The Consumer Overdraft Protection Fair Practices Act, scheduled for a vote in the House Financial Services Committee on Tuesday, could go a long way to reduce the hidden overdraft fees paid by every day Americans to their banks, which total $17.5 billion per year according to the Center for Responsible Lending.
Overdraft protection, a feature of a checking account that is regularly offered to bank customers as a convenience, has transformed into an excessive fee machine—often costing customers up to $35 per transaction.
The original intent of such programs was to save customers from the embarrassment of a bounced check. But instead, overdraft protection has transformed into a kind of inadvertent short-term loan product. When a customer overdraws his or her account, the bank extends funds to the merchant rather than denying the transaction. If the fees charged were converted into an annual percentage rate, the effective APR could be 1,000 percent or above.
Many Americans have their own nightmarish stories about how their supposedly friendly bank charged them a fee upwards of $35 for what really amounted to a simple math error or an honest mistake. Two-thirds of bank customers believe that permitting overdrafts and then charging fees without their consent is unfair, according to a 2004 survey by the Consumer Federation of America.
The Consumer Overdraft Protection Fair Practices Act, introduced by Rep. Carolyn Maloney (D-NY), has a simple premise: it would require both new and existing accountholders to opt-in to overdraft protection systems rather than being enrolled in them automatically. That is, customers should be able to choose if they want overdraft protection as it operates today or if they would rather not pay the fee and thus not give the bank permission to honor transactions that overdraw.
Rep. Maloney’s bill would also require banks to give their customers clearer information about the cost of overdraft protection. Customers could therefore better compare this service to its less-costly alternatives, such as linking their checking account to their savings account or to a line of credit.
While customers are certainly responsible for understanding the terms and conditions of their checking accounts, banks currently seem to go out of their way to shroud important information about their accounts.
A survey by the Woodstock Institute showed that many banks process a customer’s largest transactions first, increasing the likelihood that smaller subsequent transactions will incur additional overdraft fees. In other cases, banks fail to warn customers before they make debit card or ATM transactions that the transaction will overdraw their account. And in most cases, an overdraft fee is levied for each transaction made, not just for the first transaction that pushes the account below zero. That’s what makes Rep. Maloney’s bill so important: by choosing to opt-out of these expensive overdraft protection systems, all of these tricks and traps would be eliminated.
In reality, overdraft protection disproportionately affects those Americans who have very little in their checking accounts, and who are least able to afford these costly and excessive bank fees. Americans are ready for financial services that help them build credit and build assets to get ahead, not financial services riddled with tricks and traps that leave them a step behind.
The passage of the Consumer Overdraft Protection Fair Practices Act is a key step toward fixing the deficiencies in our nation’s financial services industry to make it easier for those who work hard to pay the bills on time to access the tools necessary to climb the ladder in America.