Sen. Schumer To Fed: Take Tougher Approach On Overdraft Fees Or Congress Will Act

October 16, 2009 -- WASHINGTON, DC – U.S. Senator Charles E. Schumer (D-NY) urged the Federal Reserve Friday to take a tougher approach on overdraft fees that banks impose on their customers, expressing fear that the regulator’s planned crackdown on the abusive practice won’t go far enough and adding that the Fed’s slowness to act on the issue shows the need for a new consumer watchdog agency.

On Wednesday, Federal Reserve official Daniel Tarullo acknowledged to Schumer at a Senate Banking Committee hearing that the regulator would finally issue a new rule to curb the practice “within the next month”. But Tarullo did not indicate exactly what the rule would look like, acknowledging only that it would “go right to the heart of the issue of opt-in or opt-out”. The Federal Reserve’s proposal seeks comment on both opt-in and opt-out rules. In a letter to Federal Reserve Chairman Ben Bernanke today, Schumer said that these programs must be truly voluntary and that while ending the automatic enrollment in these overdraft protection policies would be an important step, far more reforms are necessary to protect consumers.

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“The Fed is finally ready to act on this abusive practice, but so far, it doesn’t look like their reforms will go far enough to protect consumers,” Schumer said. “Making overdraft protection policies truly voluntary for customers would be a good first step, but even that is not enough. This practice needs to be totally reined in.”

“If the Fed doesn’t go far enough, Congress will go further. Banks should not be scratching and clawing their way back to profitability on the backs of their customers,” Schumer added.

Schumer’s letter comes as the Senate prepares to address the issue through legislation. Senate Banking Chairman Christopher Dodd has promised to unveil a comprehensive proposal this fall. Schumer will be an original co-sponsor of Dodd’s bill.

At issue is a practice by which banks enroll many of their account holders into expensive overdraft programs automatically – an option customers generally don’t want and often aren’t even aware of. This allows the bank to accept over-the-limit debit card charges and assess a fee for each purchase over the limit, rather than rejecting the card at the point of sale. According the Center for Responsible Lending (CRL), 80% of consumers would rather have their debit card transaction denied than have it covered and get charged an overdraft fee, but are never given the choice because they are automatically enrolled in overdraft loan programs.

Furthermore, banks game the system by rearranging the order of charges to maximize the fees they can squeeze from a costumer. For example, if a consumer has $10 in their account and makes three $2 purchases and then a $9 purchase, he or she should only be charged for a single overdraft. However, banks commonly rearrange charges so that the $9 purchase would be charged first, and then the three $2 charges. Therefore, instead of paying a single overdraft fee, a consumer pays three – likely producing over $100 in fees for the bank.

These fees result in billions of dollars in profits for banks nationwide, mostly from small transactions. The average transaction on which an overdraft fee is charged is $20, but the average fee charged is $34.

Many banks claim that the system benefits debit card users by allowing them to spend when they do not have sufficient funds in their accounts. However, the fees exacted on the customer are often double or triple the amount of the actual purchase amounting to enormous costs to the consumer. For example, a customer who overdraws from his account by purchasing a $6 sandwich when he has only $5.95 can be charged a $35 penalty. If the customer doesn't realize his or her mistake, he or she can be charged up to 10 overdrafts in a day, resulting in up to $350 in fees.

Last month, Bank of America and JPMorgan Chase announced they would voluntarily reform their overdraft policies. But Schumer said those announced steps do not go far enough. To fully protect consumers, Schumer said in his letter to Bernanke Friday, customers ought to be notified at the point-of-sale whenever a transaction will result in an overdraft charge so that they have an opportunity to cancel the transaction. Moreover, Schumer said that any fees should be “reasonable and proportional” (meaning the banks should not be able to assess $35 fees for $2 transactions), there should not be recurring fees that amount to hundreds of dollars over just a few days, and there should be a strict limit on the number of fees consumers can be charged each year.

A copy of Schumer’s letter to Bernanke appears below.

October 16, 2009

Ben S. Bernanke
Chairman
The Federal Reserve Board
20th Street and Constitution Avenue, NW
Washington, DC 20551

Dear Chairman Bernanke:

I write to you today to urge the Federal Reserve to adopt strong final rules to protect consumers from excessive and unfair overdraft charges.

At the Financial Institutions Subcommittee hearing last Wednesday, Governor Daniel Tarullo testified that the Federal Reserve is working on a proposal “which would go right to the heart of the issue” of overdraft abuses and that he expects action on that proposal “within a month”.

However, based on the existing overdraft proposal, which in several cases seek comment on multiple alternative approaches, I am concerned that your final rules will not do enough to protect consumers. For example, I am concerned that if you adopt the proposed “opt-out” option, as opposed to a meaningful “opt-in” requirement, your final rules will allow abusive existing programs to continue unless customers – who never signed up for these programs to begin with and often don’t even know they’re subject to such fees until their bank statement shows up – proactively withdraw from these accounts. I therefore strongly urge you to adopt the most robust consumer protections possible.

As you are aware, Congress is working on legislation to strengthen these rules and provide additional protections for consumers. As Congress works to pass this legislation, and before your rules become effective, many banks continue to operate their overdraft “protection” programs in an unfair and deceptive manner, without protecting customers against paying large fees – and often paying them again and again – for small debit card transactions. Banks raked in approximately $24 billion last year in overdraft fees – a 35% increase from the prior year! This is an unacceptable way for banks to soften the blow of the financial crisis, by placing the burden on those least responsible for the crisis and least able to afford it.

I strongly urge the Federal Reserve to adopt final rules that give consumers real choice with respect to their overdraft protections and protect consumers from excessive fees. Real choice means that consumers must be given the opportunity – separate and apart from the account application process – to affirmatively choose to participate in an overdraft lending program; they must be given complete, accurate and easy-to-understand disclosure about the program and all associated costs and benefits; and they must not be subject to overdraft fees on any point of sale transactions unless they are notified at the point of sale that the transaction will result in an overdraft charge and they have the opportunity to cancel the transaction. Protection from excessive fees means that fees are reasonable and proportional (no $35 charges for $2 transactions); consumers are not subject to recurring fees that can amount to hundreds of dollars over just a few days; and there is a strict limit on the number of fees consumers can be charged in a year.

I strongly urge you to adopt as quickly as possible a strong set of rules consistent with these protections.

Thank you for your consideration of this matter. Please don’t hesitate to contact my staff with any questions you may have.

Sincerely,

Charles Schumer
United States Senator

Source: Senator Charles E. Schumer