Reps. Carolyn B. Maloney (D-NY), Barney Frank (D-MA), and Luis Gutierrez (D-IL) today called on the Federal Reserve to strengthen its proposed regulation of bank overdraft fees by requiring banks to have consumers opt-in to overdraft programs and prohibiting  the posting of transactions in a sequence which maximizes overdraft fees.

In a letter to Federal Reserve Chair Ben S. Bernanke, the members of Congress said, “Overdraft fees… often take consumers completely by surprise… and {are} usually vastly disproportionate to the amount of the overdraft itself. It is only fair, then, that institutions be required to obtain consumers' affirmative consent before enrolling them in fee-based overdraft programs.”

In announcing the letter, Maloney praised the Fed’s effort to explore overdraft remedies but said, “Consumers simply shouldn’t be enrolled in overdraft programs without their consent. Since Congress just required an affirmative opt-in to over-the-limit fees in my credit card reform law, regulations should similarly require an opt-in to overdraft fees. Whenever banks step over the line of reasonable business practices into abuse of consumers’ trust and understanding, government needs to act.

“When overdraft fees are $30 or more, a $5 treat at Starbucks becomes a $35 shock after the overdraft fee is applied. And when multiple purchases in a day are posted in a sequence that only benefits the bank—incurring multiple fees—then something is broken in the system and must be fixed,” she said.

A copy of the letter can be viewed here or at http://maloney.house.gov/documents/financial/overdraft/LettertoFed05272009.pdf

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Background: In December, 2008 the Federal Reserve proposed a change in Regulation E addressing overdraft reforms.  In the proposed rule, the Fed asks for public comment on whether banks should be required to offer customers opt-in to overdraft programs or whether an opt-out mechanism is sufficient. The proposed rule deals solely with electronic fund transfers [ATM withdrawals and point-of sale (POS) transactions].  It does not address deposit manipulation or pre-transaction disclosure of potential overdrafts at ATMs and stores. 

The need for reform of overdraft fees is becoming more urgent as several government and independent reports and actions have recently confirmed:
In November 2008, the Federal Deposit Insurance Corporation released a study (PDF) of bank overdraft programs showing, among other things, that over 75% of surveyed banks automatically enroll their customers in an overdraft program and some do not allow customers to opt out.
In January, 2008 the nonpartisan Government Accountability Office (GAO) released a report (PDF) showing that consumers are not told about, and can’t avoid, many overdraft fees.
In 2007, the nonpartisan Center for Responsible Lending LINK released a report (PDF) showing that customers are paying $17.5 billion annually in fees for overdrawing their bank accounts, up 70% from the $10.3 billion they paid in 2004.