Senators Cory Booker (D-NJ) and Sherrod Brown (D-OH) announced a new bill last week to ban banks from charging overdraft fees on debit card transactions or ATM withdrawals and limit banks to charging one overdraft fee per month and up to six per calendar year.

But not all the experts agree on whether the bill will help or hurt consumers.

While the text of the bill is still unavailable, Booker said in a press release that the Stop Overdraft Profiteering Act of 2018 “would also mandate that banks post transactions in a manner that minimizes overdraft and nonsufficient fund fees (oftentimes, banks reorder transactions in such a way as to maximize overdraft fees, which can mean, in some cases, that the consumer faces multiple charges).”

The bill intends to support lower-income Americans living paycheck to paycheck who struggle not to overdraw their accounts, and it also intends to crack down on banks for not being transparent with consumers about the order in which they process transactions.

The press release cites a 2014 study from Pew Charitable Trusts which found that the average overdraft fee is $35 and overdrafters tend to be “younger, lower-income, and nonwhite.”

According to the study’s survey of overdrafters, “More than half of those who incurred a debit card overdraft penalty fee do not believe that they opted in to overdraft coverage. More than three-quarters of the people who paid an overdraft penalty fee express concern about specific overdraft policies, including the high cost of a penalty and the practices of charging ‘extended’ overdraft fees — additional charges for failing to repay a negative balance on time — and of reordering withdrawals from highest to lowest dollar amount, which have the effect of increasing overdraft fees.”

The study also calls upon the Consumer Financial Protection Bureau to “require financial institutions to make overdraft programs safer and more transparent.”

Rebecca Borné — senior policy counsel for the Center for Responsible Lending (CRL) — helped draft the bill and told InsideSources that overdraft fees were originally charged for bounced checks, but since banking became electronic, banks have exploited overdrafting to generate more revenue.

Debit cards were never designed to get a customer in debt,” she said. “Most overdraft fees are triggered by debit card transactions and can add up really, really quickly. There was never really any rationale for that. It wasn’t like a bounced check where the utility company might not get paid or something. [The bank] would just decline the payment and the customer would choose another form of payment.”

The CRL, which generally seeks to “curb predatory lending” and predatory financial practices through increased regulation, released a study Tuesday stating that bank revenue from overdraft fees has increased by more than 2 percent each year.

The study also found that more than one in 10 of the largest banks “charg[e] sustained/extended overdraft fees in addition to per-transaction overdraft fees; us[e] high-to-low transaction processing for some types of debit transactions; and allow five or more overdraft fees to be charged per day to customers.”

Banks have become so accustomed to the revenue brought in by overdraft fees that they have a financial incentive to keep their processes “opaque,” Borné said.

In her view, overdraft fees harm not just lower-income Americans, but anyone trying to schedule bill payments after depositing a check. Because banks often don’t process transactions in the order an individual makes them and can take several days to process deposits, an individual can accidentally overdraw his or her account simply because a deposit may be marked as posted to the account even though the bank hasn’t finished processing it.

Under federal law there’s a maximum amount of time they can take [to process your deposits],”Borné said. “And those laws haven’t been updated in a long time. No one knows the ultimate order in which their transactions are processed. It’s hard to know at any given time how much money you have access to, and when you can spend it without overdrawing the account. Part of the problem is the penalties are so steep when your best guess isn’t right. [They’re] grossly disproportionate: if you overspend $3, you spend a $35 fee. They’re so lucrative for the banks that they have the incentive to maximize the fees.”

But Ross Marchand, director of public policy at the right-leaning Taxpayers Protection Alliance, thinks overdraft fees actually help consumers. From his point of view, overdraft fees are just a cheap way for lower-income Americans to borrow money if they’re short on cash.

Let’s say you’re living paycheck to paycheck and your check hasn’t cleared in time for you to pay your rent, so you’re going to overdraw your account, so let’s say you have a $35 overdraft fee and your rent is $600, you’re looking at borrowing money at 10%, so this can be a good way for people to live paycheck to paycheck to borrow money,” he told InsideSources.

According to the Pew study, more than 40 percent of overdrafters said they believe overdrafting benefits them, while 50 percent it harms them. More than 80 percent said they support more overdraft regulation, and more than two-thirds said they preferred a declined transaction over an overdraft fee. The CRL poll produced the same result: most overdrafters would rather have their transaction declined than pay a fee.

Marchand affirmed there is a transparency problem with some banks’ overdraft policies, but doesn’t think legislation will solve the problem.

When it comes to less-than-transparent practices, I can understand that gripe, because a lot of financial institutions can be more transparent,” he said. “But the more competition the better. Ever since the Dodd-Frank legislation there’s been less competition, and the less competition you have, the more you have banks that can get away with not being transparent with customers.”

Capitol Federal Distinguished Professor Robert DeYoung at the University of Kansas School of Business told InsideSources that the bill could prompt small, community banks to “end relationships” with poorer customers because they will lose money covering overdrafts without charging an overdraft fee.

We can’t fault banks for wanting to earn revenue from their customers,” DeYoung said. “Banks have bills to pay; they have to earn a profit. Some banks try to keep information less than complete so they can earn greater fees, that’s for sure. Others are very clear about it and want their customers to know what the rules are and have no mistakes about when you have to pay.”

DeYoung thinks more practical legislation would require banks to be very explicit about overdraft policies and fees so consumers perfectly understand the conditions of banking with a particular financial institution.

I think a much better approach would be for banks to say [to consumers], ‘There’s not enough money for this,’ or to say, ‘We’ll give you what you want for a $25 fee,'” DeYoung said. “This is not a large change, a few lines of code could be written to make this happen, and then customers can decide whether they want to pay the fee for this overdraft protection or not. Then everyone’s honest, rather than this very blunt legislation banning things. When you’re banning something, that means banks and consumers no longer have a choice.”

Marchand thinks legislation mandating transparency will fail to accurately gauge what consumers want and need. More competition in the market would allow banks to figure out what consumers want and need. In a highly competitive market, Marchand said, if a consumer doesn’t like a particular bank’s less-than-transparent policies then that consumer can go somewhere else.

You’re not only getting more transparency but also innovation,” he said.

But Borné believes the bill will force the market to adapt and be more fair to consumers. It may prompt banks to nix free checking account options, but banks would at least be more transparent about the fees they charge.

“What you see is a lot of banks that offer free checking with no upfront monthly fees, but get all their revenue from checking accounts on overdraft fees,”Borné said. “So if you had reasonable regulation, you’d start to see a shift in the pricing model of checking accounts, and maybe most banks would charge a monthly fee for checking accounts and get their revenue that way rather than through these backend ways. Without regulation of overdraft fees, it’s impossible for there to be a shift in the market, because no bank wants to be the one bank to say, ‘We charge $10 a month for checking accounts.'”

Even though the bill may not pass the House due to its lack of bipartisan sponsorship, Borné believes such legislation is necessary not only to improve transparency and accountability in the banking industry, but also to encourage consumers to invest with good banks. 

It seems like over the last several years distrust of banks has been so high with the financial crisis and the Wells Fargo scandal,” Borné said. “Overdrafts are another area that makes it really difficult for customers to trust their banks, and it really is a shame. I think reform in this area would go such a long way to restore America’s trust in their banks.”

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