New Law Proposed to Limit Overdraft Fees

U.S. banks earned $32 billion in revenue from overdraft fees in 2012, according to Moebs Services, an economic research firm. That’s $32 billion in fees that consumers paid to banks because they, the account holders, didn’t have enough money in their accounts to cover charges.

Two Democratic representatives have introduced a bill that, if passed, would limit the amount of and instances when overdraft fees can be charged. The Overdraft Protection Act would prevent banks from charging more than one overdraft fee per month or six per year. In addition, fees would have to be “reasonable and proportional” to the amount of the overdraft. In other words, banks couldn’t charge a $35 overdraft fee when your overdraft was only for $5. Finally, fees would be prohibited if the overdraft is caused by a hold on the account, e.g. from a hotel or gas station.

According to the Consumer Federation of America, consumers could face up to $370 in overdraft charges in a single day based on bank fee policies. Some banks charge daily fees each day your account balance remains in the red.

Many banks process transactions from largest to smallest causing consumers to overdraft sooner and incur more overdraft fees. The Overdraft Protection Act would prohibit this practice. Banks may decide to change the order they process transactions when overdraft fee profits are no longer a factor.

Consumers can already opt-out of overdraft charges, at least partially. By law, banks must decline debit card transactions that exceed the amount in your checking account unless you’ve opted-in to having these transactions processed. You can opt-out and your card will be declined whenever you don’t have enough money in your account to cover the transaction. The ability to opt-out doesn’t apply to checks or recurring auto-debit transactions.

Some consumers are more at risk of overdrafting than others. Having a low checking account balance puts you at risk of overdrafting. The Consumer Fed, in a recent survey, found that 40% of consumers with balances below $500 have overdrafted their accounts within the last two years. In addition, consumers with incomes below $20,000 were seven times more likely to overdraft their accounts.

Overdraft charges are avoidable, even without help from lawmakers. Since overdraft fees are charged whenever you spend beyond what’s in your account, you can avoid fees by only spending what you have available. Be in the habit of checking your account balance before making a transaction. Many banks have smartphone apps that make it easier to check your account balance. Even without an app, you can check your balance online, by phone, at the ATM, and inside a bank branch.

Avoid overspending your checking account by planning ahead. Before you spend, consider what else you may have to pay for in the coming days or weeks. If you have big bills coming due before your next payday comes, avoid spending money frivolously.

While the Overdraft Protection Act may save consumers hundreds of dollars, the bill is still in the early stages. It has to make it through committee, be voted on by the House and the Senate, and signed by the President before consumers can start helping consumers. The bill, as writte, would become effective one year after being signed. GovTrack says this bill has a 1% chance of being enacted.

Sources: ConsumerFed.org, GovTrack.us, Today