[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
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                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 11, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-49

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina       PAUL E. GILLMOR, Ohio
GARY L. ACKERMAN, New York           TOM PRICE, Georgia
BRAD SHERMAN, California             RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          DEBORAH PRYCE, Ohio
DENNIS MOORE, Kansas                 MICHAEL N. CASTLE, Delaware
4PAUL E. KANJORSKI, Pennsylvania     PETER T. KING, New York
MAXINE WATERS, California            EDWARD R. ROYCE, California
JULIA CARSON, Indiana                STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas                WALTER B. JONES, Jr., North 
CAROLYN McCARTHY, New York               Carolina
JOE BACA, California                 JUDY BIGGERT, Illinois
AL GREEN, Texas                      SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
LINCOLN DAVIS, Tennessee             J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
KEITH ELLISON, Minnesota             STEVAN PEARCE, New Mexico
RON KLEIN, Florida                   RANDY NEUGEBAUER, Texas
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 11, 2007................................................     1
Appendix:
    July 11, 2007................................................    25

                               WITNESSES
                        Wednesday, July 11, 2007

Cunningham, Mary, President & CEO, USA Federal Credit Union, on 
  behalf of the Credit Union National Association................    15
Feddis, Nessa, Senior Federal Counsel, American Bankers 
  Association....................................................    11
Fox, Jean Ann, Director of Consumer Protection, Consumer 
  Federation of America..........................................    17
Halperin, Eric, Director, Washington Office, Center for 
  Responsible Lending............................................     5
Ireland, Oliver I., Partner, Morrison & Foerster LLP.............     7
Ludwig, Sarah, Executive Director, Neighborhood Economic 
  Development Advocacy Project...................................    13
Wu, Chi Chi, Staff Attorney, National Consumer Law Center........     9

                                APPENDIX

Prepared statements:
    Maloney, Hon. Carolyn........................................    26
    Carson, Hon. Julia...........................................    29
    Cleaver, Hon. Emanuel........................................    30
    Cunningham, Mary.............................................    33
    Feddis, Nessa................................................    40
    Fox, Jean Ann................................................    56
    Halperin, Eric...............................................    67
    Ireland, Oliver I............................................    78
    Ludwig, Sarah................................................    89
    Wu, Chi Chi..................................................    94


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                        Wednesday July 11, 2007

