Banks' Overdraft Fees Under Fire in Congress

Sen. Christopher J. Dodd (D-Conn.), right, plans to offer a bill that would require banks to get permission before imposing overdraft charges. (By Marvin Joseph -- The Washington Post)
Buy Photo

Because most overdrafts are now prompted by debit card transactions, consumer advocates argue that the industry in effect has created a new kind of unregulated credit card. But the Federal Reserve ruled in 2004 that banks were providing a service rather than a loan, and therefore the customer's decision to spend the money was sufficient to indicate approval. The Fed did require banks to detail the fees on the customer's next statement.

When Amanda Miller Littlejohn went to her bank to deposit money after returning from a Labor Day weekend trip to Nashville, she was surprised at how low her balance was.

Too embarrassed to cause a ruckus at the counter, she went home and checked her account summary online. She discovered that she had been charged five separate $36 fees for spending more than she had in her checking account.

"I had used the check card a couple of times, and they took it and no one said anything," said Littlejohn, a 28-year-old Northwest Washington resident and owner of a public relations company.

When she called SunTrust to ask why money could not be pulled from her savings account, where she had thousands of dollars, the customer service representative said that she had never asked to link her accounts.

When she asked why the bank had lent her money if she had never asked for overdraft protection either, she said, she was told that the bank was protecting her.

Barry Koling, a spokesman for SunTrust, said that he could not comment on Littlejohn's situation but that "we do offer a variety of products by which clients can avoid overdraft fees."

A survey released by the American Bankers Association last month showed that 82 percent of 1,000 customers did not pay an overdraft fee in the previous 12 months. Of those who paid the overdraft fee, 96 percent said they were glad the payment was covered.

"Clearly, consumers who pay overdraft fees are the minority, and that number is shrinking," Nessa Feddis, ABA senior federal counsel, said in a release for that study. "More importantly, most consumers want banks to pay their overdrafts so they can avoid the inconvenience, embarrassment and potential costs of having a payment or transaction rejected."

An ABA spokesman declined on Friday to comment on Dodd's upcoming bill because the details were not yet available.

The contours of the legislation remain undefined. The Federal Reserve has now proposed a new requirement that banks must sign up customers for overdraft programs. That is the minimum standard under consideration by Dodd's staff.

The House bill, authored by Carolyn Maloney (D-N.Y.), would require banks to obtain permission from customers before each overdraft loan, but Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he considered that idea unwieldy.

Sen. Charles E. Schumer (D-N.Y.) also favors a requirement making the fee proportional to the amount of the loan.

The fate of the bill is intertwined with the broader debate over financial reform. Frank said new rules clearly were necessary, but if Congress voted to create a new consumer protection agency, it could write the rules. If the banking industry succeeds in its opposition to the new agency, he said, he would favor a strong overdraft bill.

"Banks should understand that they can't have it both ways," Frank said. "If that should falter, then we will pass a tough overdraft bill."