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House Dems Ask Fed to Curb Overdraft Fees « The Washington Independent

Having recently passed long-anticipated credit card reforms, some powerful House Democrats are now putting their weight behind efforts to rein in overdraft fees — the charges applied when consumers (often unknowingly) exceed their balance on debit purchases.

Those fees have become an enormous profit engine for banks, generating $17.5 billion each year, according to a 2007 report from the Center for Responsible Lending. To boost those profits, banks commonly employ several devices: (1) They often offer the overdraft protections automatically, without telling customers. And (2) they commonly manipulate the order of purchases to increase the occurrence of overdraft fees, which range from $10 to $38, with a median charge of $27.

In a May 27 letter to Federal Reserve Chairman Ben Bernanke, Democratic Reps. Barney Frank (Mass.), Carolyn Maloney (N.Y.) and Luis Gutierrez (Ill.) urge the Fed to prohibit overdraft fees unless customers opt-in to the program. The lawmakers are also asking the Fed to ban the reordering of purchases altogether.

[A]n overdraft fee charged on a typical debit card purchase is vastly disproportionate to the amount of the overdraft itself,” the lawmakers wrote. “It is only fair, then, that institutions be required to obtain consumers’ affirmative consent before enrolling them in fee-based overdraft programs for these types of transactions.”

In December, the Fed proposed two strategies to protect consumers from overdrafts. One would install the opt-in method the Democrats want. The other would prohibit banks from charging overdraft fees without first offering the customer the chance to opt out of the automatic program.

Maloney has introduced legislation that includes the opt-in approach, while also eliminating the practice of reordering purchases to maximize the number of overdraft fees. A House subpanel took up that proposal in March, but faced with tough industry opposition and an already tight legislative calendar, it has a long and difficult road ahead.

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