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Carolyn B. 
Maloney [chairwoman of the subcommittee] presiding.
    Members present: Representatives Maloney, Moore, Green, 
Clay, Miller, Scott, Cleaver; Gillmor, Price, Hensarling, and 
Garrett.
    Chairwoman Maloney. This hearing will come to order.
    I would like to welcome my colleagues and to welcome all of 
the witnesses and thank them very much for being here today, 
for their time and for their expertise, and for their 
testimony.
    As a New Yorker, I am keenly aware of the many services 
financial institutions and credit unions provide their 
customers.
    Banking is my home town industry, from New York City, and I 
want it to grow and prosper.
    I appreciate that banking in the United States is more 
accessible, affordable, and efficient than perhaps any other 
place in the world.
    In my view, banks should be able to charge for their 
services, including the service of overdraft protection, but 
consumers, individuals should have notice of this charge ahead 
of time, and the opportunity to reject the transaction before 
incurring the charge. It's that simple.
    Hidden overdraft fees are unfair, and fairness is an 
important component of a safe and sound banking system.
    Customers should be told when they are about to take out 
more money than they actually have, and customers should be 
able to choose if they want overdraft protections or if they 
would rather not pay the fees and not have the transaction.
    Customers should be given information about how much 
overdraft protection plans cost so that they have the 
opportunity to compare the cost to other forms of overdraft 
protection, such as linking their checking account to their 
savings account or opening a line of credit.
    These are commonsense, almost due process principles, and 
they are the basis of the bill that I have reintroduced in this 
Congress with Chairman Frank, H.R. 946, the Consumer Overdraft 
Protection Fair Practices Act.
    Not surprisingly, the data shows that consumers 
overwhelmingly want what this bill provides. They want to know 
if they are going to pay an overdraft fee, and to be able to 
cancel the transaction if they do not wish to pay more.
    According to a report released today by the Center for 
Responsible Lending, overdraft fees accounted for $17.5 billion 
in 2006, an increase of 75 percent from the $10 billion 
annually that the CRL calculated banks made on overdraft fees 
in 2004, and again, I am speaking about numbers that were in 
the Center for Responsible Lending's report that they issued 
today.
    Again, my concern is not that banks shouldn't charge for 
this service. I think they have every right to charge for 
services that they provide the public. But consumers should 
have the right to decline the service and the fee if they do 
not wish to have this service.
    This bill is modeled on my successful initiative to require 
disclosure of ATM fees. Everyone is now perfectly comfortable 
with the ATM notices that tell you that you may be charged a 
fee for using the ATM.
    Lots of us use ATMs happily every day. I am very 
appreciative of the ability to withdraw money in Washington 
from my New York account, and I feel the fee that I opt-in to 
pay is very fair. Yet, it is my decision to do so.
    When that legislation was first introduced, there was 
tremendous opposition to it. What some in industry seem to be 
saying is that they just do not want to tell the public how 
much you have in your account, so they can't tell you if you're 
going to be overdrawn or not. This strikes me as straining 
credibility.
    First, at most ATMs, you can ask for your balance. That's 
part of the service that they provide.
    Secondly, not so long ago, if a customer asked an ATM for 
more money than they had in their account, the ATM machine 
would simply say no and announce that you were about to 
overdraw, and if you wrote a check for more than you had in 
your account, it would bounce. This was a service that used to 
be there, and many people still mistakenly think that it is 
still the case.
    What I basically want to say is that I believe very 
strongly in notice, and in the free market process, but I feel 
that consumers, customers should be notified about a fee or a 
service and they should have a chance to decide whether they 
want to pay that fee or have that service.
    I feel that it is balanced and that it is fair, and I have 
submitted this legislation, and I look forward to the comments 
of my colleagues and the witnesses today on this particular 
approach.
    I thank you all for coming and I yield to my colleague, and 
ranking member, Mr. Gillmor.
    Mr. Gillmor. Thank you very much, Madam Chairwoman.
    I want to thank the chairwoman for calling this hearing to 
examine recent trends in the use of overdraft protection plans. 
This is an issue that I think does deserve committee 
consideration. Over the years, the financial services industry 
has evolved dramatically. Consumers today are presented with 
many options to manage their money.
    Whereas just a decade or so ago, most bank accounts 
required a maintenance fee, today the vast majority of banks no 
longer charge one, and during this evolution, consumers were 
also moved away from the historic overdraft protection in which 
the bank offered overdraft coverage only to those customers 
that it subjectively believed to be reliable.
    Currently most consumers have the ability to have their 
bank account protected in some form or another.
    Also, some consumers, under recent Federal guidance, have 
the ability to opt-out of this type of protection.
    There is little doubt that some Americans are unable to 
responsibly handle the financial services available to them. 
That being said, I do not believe this is a reason to eliminate 
products from the market.
    The vast majority of consumers with overdraft protection on 
their checking accounts use the protection occasionally or 
never. It is a benefit to them.
    A small minority of consumers, however, repeatedly use the 
product as a short-term loan.
    This is unfortunate and I think it calls for greater 
consumer education to prevent that, and I look forward to 
hearing from the industry what solutions are in place for those 
consumers who fall into this habit.
    With that, I yield back the balance of my time and I thank 
you for calling this hearing.
    Chairwoman Maloney. I grant 3 minutes to Congressman Green.
    Mr. Green. Thank you, Madam Chairwoman, and I thank the 
ranking member as well, and the witnesses who are appearing 
today.
    This is an important hearing, because it impacts a lot of 
