Senate bill S 1799 would reform out-of-control overdraft practices


View this document (PDF)

Published: October 23, 2009

Banks and credit unions skim cash from accounts through unfair overdraft practices

Rather than discouraging customers from overdrawing their accounts, the system most banks and credit unions now use creates additional overdrafts and maximizes the number of fees they can charge. CRL finds that bank fees for overdrafts increased 35 percent in two years, rising to nearly $24 billion per year in 2008.

Customers are now typically automatically enrolled in overdraft systems that approve debit card transactions with no warning in the event of insufficient funds, so they frequently pay a $34 fee for the bank to cover even a small purchase:  The average debit card shortfall is only $17. Banks and credit unions manipulate the order in which transactions are deducted from accounts, subtracting the highest dollar amount first, which increases the number of overdraft fees they can charge.

The funds extended by the banks to cover shortfalls are recouped very quickly, usually in a matter of days when customers makes their next deposit. This makes overdraft a very expensive form of credit that customers often didn't ask for and often don't want.

FAIR Overdraft Coverage Act promises significant reform

Regulators have failed to stop our nation's financial institutions from moving from a policy of discouraging overdrafts to that of encouraging and maximizing overdrafts to drive up fees. But the Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act of 2009 promises to bring meaningful reform. Introduced by Senator Christopher Dodd on October 19, 2009, the Act would:

  • require financial institutions to obtain explicit permission from all their customers before enrolling them in a system of fee-based overdraft coverage for debit card and ATM transactions;
  • require that an overdraft fee charged on any transaction be reasonable and that its size bear some relationship to the cost of covering the overdraft;
  • prohibit reordering of customer transactions to trigger otherwise avoidable overdraft fees; and
  • limit the number of overdraft fees per person to six a year and no more than one a month.  At that point, financial institutions would have to enroll the consumer in a lower-cost program or stop charging for covering overdrafts.

The Center for Responsible Lending strongly supports the FAIR Overdraft Coverage Act as it would represent a major advance in overdraft reform.