Congress to Examine Debit Card Overdraft Loans

  Rep. Carolyn Maloney, chair of the House Financial Institutions Subcommittee, reintroduced in February legislation concerning how banks should handle loans to customers who overdraw checking accounts with their debit cards.
  The legislation is cosponsored by Barney Frank, chairman of the House Financial Services Committee. Maloney, also a New York Democrat, says her subcommittee, which oversees the banking industry, will hold hearings on the issue in the coming months.
  The congresswoman outlined her intentions in January after the Center for Responsible Lending in Washington, D.C., issued the report "Debit Card Danger." The report says in 2004 banks received $10.3 billion in overdraft fees, 46% of which were initiated when consumers used their debit cards for payments or at ATMs. By comparison, checks triggered 27% of overdraft fees. Check writing declined 10% between 2000 and 2005, the report says.
  "Over $4 billion of the overdraft fees banks collect come from allowing debit cardholders to overdraw their checking accounts," says Eric Halperin, one of the report's three authors. "Thirty-eight percent of the overdrafts occur at the point of sale, 2% at the ATM, and the balance are made over the Internet and on the telephone," he says.
  The loans banks make to debit cardholders who overdraw their checking accounts are called "bounce-protection loans" by detractors and "overdraft protection" by supporters.
  And with few exceptions, banks and credit unions automatically enroll their cardholders into the loan programs without the customers' knowledge, Halperin says.
  Maloney says she does not oppose overdraft loans. What irks her is that banks are not being forthcoming about them.
  "I believe in being upfront and giving consumers all the information they deserve," she says.
  The banks charge cardholders an average overdraft fee of $30 for loans averaging $17 to $50. The loans typically are repaid in less than five days when customers deposit funds into their checking accounts, Halperin says.
  The loans are costly to checking-account customers on a per-dollar basis. Debit cardholders pay $2.17 in overdraft fees for each dollar borrowed at the point of sale. That compares with 86 cents for every dollar borrowed to cover a bounced check, the report says.
  The loan fee per dollar borrowed by debit cardholders at the ATM for bounce-protection loans, however, is relatively low at 76 cents.
  The center reached its conclusions after analyzing a database of more than 8,500 overdrafts and 2,400 checking accounts, the report says.
  Maloney's bill would give bounce-protection loans a high profile, but this is not the first time she has introduced the legislation. A similar bill Maloney introduced in the last Congress was buried by the House Financial Services Committee, Maloney's spokesperson says. It would have required banks to notify checking-account customers that they are being enrolled in an overdraft-protection program. The customers also would be given the option to decide whether to participate.
  LANGUAGE CHANGE
  The new bill's language is a bit different. The biggest change is that it would require banks to alert customers when they are about to overdraw their accounts at an ATM.
  "If a person is buying something on debit, the bank would have to notify the cardholder they will overdraw their checking account with the purchase. But the notification would not prevent the purchase," the spokesperson says. The bill does not specify how cardholders would be notified.
  And financial institutions would have to provide customers with full disclosure of their overdraft policies.
  Frank also co-sponsored Maloney's bill in the last Congress, which was controlled by Republicans. His continued support and a Democratic majority on the committee suggest the legislation stands a good chance of emerging from the committee.
  Nessa Feddis, American Bankers Association senior federal counsel, says Maloney's bill in not feasible. There is no way for an issuer to notify cardholders they will overdraw their accounts at other banks' ATMs or at the point of sale, she says.
  "The system isn't set up to do that," Feddis says.
  Bounce loans also are the subject of a lawsuit in the U.S. District Court for the Central District of California. Several law firms are challenging Washington Mutual's policy of loaning money to debit cardholders through the financial institution's ATMs to cover overdrafts.
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