New overdraft bills in Congress propose long-needed reforms

Rep. Carolyn Maloney (D-NY) and Sen. Christopher Dodd (D-CT) introduced bills in October targeted at curbing some of the abusive practices of overdraft protection programs. A recent Woodstock report cited the impact of overdraft programs on older persons and found that this product, and other high cost forms of credit, may increase economic insecurity later in life.

 
Overdraft programs lend customers the money to cover a transaction when there are insufficient funds in their accounts, along with a $25-35 fee. Banks and credit unions often automatically enroll customers in these so-called convenience programs without their consent, while many assume that purchases that would overdraw their account would be declined. Additionally, banks and credit unions levy disproportionate fees even at ATM and point-of-sale transactions and design bank processing procedures to maximize the number of overdraft fees. Some banks recently re-designed their overdraft programs in an attempt to stave off reforms, but these changes do not go far enough and could be revoked at any time unless changes are mandated by law or regulation.

The reforms proposed by Rep. Maloney and Chairman Dodd address many of the problematic aspects of overdraft programs. Banks would have to obtain written consent from customers before enrolling them in the program. The legislation would limit both the number and the amount of fees: banks would only be able to charge one fee per month and up to six per year, while the fee amount would have to be proportional to the amount overdrawn. The bill prohibits bank processing procedures designed to maximize the number of fees, such as processing the largest transaction first instead of in chronological order and including the overdraft limit in the account balance. The bill would require banks to promptly notify consumers when their account has been overdrawn. The reforms would promote transparency about the terms of overdraft programs by requiring clear display of the actual cost and prohibiting deceptive or unfair marketing practices.

Woodstock has long advocated for these reforms and welcomes these bills as important steps towards a fairly designed bounced check program. We encourage policymakers in Illinois and around the country to support consumer protections in overdraft and similar programs.