By Sally Greenberg, NCL Executive Director
NCL joined a number of civil rights, labor, and consumer organizations recently to support legislation to curb the abuses in overdraft charges that banks have employed in the last few years.
According to the Center for Responsible Lending,
- More than 50 million Americans overdrew their checking account at least once over a 12 month period, with 27 million accountholders incurring five or more overdraft or non-sufficient funds (NSF) fees.
- Banks and credit unions collected nearly $24 billion in overdraft fees in 2008.
- Overdraft fee income for banks and credit unions rose 35 percent from 2006 to 2008.
- Overdraft loans cost consumers nearly $24 billion each year and are typically charged without consumers even knowing that they will be dinged for extra fees. These fees hit lower-income consumers and communities of color especially hard. The most common triggers of overdraft fees are debit card transactions that could easily be denied for no fee; in fact, until recent years, they most often consumer cards were rejected at point of sale if funds in their accounts were insufficient to cover the charge.
Yes, it could be embarrassing when you’re trying to buy something and your card is rejected, but its a lot cheaper than getting hit with a $34 overdraft fee, or multiple fees. Today, banks and credit unions routinely approve debit card overdrafts with no warning, charging a fee averaging $34 for an overdraft averaging only $17. The sad fact is that they force low-income families especially into a cycle of snowballing fees that eat up a large portion of their paychecks.
Fee-based overdraft coverage is, by far, the most expensive way to have an overdraft covered. But financial institutions like to make enrollment in overdraft coverage “automatic,” meaning, as soon as you get your card you’re signed up for the “coverage,” for which you can be charged $34 for every transaction where you don’t have funds in your account to cover the charges. Financial institutions were also found to be manipulating the order in which they post transactions to maximize fees.
So lawmakers have come in to address these abuses. We have bills in the House (HR 3904, Congresswoman Maloney (D-NY)) and Senate (S. 1799, introduced by Senator Dodd (D-CT )) establishing the following key reforms, among others:
- requiring that all overdraft fees be reasonable and proportional to the cost to the institution of processing the transaction;
- limiting the number of overdraft fees institutions can charge per month and per year, without preventing them from offering a lower cost alternative if they want to continue charging for overdrafts;
- requiring institutions to obtain consumers’ affirmative consent to fee-based overdraft coverage for debit card and ATM transactions;
- clarifying that overdraft fees are a finance charge under the Truth in Lending Act;
- requiring a real-time warning at an ATM before a cash withdrawal would trigger an overdraft fee; and
- prohibiting institutions from reordering transactions to maximize fees.
It’s a shame Congressional action is needed, but it is. I always ask myself why such companies couldn’t simply try to be honest brokers with their own customers, letting them know when they overdraw by rejecting the charge instead of taking them for hundreds of dollars to cover some charges, often very minor ones. By the way, the Center for Responsible Lending has great information on its Web site on this issue. CRL has led the charge on overdraft abuses and has a knowledgeable staff and a lot of good information on this issue. NCL is proud to join with CRL, labor unions, and other groups in support of these important bills.