persons who obviously are not among those who have the most 
money, because if they were, they wouldn't have some of these 
fees attached to their accounts.
    So I thank you for being here. I'm looking forward to what 
you have to say in terms of testimony.
    I approach this with an open mind and look forward to the 
questions that will follow after we've heard your comments.
    I yield back the balance of my time.
    Chairwoman Maloney. The Chair recognizes Congressman Price 
for 3 minutes.
    Mr. Price. I thank the chairwoman, and I want to thank the 
chairwoman and the ranking member for holding this important 
hearing on really what I see as an important issue of overdraft 
protection.
    Thanks to thoughtful amendments to Regulation DD, and 
interagency guidance since 2002, consumers are now provided 
with uniform and adequate disclosure information concerning 
bounced checks and courtesy overdraft protection services. This 
has allowed consumers to continue to enjoy what has become an 
increasingly fast, accessible banking system.
    The benefits these programs provide is that consumers will 
avoid a merchant's returned check fee and will stay in good 
standing with those with whom they do business.
    Many consumers already realize the importance of this 
protection because most have been charged a fee by their bank 
for inadvertently exceeding their overdraft limit, and I don't 
believe it's necessarily limited to those with lower financial 
means. I suspect that this runs the gamut across our society.
    Many banks, as well as savings and loans and credit unions, 
indeed offer courtesy overdraft protection or bounce coverage 
plans so that the checks do not bounce, and individuals' ATM 
and debit card transactions go through, and with these plans, 
people obviously still pay an overdraft fee or bounce coverage 
fee to the bank or credit union or savings and loan for each 
item.
    This is a service provided by the banks and the credit 
unions to their valued customers, but it may be one that costs 
them money. It certainly does cost them money, which is then 
appropriately charged to the consumer.
    We may hear today from some witnesses and other members 
that there needs to be a legislative solution to overdraft 
charges for consumers.
    It strikes me that Congress needs to be very careful when 
wading into the marketplace because overreaching on our part 
with legislation would very possibly cause banks and credit 
unions to stop offering overdraft protection as a product and I 
doubt that anyone here today wants that.
    I, for one, don't want to have to go back home to my 
constituents and explain why their bank no longer is offering 
them overdraft protection.
    I do have a number of questions and I hope to be able to 
stick around for the question and answer period, but one I'd 
like to hear the entire panel's thoughts on, my understanding 
is that under many loan terms, a failure to pay for which a 
bounced check would qualify often makes the loan due.
    For example, if you fail to make a car loan payment, that 
would likely make the car loan due. Wouldn't that, isn't that 
more expensive and burdensome to consumers than a market-driven 
overdraft fee?
    And I would ask you to consider giving an opinion about the 
unintended consequences of meddling in this area.
    I want to thank the entire panel for coming. I look forward 
to your testimony and to the Q&A period, and I yield back the 
balance of my time.
    Chairwoman Maloney. The Chair recognizes Mr. Scott from 
Georgia for 3 minutes.
    Mr. Scott. Thank you.
    This is a very important hearing. Overdraft fee protection 
is very important, and we hear a lot of complaints about it 
from consumers.
    Banks have their challenges in terms of whether or not they 
have the technology in place to do it at the right time and 
under the right circumstances. And I understand the importance 
of personal responsibility of one's financial life, very 
important.
    There are certain practices, however, occurring in the 
industry that do seem to be misleading and could be interpreted 
as being unfair.
    For example, I think it would be good for us to discuss 
today why most banks are not automatically warning, or rather 
most banks are not allowing a transaction to go through when a 
customer does not have the sufficient funds. That's sort of at 
the core of the matter.
    The bank knows there are not sufficient funds there. Why 
would you let the transaction go through anyway, and especially 
when we know that there's a fee being paid for that overdraft?
    In other words, are we in the banking industry trying to 
make money off of the fact that the person doesn't have the 
money there, and the bank knows the person doesn't have the 
money there, so why couldn't there be an automatic warning to 
that effect?
    And believe me, I'm not here to beat up on banks, because 
they have their challenges, and for the most part really are 
doing a very important job and providing an extremely important 
service.
    However, I do want to express concerns regarding the fact 
that many banks have claimed one of their most profitable 
services is, in fact, overdraft lending, especially just at the 
residential mortgages.
    This is an area that I think we really need to examine 
very, very closely, for when a customer sees his statement that 
says, ``Your funds have not yet cleared,'' this can be 
frustrating, and further, receiving a clear answer from the 
bank is often quite difficult.
    So, Madam Chairwoman, I think this is a very important and 
timely hearing, and I look forward to exploring that central 
question further as we go forward, which I think gets to the 
core of the matter.
    Thank you.
    Chairwoman Maloney. The gentleman's time has expired.
    We have a distinguished panel today:
    Mr. Eric Halperin, director of the Washington Office of the 
Center for Responsible Lending;
    Mr. Oliver L. Ireland, who is a partner of Morrison & 
Foerster, and was formerly an attorney with the Federal 
Reserve, the Associate General Counsel;
    Ms. Chi Chi Wu, staff attorney for the National Consumer 
Law Center;
    Ms. Nessa Feddis, senior Federal counsel for the American 
Bankers Association;
    Ms. Sarah Ludwig, executive director of Neighborhood 
Economic Development Advocacy Project--a New York based 
organization that helps low and moderate income people with 
their credit concerns;
    Ms. Mary Cunningham, president and CEO, USA Federal Credit 
Union, on behalf of the Credit Union National Association;
    And Ms. Jean Ann Fox, director of consumer protection, 
Consumer Federation of America.
    I thank all of you for coming.
    Mr. Halperin.

