Today, the House Financial Services Committee held a hearing to examine Rep. Carolyn Maloney’s (D-NY) Overdraft Protection Act of 2009, which would amend the Truth in Lending Act to address a spate of problems with overdraft protection programs.
Overdraft fees — which are incurred when a consumer overdraws a checking account — may climb to $38.5 billion this year, up from $10.3 billion just five years ago. According to the Center for Responsible Lending (CRL), at least 50 million Americans overdraw their accounts over the course of a twelve month period, and 27 million of those will incur five or more fees. The standard fee across the banking industry is currently $34.
But you wouldn’t know that there were any problems with overdraft fees if you listened to the representatives of the American Bankers Association, the Consumer Bankers Association and the Independent Community Bankers Association, who were singing the praises of such fees during the hearing. They said that overdraft fees are actually “a courtesy,” “very popular,” and ultimately keep customers “happy.” Watch a compilation:
Actually, 80 percent of consumers say that they would rather have their debit card rejected for a $5 purchase than be charged an overdraft fee, which only falls to 77 percent when the price of the purchase is increased to $40. And the fees tend to hit those who can least afford them, as CRL’s Eric Halperin told the committee:
The FDIC’s recent study of overdraft programs, consistent with CRL’s previous research, found that account holders who overdrew their accounts five or more times per year paid 93 percent of all overdraft fees. It also found that consumers living in lower-income areas bear the brunt of these fees. Seniors, young adults, military families, and the unemployed are also hit hard. Americans aged 55 and over pay $6.2 billion in total overdraft fees annually — $2.5 billion for debit card/ATM transactions alone — and those heavily dependent on Social Security pay $1.4 billion annually.
Confounding this problem is the fact that 75.1 percent of banks with overdraft programs automatically enroll consumers, according to the FDIC. In fact, Maloney’s legislation would mandate that overdraft protection be opt in instead of automatic. As Rep. Barney Frank (D-MA), a co-sponsor of Maloney’s bill, said, “We wouldn’t be in a situation where we’re considering legislation if you would have had an opt-in regime from the beginning…Don’t do people favors without asking them.”
Of course, there is serious merit to the point that consumers should take some personal responsibility and not overdraw their account. But, until fairly recently, banks were willing to discipline poor accounting by simply rejecting a debit card purchase at the point of sale. In fact, in 2004, 80 percent of institutions had a policy of rejecting a purchase if it would overdraw the account. Today, the percentage is exactly the opposite, with 80 percent permitting the purchase and charging an overdraft fee. Banks saw that overdraft fees were a significant profit center, and have now taken such fees to absurd heights.