H.R. 3904, the “Overdraft Protection Act of 2009”
House Financial Services Committee
October 30, 2009
Thank you, Chairman Frank, Ranking Member Bachus, Representative Maloney and other members of the Committee. Consumers Union, the non-profit, independent publisher of Consumer Reports magazine, strongly supports H.R. 3904, the “Overdraft Protection Act of 2009” and is pleased to cosign the testimony of Consumer Federation of America. We also appreciate the opportunity to offer the Committee our additional consumer perspective on the unfair and abusive practices used to trap consumers in fee-based overdraft programs without their affirmative consent.
First, we will share some of our polling results which underscore the confusion consumers have about overdraft loans and, how, when asked, they express a strong desire to have more decision-making control over these loans. Second, we would like to offer the Committee some real life examples of the problems people around the nation are enduring as a result of egregious overdraft programs.
In February of this year, Consumer Reports National Research Center conducted a nationally representative telephone poll about common bank policies involving overdraft fees. There were a few key findings:
Only half (52%) of those surveyed who used debit cards had a correct understanding that a bank typically allows the transaction to proceed, covers the shortage from the next deposit, and charges a fee for doing so. Consumers appear even more misinformed about ATM overdrafts. Only 31% correctly said that the bank will permit the transaction, subsequently dock the account and charge for the loan. Many consumers simply don’t expect to be charged a fee when they overdraft their account. Therefore, consumers would be unlikely to opt out of a program of which they are unaware, and that is why CU strongly supports the opt-in language in H.R. 3904.
At the same time, when asked, consumers overwhelmingly want choice when it comes to their bank accounts. Two-thirds of consumers polled said they prefer to expressly authorize overdraft coverage, so that there would be no overdraft loan—or fee— unless and until they opted into the service. Similarly, two thirds of consumers said that banks should deny a debit card or ATM transaction if the checking account balance is low. A copy of our polling results is included with our written testimony as Appendix A.
Additionally, consumers from across the country have shared with us their frustrations with automatic overdraft programs. While we have attached as Appendix B a compilation of thirteen consumer stories regarding overdraft programs, I will highlight just three today.
Rachael from North Carolina explained to Consumers Union that her bank manipulates the order in which they clear transactions, to maximize the number of times she overdraws her account.
Rachael is a married mother of three, who finds it difficult to manage her household when overdraft fees pile up. At one point Rachael found 7 overdraft charges for debit card transactions. All of the purchases which caused Rachel’s account to overdraft were for less than $20 each, and at least half of these were under $10. The smallest of these charges was for a $1 beverage purchased at a gas station; however, each of these transactions were penalized for a $35 fee.
In describing her bank’s overdraft policy, Rachael explained, “they clear the largest amounts first because they want to charge the [$35] fee on the $1 purchase.” The overdraft fees deducted from her account took away from the grocery money Rachael uses to feed her children – she describes: “When you’re taking $300 from us in two weeks, we get behind on other expenses. It literally took us two months to catch up.”
Justin from New York told us why he believes it is important to place strong limits on the number of times an institution can charge a fee for covering an overdraft. Justin knows firsthand why it is important to put in place strong monthly and annual limits on such fees, and why it will be extremely helpful to allow consumers the choice to opt-in to overdraft coverage.
Justin told Consumers Union that he was charged $385 for 11 overdrafts over a ten day period. Some of these transactions were for less than $10 – all but two were worth less than $50. Eventually, after multiple telephone calls to the bank, Justin was refunded $100 of his $385 total overdraft fees. Justin would rather have his debit card denied on transactions that would cause overdraft. He wishes that he could choose whether the bank should cover transactions which overdraw his account, and he feels that “to tack on fees and change policies to increase fee income is completely intolerable.”
Don from Ohio shared with us his personal story about overdraft fees. He describes overdraft fees as, “a snowball effect, I couldn’t get away from it –the more you put in the more they take out.”
Don and his wife rely on a limited income—the paycheck from his part time job, and the social security payment she receives for disability. Don checks his account balances regularly, but has recently been hit with a flurry of overdraft fees because of his bank’s overdraft policy.
In October 2008, Don used his debit card and overdrafted his checking account by 85 cents. Before the bank opened the next day, Don deposited $30 at the ATM thinking that this would cover the 85 cents overdraft. A day later he discovered he had incurred two overdraft fees, one for the 85 cents and the other because the $30 he had deposited did not cover the deficit caused by the first fee. The second overdraft triggered another overdraft fee and a $5 per day fee for each was also added. After haggling with his bank, Don reached a compromise where he only had to pay one of the $35 overdraft fees.
The Overdraft Protection Act will go long way to stop the abusive practices experienced by Rachael, Justin, Don and thousands of other consumers across the nation. The bill will require financial institutions to obtain consumers’ affirmative consent before covering debit card, ATM and check-based transactions for a fee. Those offering overdraft protection will be required to educate their customers sufficiently about these programs to get customers to affirmatively sign up. For those who do choose to enroll, the legislation will:
• limit the number of overdraft fees financial institutions can charge to six per year;
• require fees to be reasonable and proportional to the cost to the financial institution; and
• Prohibit banks form manipulating the clearing of transaction in a way which maximizes fees.
We at Consumers Union wholeheartedly endorse this legislation as an important step in helping consumers avoid entering a cycle of debt because of unfair and abusive overdraft fees. We look forward to working with you as the bill moves forward.