STATEMENT OF ERIC HALPERIN, DIRECTOR, WASHINGTON OFFICE, CENTER 
                    FOR RESPONSIBLE LENDING

    Mr. Halperin. Chairwoman Maloney, Ranking Member Gillmor, 
and members of the committee, thank you for holding this 
hearing and bringing to light an abusive banking practice that 
now costs Americans $17.5 billion a year.
    I serve as the director of the Washington office of the 
Center for Responsible Lending, a nonprofit research and policy 
organization that is committed to protecting family wealth.
    We're also an affiliate of Self-Help, which has a nonprofit 
loan fund and a credit union.
    Today I will summarize CRL's research on overdraft loans 
and offer our strong support for H.R. 946.
    H.R. 946 will make a simple, yet powerful improvement in 
the marketplace by giving consumers important information and 
also providing them the opportunity to choose whether or not to 
take out a high-cost overdraft loan.
    Common banking practices now increase the number of 
overdrafts rather than minimize them, and can cost account 
holders hundreds of dollars in a matter of hours.
    Under the old system, fees were primarily assessed to 
discourage overdrafts. If a customer wanted their overdrafts 
regularly covered, they arranged to have a line of credit or a 
transfer from a savings account to cover those overdrafts. Now, 
banks automatically enroll people in an overdraft loan program.
    When a customer who is an overdraft loan program goes to 
make a purchase, for example, in a store, for $20, with their 
debit card, even if they only have $5 in their account, the 
bank will now let that transaction go through, where in the 
past they would have perhaps denied that transaction without 
charging a fee. They do not warn. And then they extend the 
customer a loan of $15, for a fee of $34. That loan is repaid 
automatically when the customer's next deposit hits their 
account.
    As I mentioned this morning, we released a report putting 
the cost of overdraft loans at $17.5 billion a year. In a 
system that is enormously out of balance, that $17.5 billion in 
fees is only for $15.8 billion in credit extended. The loan 
fees are more than the amount that people are borrowing. And 
most of that $17.5 billion is paid by low and middle income 
families.
    In a 2006 CRL report, we found that just 16 percent of the 
overdraft users pay 70 percent of the fees. There is a small 
group of users that pay almost all the fees, and those users 
are more likely to be low and middle income families.
    And it is no longer about the check, although these systems 
started by primarily focussing on covering a paper check. Now, 
ATM and debit card point-of-sale transactions account for 
almost half of all transactions that trigger an overdraft.
    This shift, a dramatic shift in the market, occurred since 
2003 or 2004, when it was estimated that 80 percent of 
financial institutions would not routinely cover overdrafts 
through debit cards.
    Debit card overdrafts are also extremely expensive for 
consumers. Because the transaction amounts for debit card 
purchases are often very small, consumers end up paying 
approximately $2 in fees for every dollar of credit they get 
when they do a debit card overdraft.
    This accounts for $7.8 billion in fees paid per year, and 
these fees are easily preventable, either with a warning or a 
return to the system where those transactions were denied 
without a fee being charged unless the consumer had chosen 
ahead of time, affirmatively made the choice ahead of time to 
enroll in a program such as a line of credit or a transfer from 
savings that would allow their overdrafts to be covered.
    H.R. 946 provides a straightforward and commonsense 
solution to many of these abuses. Truth in Lending Act coverage 
will give the consumers the important information they need to 
make a decision.
    Requiring that a consumer give their written consent to 
participate in these programs will ensure that a consumer is 
making the decision about participating in the most expensive 
credit program that their bank offers.
    Providing a warning at the ATM and on a debit card purchase 
before an overdraft occurs will ensure that the consumer 
decides whether they want to pay $33 for a cup of coffee.
    And finally, prohibiting financial institutions from 
manipulating the order of checks when they come into their 
account, changing the order into the largest check clearing 
first to the smallest, will prevent consumers from needlessly 
paying overdraft fees merely because their bank changed the 
order in which their checks were processed.
    Thank you again for inviting us in to testify, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Halperin can be found on 
page 67 of the appendix.]
    Chairwoman Maloney. Mr. Ireland.

 STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER 
                              LLP

    Mr. Ireland. Thank you, Chairwoman Maloney, Ranking Member 
Gillmor, and members of the committee.
    My name is Oliver Ireland, and I'm a partner in the 
financial services practice of Morrison & Foerster here in 
Washington.
    I have over 30 years experience in financial services 
issues, over 25 of those years with the Federal Reserve system, 
and 15 years as an Associate General Counsel with the Board 
here in Washington. Since the year 2000, I've been in private 
practice.
    I have to say that the issue that has probably occupied 
more of my attention during those 30 years than any other 
single issue has been payment practices, including overdraft 
practices, overdraft practices ranging from retail overdrafts 
to overdrafts by banks at Federal Reserve banks and even 
overdrafts by Federal agencies at Federal Reserve banks.
    I share your aspirations, Chairwoman Maloney, for payment 
systems that deal in real time, final funds, so everybody knows 
what their account balance is and can make informed decisions 
about it at the time they do a transaction.
    Unfortunately, that's not the world we live in today. It's 
not the world we've lived in in the past. And I think it's 
still a ways away.
    Overdrafts are a fact of life in the payment process. 
Businesses incur overdrafts. Banks incur overdrafts. High and 
low-income consumers incur overdrafts.
    The banks I've talked to that offer overdraft services to 
their customers tell me that those services are used across the 
economic spectrum, that they're not concentrated in any 
particular economic strata such as low or moderate income 
consumers.
    And as I indicated, even government agencies have been 
known to overdraw their accounts for short periods of time.
    Many of these overdrafts result because of imprecisions in 
the accounting and posting process, mail delays, all kinds of 
operational issues that arise in the payment process where 
people think they have money or should have money by a given 
point in time, but it's not yet available to cover payments.
    Banks have been providing overdraft services and paying 
overdraft services in order to deal with those kinds of 
problems for decades, and the reason they've done that is the 
importance of completing transactions in the real economy.
    The consequences of a failed transaction are not apparent 
to the bank who is processing the payment.
    Nevertheless, those consequences can be orders of magnitude 
larger than the amount of the transaction which itself may be 
orders of magnitude larger than the overdraft that would be 
created by completing the transaction.
    So banks have historically endeavored to pay overdrafts for 
their customers as a payment service associated with managing 
transaction accounts for their customers.
    To be sure, those products and that practice has been 
abused in the past.
    We have had dramatic examples of individuals who find out 
that their banks will accommodate those overdrafts and use them 
as a vehicle for short-term loans or even longer-term loans if 
they can hold off the bank's collection efforts.
    However, the principal focus of overdrafts in the banking 
system has historically been the making and completion of 
payments, rather than as a lending and credit vehicle.
    Today the overdraft process has become automated. It used 
to be a manual process. Payment processing itself is highly 
automated and is highly efficient.
    That automation in the overdraft process has made the 
ability to complete payments through overdrafts available to 
all bank customers or many bank customers that it was not 
available to before, where it was limited to select groups that 
may be known to individual bank officers.
    There are also significant consequences to making mistakes 
in the payment process.
    For these reasons, and the degree of automation, the policy 
options that are available for changing payment processes and 
current payment procedures have to be considered very 
carefully, and tend to be limited.
    I can remember when I was at the Federal Reserve and we 
were trying to put in effect our own overdraft payment process 
for Fed Wire transactions, which are large dollar corporate 
payments initiated by banks, and the Fed Wire software manager 
would sit in the room and we'd come up with a policy program to 
reduce overdrafts, and he'd say, ``You can't do it,'' he had to 
veto, simply because the operation wouldn't support it.
    Operations obviously can change.
    Chairwoman Maloney. The Chair grants the gentleman 30 
additional seconds. Your time has expired.
    Mr. Ireland. Operations can change, but I think it's going 
to be a difficult process.
    I would like to say, however, that I do think you've 
identified another important issue, and that is that fees for 
overdrafts can, which have been imposed, can often exceed the 
value of the service, and there needs to be some way to control 
those fees.
    Banking agency guidance today requires banks both to cap 
the fees and to give customers an opportunity to opt-out of 
overdraft payment.
    Thank you. I'd be happy to answer any of your questions.
    [The prepared statement of Mr. Ireland can be found on page 
78 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Ms. Wu.

STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL CONSUMER LAW 
                             CENTER

    Ms. Wu. Madam Chairwoman, Representative Gillmor, and 
members of the subcommittee, thank you very much for inviting 
me here today. I'm testifying on behalf of the low-income 
clients of the National Consumer Law Center.
    Madam Chairwoman, thank you for holding this hearing and 
for introducing H.R. 946. This bill will go a long way in 
addressing the abuses of overdraft loan programs, and 
unfortunately, these abuses are many.
    One of the abuses is that overdraft loans are one of the 
few forms of involuntary credit. They are ``crammed,'' or 
imposed on consumers who have not requested them. Consumers who 
don't want this form of credit are forced to actively contact 
their banks to opt-out.
    Some consumers may not be aware, until they overdraw their 
account, that they're accessing a high-cost credit product, 
especially true in the ATM or debit card context, where 
transactions that would overdraw an account were previously 
declined and no fee was imposed.
    Now, Mr. Ireland talked about how overdrafts are 
unavoidable, and implying so even in the ATM and debit card 
context.
    There may be accidental overdrafts, but what is the 
egregious and unconscionable practice is when a bank 
intentionally programs their computers to approve an ATM or 
debit card withdrawal when they know the transaction will 
overdraw the account.
    And to show that is happening, here is a statement from 
Bank of America in 2005:
    ``In our ongoing efforts to make banking easier with us, 
our goal is to authorize more transactions made using your ATM 
or check card, even if it creates an overdraft on your 
account.''
    This is not accidental. This is deliberate.
    Now, there has been an issue raised as to whether overdraft 
loans are a form of credit. They are unquestionably a form of 
credit. They are credit as defined under the Truth in Lending 
Act, the right to incur debt and defer its payment.
    When a bank lets a consumer use the banks' funds to pay for 
an overdraft and then requires the consumer to repay the bank, 
it's granting the right to incur debt and defer its payment.
    Regulator after regulator, from the OCC to State banking 
departments, including the Federal Reserve Board, have stated 
that overdraft loans are a form of credit, and even the Fed 
Wire overdrafts that Mr. Ireland talked about are considered a 
form of credit.
    Furthermore, when banks ``cram'' these overdraft loans onto 
banking accounts, it's a default product. They typically don't 
engage in any underwriting.
    Unlike traditional, affordable lines of credit, banks don't 
assess a consumer's ability to pay. They make sure these 
programs are profitable by charging huge fees, providing huge 
profit margins as well as covering any alleged risk.
    Now, despite the fact that overdraft loans are credit, 
banks don't need to make Truth in Lending disclosures. You see, 
in 1969, the Federal Reserve Board exempted overdraft fees from 
the definition of finance charge.
    This exemption was reasonable, maybe, in 1969, when all we 
had was the traditional bankers' courtesy of occasionally 
paying an overdraft on an ad hoc basis as a customer 
accommodation. But banks have exploited this exemption, 
creating high-cost, automated credit programs while avoiding 
Truth in Lending disclosures.
    Now, the Fed had the opportunity to close this gaping 
loophole and require Truth in Lending disclosures. Instead, the 
Fed chose to regulate them under the less effective Truth in 
Savings Act, which undermines the Truth in Lending Act's core 
purpose in promoting the informed use of credit.
    Without the APR disclosure required by Truth in Lending, 
consumers have no way to compare an overdraft loan to other 
credit transactions, such as a payday loan, an auto title loan, 
or a credit card cash advance.
    Under the Fed's regulation, the disclosed APR for a typical 
payday loan is 400 percent, but for an overdraft loan program, 
the lender can disclose that the account is actually earning 
interest under Truth in Savings.
    And under Truth in Lending, as well as for all practical 
purposes, ATM and debit cards that access overdraft loans are 
transformed into super-expensive credit cards.
    For example, this is a typical debit card. It even has a 
MasterCard logo on it. If my bank allows me to use its money to 
pay for purchases, what makes it different from other credit 
cards in my wallet, except for the steep fee?
    Now, by the way, I've heard some argument that it would be 
difficult to calculate an APR because the bank doesn't know how 
long in advance the loan is outstanding for.
    But you have the same issue with credit cards fees, like 
cash advance fees, and Congress built into the Truth in Lending 
Act a way disclose an APR for credit card fees.
    In fact, H.R. 946 actually deals with this issue and 
requires overdraft loan fees to be disclosed using a fee-
inclusive APR similar to credit cards.
    Finally, I want to talk about how overdraft loans can cause 
financial hardships when they seize Social Security or other 
Federal payments to repay them.
    Federal law is supposed to protect these benefits, and 
indeed, the only creditors that can touch them are the U.S. 
Government itself and banks when they take or offset protected 
Social Security and other benefits to pay for overdraft loans 
and fees.
    H.R. 946 would address many of the problems discussed today 
and prohibit the cramming of overdraft loans by requiring banks 
to obtain real consent. It would require Truth in Lending 
disclosures and it would require banks to warn consumers and 
give them an opportunity to cancel before an ATM or debit card 
transaction will overdraw an account.
    We thank you for the opportunity to testify and look 
forward to working with the chairwoman and other members of the 
subcommittee on H.R. 946. Thank you.
    [The prepared statement of Ms. Wu can be found on page 94 
of the appendix.]
    Chairwoman Maloney. Ms. Feddis.

