WASHINGTON — Bank customers who overdraw their checking accounts would get new protections from excessive penalties under legislation proposed Monday by the Senate banking committee chairman.
The measure unveiled by Sen. Christopher Dodd, D-Conn., would give people a choice in whether they want to participate in overdraft programs that charge fees for covering ATM withdrawals and debit card transactions.
Most banks now automatically enroll customers in overdraft programs. That means that a sale will go through if a person spends more than is in his account, but the customer will be hit with a fee, usually in the $25 to $35 range even if the overdraft is just a few dollars.
The unwary customer who makes several overdrawn purchases in a day could be charged a $35 penalty for each purchase.
Several major banks, in anticipation of congressional action, have already said they will start letting people opt out of overdraft programs. Some have also said they will lower their fees.
Dodd cited estimates that banks stand to collect a record $38.5 billion in fees for customer overdrafts this year.
"At a time when many can afford it least, American consumers are being hit with hundreds of dollars in penalties for overdrawing on their account by just a few dollars," he said in a statement. "Banks should not be trying to bolster their profits at the expense of their customers."
Dodd's bill would:
— Require banks to get customers' consent before enrolling them in an overdraft protection program for ATM and debit card transactions.
— Limit the number of overdraft fees banks can charge to one per month and six per year.
— Require that fees be proportional to the cost of processing the overdraft.
— Require customers be notified, by e-mail, text or traditional mail, when they overdraw their account.
— Require that customers be warned if an ATM or teller transaction will overdraw their account.
The bill also bars banks from issuing negative reports to consumer credit report agencies if an overdraft fee is paid under the terms of the program.
The overdraft proposal would follow similar legislation enacted into law last spring to protect consumers from high interest and penalty fees charged by credit card companies. Congress is also trying to craft legislation to increase consumer protections for financial transactions.
"Taxpayers helped stabilize the financial services industry. Big banks should not return the favor by slamming consumers with billions of dollars in overdraft fees," said Sen. Sherrod Brown, D-Ohio, who co-sponsored the legislation with Sens. Jack Reed, D-R.I., and Charles Schumer, D-N.Y. Brown said Ohio consumers paid nearly $900 million in overdraft charges last year.
Rep. Carolyn Maloney, D-N.Y., has introduced similar legislation in the House.
Dodd noted that last month, after he announced he was drafting the bill, three major banks — JPMorgan Chase, Bank of America and U.S. Bank and Wells Fargo, said they would undertake what Dodd said were "moderate" changes in their overdraft programs.
Bank of America said that, as of Monday, it won't charge an initial fee for overdrafts under $10. A customer could still get charged the $35 fee for not bringing the account into balance within five days.