Dems: Legislation Still Needed to Rein in Overdrafts

The Federal Reserve’s new opt-in requirement for overdraft protections is progress, according to Democratic finance leaders, but legislation providing further consumer protections is still needed.

“Giving customers the chance to choose whether they want ‘overdraft protection’ is important,” Senate Banking Committee Chairman Chris Dodd (D-Conn.) said in a statement, “but we need to do far more to protect customers from abusive bank products. We still need to stop the excessive fees, repeated charges, lax notification, and processing manipulation that have become standard in these so-called overdraft ‘protection’ programs.”

Rep. Carolyn Maloney (D-N.Y.) just weighed in with an identical message.

While these rules are a good, solid step forward, they don’t eliminate the need for Congressional action on this issue. The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed’s new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!

Both Dodd and Maloney have introduced legislation that goes a good deal further to protect consumers from overdrafts than the Fed’s new rules. Aside from the opt-in stipulation, those bills would also: (1) cap the number of fees at one per month and six per year; (2) require banks to warn customers at the counter if a purchase would overdraw their account, allowing them to opt out; (3) require that the charge be proportionate to the banks’ cost to process the transaction; and (4) prohibit banks from reordering purchases in order to maximize the number of overdraft fees.

The Fed’s new rules don’t tackle any of those things.