New Overdraft Fee Laws Coming? Requiring Consent for 'Protection'
Banks have ramped up overdraft fees to an unprecedented level over the past 10 years. Now Congress may step in to require consent to overdraft "protection," and hopefully ban some of the shady tactics banks have used to push people into the red.
According to the Washington Post, between 1999 and 2009, bank revenue from overdraft fees went from around $18 billion to about $38.5 billion. And larger banks who have received taxpayer bailouts... they rely most heavily on revenue from overdraft fees.
As discussed previously, overdraft fees in the age of the check card are a much different and more profitable beast than their paper check overdraft forefather.
That's because people often use check cards multiple times a day. And because they are automatically signed up for overdraft "protection" when they open an account.
Dipping below a zero balance of course means an overdraft fee. But today it also means another for each transaction while still below zero, all without necessarily knowing you've gone sub-zero, and without an opportunity to refuse a transaction that would result in another overdraft.
Oh, and your bank might process your larger transactions ahead of smaller ones, to put you under and then have you dinged again for each of the smaller transactions (which is a problem apparently not yet addressed in the currently discussed legislation).
Some Congressional Democrats, including Senator Chris Dodd would like to require consent from account holders to dip into overdraft protection. Dodd put it simply: "People out there are getting whacked. ... They should have the right to say, 'Deny me the transaction.' " He plans to introduce legislation to require customer consent to a transaction that would result in overdraft. A similar bill has been introduced in the House of Representatives.
As noted by the Post, some think that current bank overdraft protections have made check cards a sort of unregulated credit card. Because banks classify money they spot you when you go under as a "service," rather than a "loan," they are currently allowed to charge a $35 fee for a $1 overdraft. That might be viewed as 3,500% interest on what some would call a short term loan. Another potential reform being considered is to make any overdraft fee proportionate to the amount the bank actually covers in overdraft.
Any reforms face stiff opposition from banks. They characterize overdraft protection as a service they are kind enough to offer customers. The American Bankers Association, Nessa Feddis, points out that "[c]learly, consumers who pay overdraft fees are the minority, and that number is shrinking."
She's right. As of 2006 data, almost 70% of the billions banks are getting in overdraft fees came from only 4.9% of consumer account holders. Those are the folks getting hit many times, often in rapid succession and often without ever knowing that they went under. They're also folks to whom hundreds of dollars in overdraft fees is no small thing, much less a "service" which protects them.
- Overdraft fee overload: Can we get a little help (Wallet Pop)
- Overdraft Fee Bonanza (FindLaw's Common Law)
- Overspending on Debit Cards Is a Boon for Banks (NY Times)
- Vote: Should Banks Be Forced To Ask Permission Before Overdrafting Your Account? (The Consumerist)
- Debtor Options Short of Bankruptcy (provided by Law Offices of Barry Levinson)