Senate Hears Calls for Regulation of Overdraft Practices

overdraft fees/ABC News
As consumers' and lawmakers' anger grows over overdraft fees, some banks are taking steps to curb them... but are they enough?

The Senate Banking Committee today heard testimony from consumer groups about the need for regulation to stop banks from assessing disproportionate fees when consumers overdraw their checking accounts.

Last year, consumers paid $24 billion in overdraft fees and according to Jean Ann Fox, director of financial Services for the Consumer Federation of America, the people who face these fees "are most likely young, low income, and minorities."

"The consumers who are trapped in overdraft are the ones who can least afford the most expensive form of credit that banks offer," she said. "These are not a convenience. Overdraft loans are dangerous high-cost loans."

VIDEO: Protect Yourself Against Overdraft FeesPlay

According to the FDIC, 93 percent of overdraft fees are paid by just 14 percent of bank customers.

"It's the worst off, people who are struggling the most, who are paying the lion's share of these billions of dollars in fees. It's ridiculous," committee chairman Sen. Chris Dodd, D-Conn., said.

Last week the Federal Reserve announced new rules that ban banks from charging overdraft fees on debit card and ATM transactions unless a customer specifically opts into an overdraft program. The new rules will go into effect July 1.

Dodd has introduced legislation that would go much further than the new Fed rules, by limiting the number of overdraft fees banks can charge to one per month and six per year, and requiring that the fees be "reasonable and proportional to the cost of processing the overdraft," he said.

Dodd's legislation would also require banks to process transactions in the order they were received and to notify customers if they have overdrawn their account.

Such information could have saved Mario Livieri a lot of money when his checking account went into overdraft last summer. Livieri testified that inadvertently overdrawing his checking account by $2.17 ultimately led to his bank charging him $140 in fees.

Because his bank did not immediately notify him of the initial overdraft and $35 fee, Livieri continued to use his debit card, which resulted in the additional charges.

"If that sort of practice -- running up ridiculous charges for an overdraft protection program I didn't even sign up for -- is legal, it shouldn't be," he said. "And it certainly isn't fair."

Overdraft Fees Anger Some Consumers

Dodd's proposed legislation would also require banks to warn customers if a debit card purchase or ATM withdrawal would cause them to overdraw their account so they have the chance to cancel the transaction.

"Eighty percent of consumers prefer to be denied rather than imposed the $35 fee on a debit," said Michael Calhoun of the Center for Responsible Lending.

Citibank, which already has a policy to deny a transaction if an account has insufficient funds, agrees with the position that consumers should be able to opt in to overdraft protection.

"Clearly, there's an opportunity to improve consumer protection," Citibank chief administrative officer John Carey said.

He proposed a solution whereby a customer could decide at the time of a transaction that would overdraw his or her account whether to cancel the transaction or accept the overdraft fee. But he acknowledged that the processes to enact that kind of a procedure are not yet available.

"Until that's there, perhaps the transactions shouldn't be approved," he said.