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Bill would crack down on nasty overdraft fees

Updated at 6:30 p.m. ET: Rep. Carolyn Maloney doesn’t want you to unwittingly fork over $35 for a cup of coffee.

Maloney, D-N.Y., Wednesday introduced the "Overdraft Protection Act," a bill that aims to crack down on overdraft fees. The bill aims to limit when and how banks charge consumers who try to spend more money than they have in their bank account. 

If approved, the House bill would also: 

  • Require overdraft fees to be “reasonable and proportional” to the cost of the transaction.
  • Limit the quantity of fees that can be charged to one per month and six per year.
  • Ban banks from manipulating the order in which transactions are posted. Critics say this is done deliberately to maximize overdraft fees.

The bill proposes a major expansion of consumer rights by extending the opt-in requirement to paper checks, ATMs and recurring monthly payments. 

“With the rise of debit cards and the constant presence of swipe-card terminals to pay for everything from a  tank of gas to a candy bar, it’s easier than ever to overdraw an account and incur an overdraft fee,” says Maloney, a senior member of the House Financial Services Committee. “That’s how a $5 cup of coffee can become a $35 cup of coffee faster than you can say ‘overdrawn!’ " 

As I reported earlier this week, many people who have overdraft coverage for point-of-purchase debit card transactions and ATM withdrawals don't know they signed up for their service from their bank. If they are about to overdraw, the transaction will be approved and they'll get hit with a $35 fee. 

A Federal Reserve rule which took effect in August 2010 requires customers to affirmatively opt-in to this for-fee service. But a recent study from the Pew Charitable Trusts found that many people don't understand how the system works. They think if they opt-in they won't pay a fee if they're about to overdraw the account. It’s just the opposite. 

Most said they would prefer for the transaction to be declined and no fee charged. 

Maloney says the Fed rule isn't working, and "it's clear more need to be done in the area of consumer disclosures" to help people avoid multiple overdrafts. 

To their credit, some banks, including Citibank and Bank of America, have responded to consumer outrage over overdraft fees by changing their policy. They now deny debit card transactions that would overdraw an account. 

But the chief banking industry lobbying group opposes the bill.

“Overdraft protection is a service customers freely elect to have and they value their payments being covered," American Bankers Association spokesman Jeff Sigmund said in a statement. "They know the fee in advance and can opt out of overdraft protection at any time.”

Consumer groups support the bill. 

"Overdraft protection can work against consumers when banks use tricks and traps to make it easy for consumers to trigger their overdraft or when banks engage in confusing marketing for expensive overdraft programs,” says Pam Banks with Consumers Union. “This bill is an attempt to curb some of those abuses." 

Susan Weinstock, director of Pew’s Safe Checking in the Electronic Age Project, agrees. "Pew's research shows that there's rampant consumer confusion about overdraft and we think this bill takes a lot of really important steps in clearing up a lot of that confusion." 

Here's a look at the main provisions of the "Overdraft Protection Act." 

  • Requires consumer consent before banks can permit overdraft fees to paper checks, automated clearinghouse (ACH) charges and debit card swipe-terminal transactions on consumer accounts, and defines overdraft fees as finance charges subject to the Truth in Lending Act disclosures.  Current Federal Reserve rules require opt-in to overdraft fees only for debit card transactions. 
  • Prohibits banks from manipulating the sequence in which checks and other debits are posted if it causes more overdrafts and maximizes fees paid to banks. 
  • Requires that fees be ‘reasonable and proportional’ to the amount of the overdraft. 
  • Caps the number of fees that can be charged at one per month and six per year. 
  • Enhances disclosures to consumers both at the point of opt-in (disclosing alternatives to overdraft protection, including linked accounts or lines of credit) and when an overdraft fee is charged (if consumers choose to opt in). 
  • Requires the Consumer Finance Protection Bureau (CFPB) to study prepaid debit card overdraft fees and grants rulemaking authority over those fees to CFPB. 

The Consumer Financial Protect Bureau (CFPB) is already investigating checking account overdraft protection programs to see how they are impacting customers. 

As part of that process, the CFPB wants feedback on a prototype “penalty fee box” it designed for bank statements. This box would highlight how much you paid in overdraft fees and why. Comments are being accepted until the end of June. 

The CFPB also issued a consumer advisory about overdraft coverage. It’s short, simple and should help you figure out your overdraft status.