks to give consumers the option of whether they wished to have overdraft protection. However, since the ruling also gave the bank the option to return unpaid debits if the customer did not “opt-in” for overdraft protection, many customers signed up for the elective coverage.

Michael Moebs, CEO of Moebs Services, said that the new regulations don’t appear to have reduced overdraft fees.

“Despite regulation and legislation, such as 2008’s Truth in Savings revision, 2010’s Reg. E opt-in requirements, and the 2011 overdraft guidelines issued by the FDIC, consumers’ use of overdrafts shows no indication of going away, and is actually increasing,” Moebs said.

The study also showed that in some cases, consumers who had a lot of overdrafts relied upon payday lenders to cover their shortages, rather than choosing to “opt-in” to the institution’s overdraft protection because of the high fees. Moebs found that the median for overdraft fees is about $40, and that “57 out of 100 frequent overdraft users go to payday lenders when short on funds, because payday lenders are the low-price source for short-term cash needs.”

According to Rep. Maloney, the proposed bill would protect consumers from increasing costs by limiting overdraft fees to one per month and six per year and prohibit financial institutions from manipulating the manner in which debits are charged against an account. In some cases, banks have reportedly charged the higher debit against a low-balance account before debiting smaller ones, resulting in more overdraft fees for the individual account. The legislation would require the financial institution to debit smaller amounts first.

The proposed legislation would also provide oversight to ensure that overdraft fees remained “reasonable and proportional,” and require financial institution to include more disclosures and information about overdraft protection options. The bank’s ability to charge overdraft fees would also be restricted in cases where there has been a hold on the account by a vendor or hotel. Some hotels for example, will place a hold on an account in excess of the actual debit until the customer has checked out and paid the bill.

Maloney has introduced overdraft protection legislation each year since 2005. She says this year’s version offers further protections and “differs … by directing the Consumer Financial Protection Bureau to study pre-paid card overdraft programs and (by) limiting the number of overdraft fees a consumer can incur."

Image of consumer with credit card courtesy of B. Rosen.

Image of piggy bank courtesy of Tax Credits.