Law Eyed To Curb Bank Overdraft Fees

Published: Jul 29, 2007

One of the biggest selling points for debit cards has been that you couldn't spend more than you had in your bank account, making them a good alternative to racking up debt on a credit card.

The sales pitch worked. Consumers now make one-third of their in-store purchases with a debit card - up from 21 percent six years ago, according to the American Bankers Association, an industry trade group.

But, as many users have discovered, the debit card carries the same problem as its credit card cousin: You can spend over your limit.

The practice of approving a check or debit transaction when the account has insufficient funds is an intentional effort to drive up revenue, according to a new study by the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization.

"Banks should protect customers' funds, not plunder them with high fees and harmful practices," said Eric Halperin, director of the center's Washington office.

This year, the center published a report that found that debit card purchases at point of sale terminals and withdrawals at ATMs triggered 46 percent of overdrafts. The rate for paper checks was just 27 percent of overdrafts.

In its most recent report, "Out of Balance," the consumer advocacy group found that debit cards are the largest source of account overdraft fees for banks and credit unions. Debit card point of sale and ATM overdrafts cost consumers $7.8 billion in 2006, which represented 45 percent of the $17.5 billion the financial institutions received in overdraft fees last year.

Many banks and credit unions automatically enroll customers for overdraft protection programs when they open a checking account. When an overdraft occurs, the financial institution will automatically advance the funds but charge the customer a fee.

In hopes of reducing overdraft fees, the center is supporting legislation sponsored by Rep. Carolyn Maloney, D-N.Y., and Rep. Barney Frank, D-Mass., that would require banks and credit unions to warn their customers before authorizing an electronic overdraft. The House recently held a hearing on the legislation.

Bankers argue that overdraft protection is something that consumers not only want, but also need, considering many overdraw their checking accounts.

"It helps to avoid embarrassment, inconvenience, merchant fees and other adverse consequences of having a check bounce or a transaction denied," Nessa Feddis, senior federal counsel for the bankers association, said in recent testimony before a House subcommittee.

Feddis said it's the customers' responsibility to keep track of their money because they are in a better position to know their balances.

I agree with the center that at the very least, consumers should be warned they don't have sufficient funds for a particular purchase. So what if they're embarrassed or inconvenienced? It sure beats overdraft fees. If they choose to go forward with the transaction, then they can't complain about the financial consequences.

On this issue, everyone should be held accountable. Consumers have many ways to check what they have in their accounts before using their debit cards, including going online or using the automated phone system at the bank. To cover themselves when mistakes happen, they can link their checking accounts to a source of backup funds: a savings account or a line of credit. Or they can just opt out of overdraft protection.

And financial institutions should restrain their fee frenzy and stop routinely allowing consumers to withdraw funds that exceed their account levels, only to slam them with overdraft charges.

Michelle Singletary can be reached at The Washington Post, 1150 15th St. N.W., Washington DC 20071.