Bill proposes protections for consumers from bank overdraft fees

PHOTOGRAPHER: Ameerah Cetawayo

As bank overdraft fees draw the ire of politicians and consumer advocates, some financial institutions are tweaking their policies but others say it’s the account holder’s responsibility not to spend what they don’t have.

U.S. Sen. Charles Schumer, D-N.Y., announced Tuesday at The College of Saint Rose he is supporting legislation that reins in practices that result in excessive fees for consumers.

Schumer said overdraft fees disproportionately affect people with low incomes, such as students and the elderly who are living on a fixed income. Americans aged 18 to 24 pay nearly $1 billion in overdraft fees annually, as do Americans who depend heavily on Social Security income, according to the announcement.

“Bottom line, debit cardholders are getting scammed by their banks,” said Schumer. “Families across the Capital Region are being involuntarily placed in these overdraft loan programs and getting ripped off by excessive fees. It’s time to stop them dead in their tracks. This legislation will provide cardholders with a warning when they are about to overdraft from their accounts to protect them from sky-high fees, and prevent banks from rearranging charges so that customers are placed in the worst possible position.”

The legislation would prevent banks from placing their consumers in overdraft loan programs without their knowledge and require banks to warn customers when a transaction will result in an overdraft fee.

The legislation would specifically:

— Require banks to give consumers the choice to not participate in an overdraft protection program. Consumers will either have to choose to opt in to a program or have an easy method of opting out.

— Increase disclosure of the fees and APR charges on overdraft loans so that consumers can factor that in when choosing a debit card provider.

— Require banks to warn the customer that an electronic transaction may trigger an overdraft loan fee and allow the customer to cancel the transaction after receiving this warning.

— Prohibit banks from manipulating the order in which checks and other debits are posted if it causes more overdrafts and maximizes fees.

— Require banks to be proportional in the fees they charge — the fee for a nickel overdraft should not be the same as a fee for a $100 overdraft.

Legislation has been introduced in the House of Representatives by U.S. Rep. Carolyn Maloney, D-N.Y. Schumer will be an original co-sponsor of legislation being introduced in the Senate by Sen. Chris Dodd, D-Conn.

The new legislation would affect some banks in the Capital Region, but not others.

“We don’t put people in the overdraft plan, unless they ask for it,” said Kevin Timmons, vice president and treasurer of TrustCo bank. “They have to ask and file an application, just like they would for a loan.”

Other banks have already taken proactive measures.

Bank of America recently altered its bank overdraft policies. Spokeswoman Anne Pace said the company recognized that many of its customers are facing financial challenges that cause them to make small mistakes in how they manage their funds.

“We knew this was a customer issue and we had many complaints about it,” Pace said. “A lot of them are just making small mistakes. So we made a change.”

“Recognizing that some accounts are overdrawn by relatively small amounts, Bank of America reduced the overdraft fee to $10 per item if the total overdrafts in a day total $5 or less. This directly addresses one of our largest customer complaints and allows us to help them when they make small mistakes,” Pace said. “We believe we are the first major bank to do this.”

With the right information and tools, customers can better manage their money so they can avoid fees, Pace said. “All of our overdraft fees are preventable,” she said.

Schumer said billions of dollars in overdraft fee profits for banks nationwide are mostly coming from small transactions, with the average transaction on which an overdraft fee is charged being $20, and the average fee charged being $34.

According to a 2008 study by the Federal Deposit Insurance Corporation, overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent, costing consumers $17.5 billion per year.