A $35 Pack of Gum? Congress Takes Aim At Debit Card Overdraft Fees

Oct. 30, 2009 -- Anyone who has ever charged a 25-cent pack of gum on their debit card only to discover later that the gum would cost $35 because the purchase overdrew their bank account can understand the hazards of overdraft fees.

An estimated 50 million people can relate to that frustration – that is how many people overdraw their bank account every year, according to the Center for Responsible Lending. In 2008, consumers spent nearly $24 billion in overdraft fees, a 35 percent increase from 2006.

Lawmakers on capitol hill today said banks should be banned from the practice of of automatically enrolling consumers in overdraft programs that charge fees for letting customers to continue to make purchases without sufficient funds in their accounts. Instead, banks should give consumers the choice to opt in to these programs if they want.

"How is this action any different from Burger King charging you for a hamburger you don't even want? That would be highway robbery," said Rep. Carolyn Maloney, D-N.Y., of who has introduced a bill in the House that would ban banks from charging more than one overdraft fee a month or more than six a year.

"Isn't it better to let consumers make a choice about what product they want?" Maloney added at a House Financial Services Committee hearing in Washington Friday.

The banking industry opposes the measure, said Nessa Feddis of the American Bankers Association, one of several groups that sent representatives to testify.

Rep. Emanuel Cleaver, D-Mo., sarcastically thanked industry reps , telling them, "You bypass us as the most hated group in America."

"Do you think it's the morally right thing to do?" Cleaver then asked the bankers.

Silence followed for the next 30 seconds, before R. Michael Menzies of the Independent Community Bankers Association replied, "It is not only not immoral – it is fair, reasonable, responsible."

Lawmakers such as the House panel's chairman, Rep. Barney Frank, D-Mass., and Senate Banking Committee boss Chris Dodd, D-Conn., have supported the opt-in choice for overdraft programs. A number of banks such as Bank of America and JP Morgan Chase have announced they will offer the opt-out option. The Federal Reserve is expected to issue new rules on the issue by the end of this year.

Fields said today 11 percent of banks offer opt in options to customers, a number too low for most committee members.

Another issue is the size of the fees charged by banks.

Rep. Keith Ellison, D-Minn., asked the numerous witnesses at today's hearing how overdraft fees in the $35 range can be justified if the actual overdraft costs incurred by banks are far less.

"Even if its $11," Ellison asked, "how do they end up with $39?"

"Because they can," responded Jean Ann Fox of the Consumer Federation of America who also testified. "You don't have competitive pressure on the size of this fee and consumers don't think they're going to incur it."