Dodd's Bill Protects Customers From Abusive Overdraft Fees

03/18/2010 05:12 am ET | Updated May 25, 2011

STAMFORD, CT - Ninety percent of bank overdraft fees happen to only ten percent of checking account holders, comprising those people who are also the most vulnerable. According to the Center for Responsible Lending, banks collect nearly $1 billion per year in overdraft fees from young adults and $4.5 billion from senior citizens, the two groups who can least afford excessive charges and are less likely to fight back.

Senate Banking Committee Chairman Chris Dodd unveiled The Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act, a bill to protect the people of the United States from excessive checking account overdraft fees.

The Connecticut Democrat was joined at the event by Attorney Ellery Plotkin, a consumer advocate and Mario Livieri, a resident of Branford, CT who was unfairly hit with overdraft fees earlier this year.

"At a time when many can afford it least, Connecticut consumers like Mario are being hit with hundreds of dollars in penalties for overdrawing on their account by just a few dollars. Banks should not be trying to bolster their profits at the expense of their customers," said Dodd.

Mario Livieri, a 75-year-old gentleman who has owned his own building and lumber company for more than 50 years, made a mistake: he wrote a check for $200, leaving his checking account $2.17 short. The bank charged him $35, and continued to do so for days before notifying him. By then, Livieri's new charges had incurred additional overdraft fees, racking up over $146 in fees for the bank. He stated that the notice postmarks were 4 to 5 days later, but he was told he had no rights to have the fees rescinded.

Dodd's legislation allows consumers to choose whether they want overdraft protection for their bank account, and sets strict limits on the fees involved to reduce account manipulation and to increase oversight. So-called "overdraft protection programs" enable customers to overdraw their accounts without their knowledge when they make debit card purchases, electronic transfers, ATM withdrawals or use checks. Democratic Representative Carolyn Maloney from New York has also introduced legislation in the House.

Account holders are often enrolled in overdraft protection programs without their consent and many banks slap customers with fees upwards of $30 for this "courtesy" even if their account is only overdrawn by a few cents. They can continue to charge the account for days without giving timely notification to the consumer. "Banks can transfer billions of dollars at the speed of light; they should be able to notify their customers of a potential overdraft," Dodd said.

Some banks maximize penalties by processing larger purchases first, thereby draining accounts faster and creating the potential for multiple fees on multiple smaller purchases. Even on debit card or ATM transactions, banks do not notify the customer when they are withdrawing against insufficient funds. As a result, a few small purchases can result in hundreds of dollars in fees before a customer is notified.

Last month, five days after Dodd announced he was drafting this bill, three of the nation's largest banks -- J.P. Morgan Chase, Bank of America, and Wells Fargo announced moderate changes to their overdraft coverage programs. In June, Chairman Dodd wrote Federal Reserve Chairman Ben Bernanke, asking the Fed to require banks receive customers' permission before enrolling them in "overdraft protection programs," similar to the "opt-in" approach to over-the-limit fees for credit cards that Dodd included in the Credit CARD Act.

The FAIR Overdraft Coverage Act will rein in abusive fees, give customers greater choice, and make these programs transparent. Below is a summary of the bill:

Gives Customers Real Choice
• Requires Customer Consent for Enrollment: Customers must actively opt-in before they can be enrolled in overdraft coverage programs that charge fees for covering ATM withdrawals and debit card transactions.
• Prohibits Discrimination if You Do Not Enroll: Banks cannot punish customers who do not enroll by denying them access to unrelated preferential features available to other customers.

Limits Overdraft Coverage Fees
• Limits Number of Fees: Institutions cannot charge more than one overdraft coverage fee a month or more than six a year. Institutions can either pay additional overdrafts without fees or reject them.
• Requires Reasonable Fees: Fee amounts must be proportional to the cost of processing the overdraft.
• Ends Processing Manipulation: Institutions cannot manipulate the order in which they post transactions in order to rack up extra fees.
• No Fees for "Holds": Prohibits fees if an overdraft is due solely because of a bank hold - as in the case of a hold placed on funds when reserving a hotel - and the hold is greater than the actual amount of the transaction.
• Study Point-of-Sale Transactions: The US Government of Accountability office must study the feasibility of warning customers about a debit card transaction that triggers overdraft fees with the option to cancel it.

Increases Transparency
• Customers Must Be Notified of Overdraft: Customers must be notified when they overdraw their account and must be given the option of choosing to be notified by email, text or a letter.
• Advanced Warning and Opportunity to Cancel: Requires that customers be warned if a transaction at an ATM or branch teller will overdraw their account, and be given the chance to cancel the transaction.
• Show Fees on Statements: Requires periodic statements clearly disclose the amount of overdraft coverage fees charged for the statement period and year-to-date.
• Account Balance Information: Prohibits institutions from including the amount available under an overdraft coverage program as part of the customer's account balance.
• Disclose Options: Requires institutions inform customers of the different overdraft services and products they provide, including how terms, fees and products differ.
• Explain Terminated or Suspended Programs: Requires customers be notified, by a medium of their choice, if an overdraft coverage program is terminated or suspended and why.
• Fair Marketing: Prohibits unfair and deceptive marketing practices of overdraft coverage programs and requires clear disclosure of overdraft coverage fees in marketing materials.
• Protects Customer's Credit Scores: Prohibits institutions from negatively reporting to consumer credit report agencies if an overdraft amount and fee are paid under the terms of an overdraft coverage program.

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