On July 28, the U.S. House Committee on Financial Services passed H.R. 4277, the Overdraft Protection Act. Introduced by Congresswoman Carolyn B. Maloney (D-NY), the bill would prohibit financial institutions from engaging in unfair or deceptive acts or practices in connection with overdraft coverage.
Specifically, the bill would require financial institutions that offer overdraft coverage for accounts to disclose: (i) the specific amount of overdraft coverage fees; (ii) that the consumer’s transaction may be declined if there are insufficient funds in the account; and (iii) that the consumer will not be charged a fee if the transaction is declined. The bill also requires prompt notice of an account’s overdraft status, limits the number of overdraft coverage fees a consumer may be charged in a given month and year, requires that such fees be reasonable, and prohibits a fee if the overdraft results solely from a debit hold amount that exceeds the actual dollar amount of the transaction. Finally, the bill further restricts financial institutions from charging a NSF fee for any ATM or debit transaction and from reporting negative information regarding consumer use of overdraft coverage to any consumer reporting agency when the overdraft amounts and coverage fees are paid under the terms of an overdraft coverage program.
Consumer advocacy groups praised the passage of the “commonsense” bill, deriding overdraft coverage as “abusive” and urging the House to pass the legislation, while industry groups attempted to “correct the record,” noting that the bill would dramatically restrict access to overdraft protection, a product millions of consumers “knowingly use, value, and count on in times of need” and rely upon to cover short-term gaps in finances at little to no cost.
In a recent op-ed in American Banker, the President & CEO of the Consumer Bankers Association, Lindsey Johnson, urged policymakers to oppose the legislation and recognize the impact of recently unveiled bank-led overdraft innovations. Johnson noted that, while the banking industry has changed dramatically from the introduction of the first iteration of the bill in 2009, the bill’s language has remained static and fails to address the realities faced by contemporary consumers. As an example, the CBA explained in a recent letter to the House Committee on Financial Services that banks “have made significant changes to their overdraft products” since the first iteration of the bill was introduced referencing the implementation of an “opt-in requirement” and various other disclosures beginning in 2010. Other bank-led changes include: significant reduction or elimination of overdraft fees; elimination of account transfer fees to coverage overages; de minimis exceptions to cover small overages; grace periods for customers to make accounts whole before overdraft fees are assessed; elimination of extended overdraft fees; and elimination of returned items fees.
Citing numerous industry examples, Johnson explained that banks are offering increasing flexibility in their products to meet consumer demand and emphasizing choice in an increasingly competitive marketplace, all of which inures to the benefit of consumers, including because overdraft coverage “remains one of the few short-term liquidity products available to consumers within the well-regulated, well-supervised banking system.”
Indeed, Johnson says, the CFPB has even recently acknowledged that “changes in overdraft program settings and in other checking account policies are making meaningful difference in the amount consumers incur in various fees while using their checking accounts at their banks.” Limiting consumer access to overdraft, as Johnson argues the bill would certainly do, “only pushes Americans to meet their needs through less desirable and higher costs venues outside of the highly regulated banking industry” which only harms consumers in the long term.
Faced with a looming vote by the full House, the bill underscores the industry’s need to conduct a thorough review of its policies and procedures relating to overdraft coverage with the assistance of legal counsel.