New Overdraft Rules May Be in the (Debit) Cards

by Sarah Grotta 0

ATM money withdrawal and cellphone technology.

Last week, Senators Cory Booker (D-NJ) and Sherrod Brown (D-OH) introduced a bill that will significantly curtail the overdraft income banks can earn.  The Stop Overdraft Profiteering Act of 2018 would ban overdraft fees on debit card transactions and ATM withdrawals, limit fees placed for checks and recurring payments, and control banks’ transaction posting rules as InsideSources reported.

One side of the argument for the bill is that despite the rules requiring banks to ask for consumers to opt-in for overdraft, many don’t recall doing so and are surprised when overdraft fees are incurred.  There are also instances cited of banks being less than transparent about overdraft fees:

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 other side of the argument is that banks are providing a valuable service and without the availability of funds extended through overdrafts, many consumers would have no other source for short term loans and penalty fees charged by businesses for late payments would often outweigh the cost of overdraft fees. Additionally, fees earned through overdrafts provide banks the ability to profitably offer checking accounts that are otherwise free to consumers:

Ross March and, 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. 

This effort around overdrafts may also be a test for the way the CFPB will interact with legislators.  Senator Booker sent a letter to the CFPB last month to inquire why overdraft reform was not on the agency’s list of pending regulatory action when it had been in the past.   This bill is certainly one to watch.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

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