Overdraft Fee Limitations / Proposed Banking Legislation

Currently, banks legally must offer customers the option to opt out of over draft programs. So, upon customer request, the bank must code a customer’s account, not paying items when the customer does not have efficient funds to cover items attempting to come through. The problem is the average customer does not know this is even an option. They don’t know to ask to opt out of overdraft programs.

Senate Banking Committee Chairman Chris Dodd is drafting a bill to limit or regulate the overdraft programs at financial institutions. Among other things, the bill would require financial institutions to get the consent of the customer to overdraft services before the bank could charge overdraft fees.

In the House, Rep. Carolyn Maloney has been working on a similar bill, called The Maloney bill. This bill would require banks to give consumers notice and a chance to cancel a transaction at the point of sale or at an ATM machine when the transaction would trigger an overdraft fee.

Both bills are looking at prohibiting banks from manipulating payment priority of items. Many banks pay the largest to smallest items, stating that the larger items are more important items, like a house payment or a car payment. Critics claim that this is just ploy to maximize the collection of fees since the consumer might have multiple smaller checks that clear the same day. If the first transaction overdraws the account, each subsequent charge will incur a fee.

Dodd’s bill is being supported by Sen. Charles Schumer, D-N.Y., the No. 3 Democrat in the Senate. Schumer stated that overdraft fees should be proportional to the amount of the overdraft.

From the financial industry perspective, it is difficult to make money in “straight banking” and must be supported by fee based products. Although I am not sure how true this is, I do know that the spread between what we charge on loans and what we pay for deposits has continued to shrink every year I have been in banking.


References:

Kaper, Stacy. “Dodd Preps Bill to Limit Fees on Overdrafts.” American Banker. 18 Sept. 2009. Viewed 27 Sept. 2009. http://www.prosperityagenda.us/node/1877.