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Banks, credit unions speak out against legislation to restrict overdraft programs

Limiting the programs would mean more bounced checks, officials from financial institutions tell a House panel. But backers of the bill say banks essentially are making loans with exorbitant fees.

October 31, 2009|Jim Puzzanghera

WASHINGTON — Banks and credit union officials described their controversial automatic overdraft protection programs -- with fees that average $35 each time they are triggered -- as a courtesy so customers aren't embarrassed when a store cashier denies a purchase or, worse, when a mortgage check bounces.

"Payment rejection means embarrassment, inconvenience, merchant fees and other adverse circumstances," said Nessa Feddis, senior counsel at the American Bankers Assn.'s Center for Regulatory Compliance.

But lawmakers weren't buying it Friday as support builds in Congress to restrict overdraft programs in the wake of complaints that fees are too large and the protection is forced on unsuspecting customers.

"Don't do people favors without asking them," Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, warned industry representatives.

The amount of overdraft fees collected by banks has skyrocketed to an estimated $26.6 billion this year, more than twice what was paid five years ago, the Center for Responsive Lending said.

The jump has been fueled by increased use of debit cards, which draw directly from a customer's checking account.

"What started out as a courtesy becomes a profit center," said Rep. Ed Perlmutter (D-Colo.). He said his daughter recently overdrew her account by $2 in using a debit card to buy a $6.50 cup of coffee. She was hit with a $35 overdraft fee.

Some large banks, including Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., recently announced changes to their overdraft programs. Among those changes are ones limiting the number of charges that could be assessed on an account each day and allowing customers to opt out of the protection.

But legislation in Congress would go much further. It would place tougher limits on overdraft coverage fees and require banks to let customers choose the service rather than automatically enrolling them.

"Consumers often do not know they have even incurred overdraft fees until they get the bill," Rep. Carolyn Maloney (D-N.Y.), one of the lead sponsors of the legislation, said as the House Financial Services Committee began considering it Friday.

The legislation would increase disclosure to customers and limit overdraft charges to one a month and six a year for each account, after which purchases would be denied. Fees for using overdraft protection would have to be "reasonable and proportional to the cost of processing the transaction."

Banks would be prohibited from manipulating the order in which they post transactions. Consumer groups have complained that many banks process larger transactions ahead of smaller ones, with the larger charges triggering the initial overdraft fee, thus setting up the smaller charges to trigger separate fees. The legislation calls for a feasibility study on giving customers opportunities to receive a warning of any purchase causing an overdraft fee and to deny the coverage.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) has introduced a similar bill.

But banking and credit unions largely oppose the legislation, contending that it would lead to higher fees for all customers.

"They would pay more merchant returned-check fees and have more returned checks reported to credit bureaus," said Rodney Staatz, chief executive of the SECU Credit Union of Linthicum, Md., and a member of the Credit Union National Assn. "I'm very concerned that all consumers will lose under this scenario."

Feddis said part of the reason overdraft protection fees are so large is to discourage their use. Restricting them would lead to higher fees for checking accounts.

But Jim Blaine, president of the North Carolina State Employees Credit Union, which does not offer overdraft protection, said the industry needs to be careful about such programs given the outrage about the financial crisis.

"We will further damage our credibility by refusing to tell consumers the blunt truth about this product -- it is a loan," he said.


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