WASHINGTON — A drive to restrict overdraft fees is rapidly gaining momentum on Capitol Hill, potentially threatening a revenue stream that has become crucially important to many institutions during the financial crisis.
Senate Banking Committee Chairman Chris Dodd is drafting a bill that he hopes to introduce next week. Though details of the legislation are unclear, it is likely to require banks to get their customers' permission before enrolling them in an overdraft program.
The bill is already being actively supported by Sen. Charles Schumer, D-N.Y., the No. 3 Democrat in the Senate, who pledged last week to help push it through.
In the House, Rep. Carolyn Maloney, who helped enact credit card reform this year, is also looking for a way to kick-start overdraft legislation introduced in March.
With recent media attention on the issue, industry observers and banking industry representatives said the bill looks as if it could gain traction relatively easily — and would be hard for lawmakers to oppose.
"They are going to go to town with this stuff," said Chris Low the chief economist at First Horizon National Corp.'s FTN Financial. "Just like the first pass of card reform, I think it's too tempting because it's so clearly popular. There is so much outrage. … I don't think anyone can stop it. It's going to appeal to a lot of people."
Brian Gardner, an analyst at KBW Inc., agreed. "It's one of those few banking issues that plays well with the electorate," he said.
Though Dodd appears to have his hands full with regulatory reform and the health-care debate, his staff has been busy bringing in industry representatives and consumer groups to discuss several issues related to overdraft programs.
Though the staff members have said little about what Dodd's bill would do, the senator gave a clue in a June letter to the Federal Reserve Board, urging it to craft a final overdraft rule to require that customers "opt in" to such programs. The Fed issued a proposal last year asking for comment on the pros and cons of opting in to or out of overdraft protection. A final rule is expected by yearend.
"I write to urge you to finalize as soon as possible the proposed rule amending Regulation E that would curb abusive overdraft practices, and to provide stronger consumer protections in the final rule by requiring that financial institutions obtain the affirmative consent of consumers to overdraft services before they can charge overdraft fees (the 'opt-in' approach)," Dodd wrote.
Sources said Dodd's staff is also zeroing in on how banks decide which overdrafts to cover and how banks decide the order in which they clear transactions.
For example, some industry lobbyists argue that banks clear the biggest check first, such as a mortgage payment, because it is the most significant charge the consumer must pay. But critics, including some members of Congress, have asserted that the system is just a ruse to rack up fees since the consumer might have five smaller checks that clear the same day. If the first transaction overdraws the account, each subsequent charge will incur a fee.
The Maloney bill seeks to curb banks' imposing multiple overdraft fees by prohibiting them from manipulating the order of transaction clearing.
Sources also said that Dodd's staff is looking carefully at the best practices included in a 2005 interagency guidance that said financial institutions should not engage in marketing that encourages overdrafts, should fairly represent alternatives like lines of credit, and should clearly explain overdraft program features including that it is discretionary.
The guidance said that fees should be specific and clearly disclosed, the impact of transaction-clearing policies should be clearly explained, and consumers should be alerted before a transaction triggers any fees, including at automated teller machines. The guidance also said banks should consider capping customers' potential daily cost for the overdraft program.
Consumer groups are pushing Dodd to consider the Maloney bill. It would require banks to give consumers notice and a chance to cancel a transaction at the point of sale or at an ATM machine when the transaction would trigger an overdraft fee.
Schumer has also been talking about the subject, including touring New York this month and vowing to help enact reform. He has said that he will fight for legislation that sounds similar to the Maloney bill, requiring banks to give consumers a choice about overdraft programs. Banks should either be forced to make consumers opt in to the program, he has said, or provide an "easy method" to opt out.
Legislation should also increase disclosure in advance of fees and annual percentage rate charges on overdraft loans, Schumer has said, require banks to warn customers that an electronic transaction may trigger an overdraft loan fee and let the customer cancel a transaction after getting this warning. He also wants to prohibit banks from manipulating the order in which checks and other debits are posted if it causes more overdrafts and maximizes fees.
According to Schumer, legislation should also require banks to be proportional in the fees they charge — the fee for a nickel overdraft should not be the same as a fee for a $100 overdraft.
"Bottom line, debit cardholders are getting scammed by their banks," Schumer told constituents in Syracuse on Sept. 8. "Families across central New York are being involuntarily placed in these overdraft loan programs and getting ripped off by excessive fees. It's time to stop them dead in their tracks. This legislation will provide cardholders with a warning when they are about to overdraft from their accounts to protect them from sky-high fees and prevent banks from rearranging charges so that customers are placed in the worst possible position."
Restricting overdraft fees would hit institutions, particularly community banks, when fee income has become increasingly more important to their bottom line.
"It's hard to make money in straight banking, so you have to have fee-based activities," said Kip Weissman, a partner in Luse Gorman. "Overdraft is the flavor of the month right now. Overdraft provides support for all kinds of non-fee-based products that community banks have to offer to compete. I haven't heard any community banks that are in favor of this."
Industry groups are mobilizing against the bill, but it is unclear whether they can stop it.
"As we have said when this issue came up before, these are important programs that work very well for most consumers, and we are very concerned about legislative initiatives that can affect availability and efficiency of overdraft protection," said Floyd Stoner, the head lobbyist for the American Bankers Association.
Though broad regulatory reform remains the dominant banking issue, analysts and lobbyists said they could easily see Congress adopting reforms targeting overdraft fees either as a stand-alone bill or as part of the financial services revamping.
Some lobbyists speculated that Maloney might seek to add an amendment specifically dealing with overdraft charges to a bill to create a consumer protection agency. "I'm working closely with Chairman Frank to bring relief to consumers who have been overburdened with outrageous overdraft policies," Maloney wrote in an e-mail to American Banker. "I'm redoubling my efforts on the issue this fall to give consumers the kind of notice and opt-in provisions that were applied to credit cards in my credit card reform bill."