Bank overdraft fees that can turn a cup of coffee into a $40 expense disproportionately hit the young and the poor, consumer groups are complaining to Congress.
Last year, overdraft fees _ charges when a customer writes a check, uses a debit card or withdraws money from an ATM for an amount larger than his account holds _ reached nearly $24 billion, more than double the level of 2004, consumer advocates said. Nearly half of that comes from debit card and ATM overdrafts.
And unfortunately, Jean Ann Fox of the Consumer Federation of America tells the Senate Banking, Housing and Urban Affairs Committee in testimony prepared for a hearing Tuesday, "abusive overdraft fees have the greatest impact on those who can least afford them."
Michael Calhoun of the Center for Responsible Lending says his group estimates that 50 million Americans overdraw their accounts annually, with the consumers most likely to be hit by penalty charges being lower-income, non-white or young account holders.
Younger consumers more likely to use a debit card for small transactions pay $3 in fees for every $1 borrowed for debit card overdrafts, Fox said. They're the ones who might get hit with a $35 penalty, the median maximum overdraft fee for the largest banks, if their card doesn't cover the cost of a cup of coffee.
Banking committee chairman Chris Dodd, D-Conn., has introduced legislation that would allow consumers to "opt-in" for overdraft protection on ATM and debit card transactions when they open an account. It would also limit the number of overdraft fees a bank can charge per month and year, require that fees be proportional to the cost of processing the overdraft and require that customers be notified when they overdraw their account so they don't make further uncovered transactions. Rep. Carolyn Maloney, D-N.Y., has proposed similar legislation in the House.
The Federal Reserve last week also announced a rule, to take effect July 1, under which banks would have to secure their customers' consent before charging large overdraft fees on ATM and debit card transactions.
It would also require that banks offer opt-in options. If a customer chooses not to participate, any debit or ATM transaction that overdraws their account would be denied.
Several large banks, including Bank of America Corp., and JPMorgan Chase & Co., have said they plan to reform their overdraft policies, and John P. Carey of Citigroup North America Consumer Banking tells the Senate hearing that Citibank declines ATM or debit transactions when funds are insufficient and thus does not charge overdaft fees.
He says his bank supports the legislative goal of protecting consumers from unnecessary overdraft fees. But he urges flexibility, saying, for example, that a person stranded overseas without cash should have the choice of accessing $100 from an ATM machine knowing that it will cost him $135.
He also says that limiting the number of fees a bank can assess could remove a deterrent for those who intentionally and fraudulently create overdrafts.
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