In a move to end an “unfair” practice he said traps consumers in a “vicious cycle of poverty,” U.S. Sen. Cory Booker of New Jersey has introduced a bill that would prohibit banks from charging customers certain overdraft fees.
When an account holders cut a check or swipes a debit card for a transaction that would send their account below zero, banks often approve the charge but levy an overdraft fee. That leaves customers on the hook for the remainder of the charge as well as the added fee.
Banks use these fees to prey on low-income earners whose account balances already teeter on the verge of empty, said Booker, a Democrat.
But banking industry insiders who defend overdraft fees say the mechanism ensures that customers can spend money at critical moments without worrying about bouncing a check or having their debit cards rejected. They have criticized the proposed legislation for targeting what some consider a useful service.
“What you’re really doing is limiting a consumer’s ability to obtain short-term liquidity when they need it,” said David Pommerehn, vice president of the Consumer Bankers Association. “To buy gas to get to work or to buy food to feed families.”
Booker’s bill — The Stop Overdraft Profiteering Act of 2018 — would place an outright ban on overdraft fees for debit card transactions and ATM withdrawals.
As far as overdraft fees on checks and recurring bill payments, banks would be limited to charging one fee per month and no more than six overdraft fees in a given calendar year.
The measure would also require that remaining overdraft fees be “reasonable and proportional to the financial institution’s costs in providing the overdraft coverage,” and that banks provide more information to customers about its policies.
“These fees generate enormous amounts of revenue for the banks while most customers don’t even know they’ve opted into such charges,” Booker said, in a statement. “Worse yet, overdraft fees fall on those least likely to be able to afford them – individuals for whom a $35 overdraft charge could push them over the brink into financial ruin.”
Many banks charge $35 overdraft fees, according to a Pew report from 2016.
The report also highlighted “heavy overdrafters”— customers who pay more than $100 in fees per year — and found that they are often younger, renting their homes, and making below-average incomes.
“For these consumers, overdraft service is not just an occasional courtesy, but an extremely expensive form of credit that is also high risk because it lacks the consumer protections that accompany other credit products,” according to a statement on Pew’s website.
Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, said legislation is necessary to protect vulnerable customers who pay billions of dollars in overdraft fees per year. “We will see, when Congress moves to pass this or not pass it, whether Wall Street wins out or Main Street wins out,” she said.
However, according to Pommerehn, both sides can win.
He pointed to some recent changes around overdraft fees, such as guidance issued by the U.S. Treasury in 2010 that aimed to help banks make the process of opting into overdraft services clearer to customers. (Customers who don’t opt into overdraft protection will not be able to overdraw on their accounts.)
Pommerehn also said many banks have eliminated fees for accounts that are overdrawn by small amounts of $5 or $10.
“Overdraft is important to some people, and they need it,” he said. “The premise of the bill is misguided, and I think it would do harm to consumers.”