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Overdraft Protection Protection

October 1, 2007 - by Donny Shaw

Ever been burned by your bank for accidentally spending more than have you actually have in your account? Congresswoman Carolyn Maloney (D-NY) sympathizes. She is preparing to bring a bill to the House floor that would protect consumers from the costs of unknowingly dipping into overdraft on their accounts.

Overdraft protection is offered to bank customers as a safety net to save them from the embarrassment of bouncing a check or having their debit card rejected when trying to make a purchase. But in most cases, because customers often don’t know that their accounts allow them to take out more than they’ve put in and are not notified when they are about to do so, overdraft protection is a sneaky way for banks to rope customers into taking out hugely overpriced loans. A recent study from the Center for Responsible Lending found that banks collect $17.5 billion per year in overdraft fees while providing only $15.8 billion in loans. On average, banks charge $34 for each overdrawing transaction while the average value of the loans that banks make for such transactions is only $17. That’s an average flat-rate fee of 200 percent. Being denied a purchase at a cash register may be embarrassing, but with rates like that, the mountain of debt that overdraft protection creates for people with small bank accounts is likely to have much graver effects down the road.

Maloney originally introduced her bill, The Consumer Overdraft Protection Fair Practices Act, in the previous 109th Congress, but it didn’t make it out of committee. With Democrats now controlling the flow of legislation and a larger, bipartisan group of co-sponsors backing her bill, she is confident that it will be successfully marked-up by the House Financial Service Committee and brought to a full vote on the House floor soon.

Maloney says that her bill would simply provide customers with the information they need to make a choice as to whether or not they want to use their bank’s overdraft protection service. For example, banks would be required to disclose their fees and interest rates and account holders would have to sign a consent form before being enrolled in an overdraft protection system. Currently, overdraft protection enrollment is often done automatically by banks when signing up new accounts.

Another provision in the bill would require retailers to notify customers during a point of sale that their purchase is going to cause their account to be overdrawn.

Lobbying against the bill has been intense. It was originally slated to be marked-up by the committee last week, but the mark-up was delayed to due to the concerns expressed by banking group lobbyists. The Independent Community Bankers Association, for example, is concerned about technological limitations on complying with the point-of-sale provision. “An out-of-network [system] has to be able to interface with a community bank in Illinois and get real-time information. It’s going to be tough,” said Jason Kratovil, director of congressional policy issues for ICBA. And Nessa Feddis of the American Bankers Association has said that “current technology makes real-time notification of overdrafts cost prohibitive.” In other words, they could update the technology, but it would be very expensive. I wonder how those costs compare to the $17.5 billion in overdraft fees that consumers spend each year…

Am aide to Maloney has indicated that she will offer a manager’s amendment to strike the point-of-sale provision, which could be re-atached later through the Senate’s actions on the bill.

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