Three Democratic lawmakers want the Federal Reserve to curb charges that banks levy on customers when they make a purchase with a debit card and overdraw an account. The fees can mount up quickly and cost consumers more than their actual purchases.
The practice is known as "overdraft protection," and consumers often don't even know that they have the unasked-for convenience until the charges appear on their accounts.
House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.), along with Rep. Carolyn Maloney (D-N.Y.) and Rep. Luis Gutierrez (D-Ill.), sent a letter to Federal Reserve Chairman Ben Bernanke asking the Fed to strengthen planned regulation of overdrafts.
"Overdraft abuses related to debit card purchases and ATM withdrawals are particularly egregious for at least two reasons," the lawmakers wrote. "First, overdraft fees triggered by these transactions, which could easily be denied at the terminal, often take consumers completely by surprise. Second, an overdraft fee charged on a typical debit card purchase is vastly disproportionate to the amount of the overdraft itself."
The lawmakers asked the Fed to require institutions to obtain consumers' explicit consent before enrolling them in overdraft protection.
Overdraft charges bring in big-time revenue for banks and represent one of the biggest slices of the short-term unsecured credit market -- bigger than credit card over-the-limit penalties and much bigger than payday loans. Indeed, overdraft penalties are short-term loans, and they can be even costlier than their payday cousins.
Michael Flores, CEO of Bretton Woods, a consulting firm that works for both payday lenders and banks, estimates that overdraft fees brough in $34.7 billion in revenue for banks and credit unions in 2008, compared with $7.3 billion for payday lenders.
Payday loans are often vilified for their high costs, and they're illegal in 15 states. The annualized percentage rate (APR) of interest on a typical payday loan is 400 percent or more, according to the Consumer Federation of America. But that's nothing compared with the overdrafts the lawmakers are targeting.
The Federal Deposit Insurance Corporation released a survey in January 2008 that broke down the average cost of overdraft fees to consumers: A typical $27 overdraft repaid in two weeks incurred an APR of 3,520 percent, a $60 ATM overdraft would incur an APR of 1,173 percent, and a $66 check overdraft would incur an APR of 1,067 percent.
Bank overdraft fees could make even a payday lender blush.