WASHINGTON -- Consumer advocates on Tuesday urged Congress to move forward on legislation to curb bank practices under which a cup of coffee bought with an overextended debit card can turn into a $40 expense.
Banks last year collected nearly $24 billion in overdraft fees, more than double the level of 2004, and much of that comes from those least able to pay -- the poor, the young, minorities and seniors -- witnesses said at a Senate Banking, Housing and Urban Affairs Committee hearing on abusive overdraft policies.
In the midst of a recession, said Michael Calhoun of the Center for Responsible Lending, "abusive overdraft practices are making the dire financial situations faced by many families even worse."
Overdraft fees are charges when a customer writes a check, uses a debit card or withdraws money from an ATM for an amount larger than the account holds. Nearly half the $24 billion total comes from debit card and ATM overdrafts.
People have a responsibility to spend within their means, said Sen. Chris Dodd, D-Conn., chairman of the committee and author of legislation that addresses excessive overdraft charges. But current programs "encourage consumers to overdraw their accounts and then slam them with too high fees."
Jean Ann Fox of the Consumer Federation of America said the median maximum overdraft fee for the largest banks is now $35. That means an uncovered $5 debit card purchase at a coffee shop could easily turn into a $40 charge.
Dodd added that banks can also charge multiple fees in a day from a consumer who unwittingly makes several purchases with an overdrawn card.
One of Dodd's constituents, Mario Livieri of Branford, Conn., described how he was charged $35 when he was $2.17 short on a $200 check. In the week that it took the bank to notify him that he was overdrawn, he had withdrawn another $100 from the ATM, racking up another $140 in charges. He was repaid $35 after he complained, but had to pay the rest. He stressed that he never signed up for overdraft protection. "It's legal, it shouldn't be and it certainly isn't fair."
Calhoun said his group estimates that 50 million Americans overdraw their accounts annually, with the consumers most likely to be hit by penalty charges being lower-income, non-white or young account holders.
Younger consumers more likely to use a debit card for small transactions pay $3 in fees for every $1 borrowed for debit card overdrafts, Fox said. She said students and young members of the workforce pay about $1 billion a year in fees.
Dodd's legislation would allow consumers to "opt-in" for overdraft protection on ATM and debit card transactions when they open an account. It would also limit the number of overdraft fees a bank can charge per month and year, require that fees be proportional to the cost of processing the overdraft and require that customers be notified when they overdraw their account so they don't make further uncovered transactions. Rep. Carolyn Maloney, D-N.Y., has proposed similar legislation in the House.
The Federal Reserve last week also announced a rule, to take effect July 1, under which banks would have to secure their customers' consent before charging large overdraft fees on ATM and debit card transactions.
If a customer chooses not to participate in overdraft protection, any debit or ATM transaction that overdraws their account would be denied.
Several large banks, including Bank of America Corp., and JPMorgan Chase & Co., have said they plan to reform their overdraft policies, and John P. Carey of Citigroup North America Consumer Banking told the Senate hearing that Citibank declines ATM or debit transactions when funds are insufficient and thus does not charge overdraft fees.
He said his bank supports the legislative goal of protecting consumers from unnecessary overdraft fees. But he urged flexibility, saying, for example, that a person stranded overseas without cash should have the choice of accessing $100 from an ATM machine knowing that it will cost him $135.
He also said that limiting the number of fees a bank can assess could remove a deterrent for those who intentionally and fraudulently create overdrafts.
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