Feds Take Dead Aim Against Bank Overdraft Fees

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Now that the Credit Card Reform Act is in place – either in December or February 2010, depending on what Congress ultimately agrees on – lawmakers and the Federal Reserve have trained their sights on banks.

Bank overdraft fees have long been a big bugaboo for consumers, and their anger has been increasingly heard loud and clear in Washington. According to the analytical firm Moebs Services, banks earn roughly $38.5 billion annually – just on bank overdraft fees. Not only that, but Moeb estimates that banks have hiked overdraft fees by 4% in 2009.

In addition, a November 2008 study by the FDIC says that almost all banks (94.7%) treated linked-account programs as opt-in programs, requiring that customers affirmatively request to have accounts linked.

Overall, the FDIC study says that bank overdraft fees average between $10 and $38 per overdraft, with $27 the median banking industry overdraft penalty.

Some powerful legislators are now calling for new rules on how much and how often bans can levy overdraft fees. Leading the way is Sen. Christopher Dodd (D-Conn.), Chairman of the U.S. Senate’s Banking Committee, who is planning to roll out legislation that would call for banks to get direct permission from consumers to allow debit card transactions (the chief trigger for bank overdraft penalties) to go through if there isn’t enough cash in the account to cover the deal. Under the Dodd proposal, if consumers don’t allow that permission, their debit transactions would be denied at the point of sale.

According to Dodd’s Web site, so-called overdraft protection programs enable customers to overdraw their accounts, without their knowledge, when they use checks, electronic transfers, debit card purchases and ATM withdrawals. Account holders are often enrolled in the programs without their consent and many banks will hit customers with fees upwards of $30 for this “courtesy” even if their account is only overdrawn by a few cents.

Call it coincidence or not, but on Sept. 18 – a mere five days after Sen. Dodd said he was going after banks on overdraft fees, three major financial institutions said they would cut fees charged to bank customers.

Wells Fargo (Stock Quote: WFC) J.P Morgan Chase (Stock Quote: JPM) and Bank of America (Stock Quote: BAC) all said they would eliminate overdraft fees on checking account transactions that exceeded account limits by less than $5. Wells Fargo also said that it would limit overdraft fees to four transactions a day.

Whether the fee cuts listed above are enough to satisfy politicians is questionable. Aside from the Dodd proposal, which is still taking shape, the Federal Reserve has proposed that banks must physically sign up bank consumers for overdraft programs. An accompanying U.S. House of Representatives proposal, from Carolyn Maloney (D-N.Y.), would demand that banks get “point of sales” permission from bank customers prior to each overdraft transaction.

Apparently, if banks continue to police themselves on overdraft fees, the need for legislation coming down from Congress should lessen.

That said, it’s an anti-Wall Street mindset on Main Street these days, and on both ends of Pennsylvania Avenue in Washington. Consequently, banks set overdraft traps at their own expense these days.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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