  STATEMENT OF NESSA FEDDIS, SENIOR FEDERAL COUNSEL, AMERICAN 
                      BANKERS ASSOCIATION

    Ms. Feddis. Thank you.
    Madam Chairwoman and members of the subcommittee, my name 
is Nessa Feddis, and I am the senior Federal counsel for the 
American Bankers Association. I am pleased to be here today to 
represent the ABA on the issue of overdraft policies and 
practices of banks.
    As you note, Madam Chairwoman, the American consumers enjoy 
the most affordable, efficient, and accessible banking in the 
world. Consumers can open a checking account with a small 
deposit and have access to an entire menu of payment services 
at little or no cost. They can write checks, use debit cards to 
withdraw cash or make purchases, pay bills, and make funds 
transfers day or night, around the globe.
    In the best of all worlds, people would only write a check 
or make an electronic payment when there are sufficient funds 
in their account. Of course, this isn't a perfect world. For 
this reason, banks have traditionally accommodated customers 
when they inadvertently overdraw their account. Consumers value 
banks' practice of paying overdrafts. Indeed, they expect it.
    They avoid the embarrassment, hassle, costs, and other 
adverse consequences of having a payment returned or a 
transaction denied. Returning a payment for a merchant, for a 
mortgage company, a credit card company, usually means the 
consumer pays additional fees charged by the person receiving 
the payment.
    Consumers also value having debit card transactions 
approved even when there are insufficient funds. For example, 
many consumers would rather their deposit institution authorize 
the debit transaction than face the consequences of not being 
able to pay for a meal they've just consumed or the groceries 
that have already been rung up and bagged.
    Consumers are in control and can avoid overdraft fees. 
Keeping track of transactions is critical to overdrawing an 
account. This, of course, is not always a pleasant task, and 
most of us would like to avoid it altogether, but doing so is 
an important responsibility of using a transaction account.
    The bottom line is that consumers are in the best position 
to know what their actual balance is. Only they know which 
checks that they have written, automatic payments they have 
authorized, and debit transactions they have approved.
    However, even if individuals do not keep an accurate, up to 
date record of their transactions, it's easy for them to check 
their balance. They can check their balances by phone, at the 
ATM, online, or using the Internet browser on a phone or other 
handheld device.
    Customers who find it challenging to manage their accounts 
have other options available to them. Many simply maintain a 
cushion. Others establish a line of credit or arrange for 
overdrafts to be covered by automatic transfers from a savings 
account or to a credit card account.
    In addition, most banks permit customers to opt-out of 
having overdrafts authorized or paid.
    Banks will also often waive the fee for an initial or 
occasional overdraft. After the first incident, however, the 
consumer is then aware that debit card transactions, for 
example, may cause an overdraft.
    Of course, consumers dissatisfied with their bank's 
services have many other banks to choose from in a very 
competitive industry.
    The banking industry and regulators have been and will 
continue to be responsive to consumer concerns about overdraft 
fees.
    ABA, in March 2003, in a letter to members, urged caution 
with regard to overdraft practices, and following that, 
published extensive guidelines for best practices.
    In addition, in 2005, the banking agencies adopted their 
overdraft protection program guidance, which the industry 
adopted and fully supports.
    The Federal Reserve Board went further to address concerns 
about consumer understanding of the cost of overdrafts by 
amending the Truth in Savings Act's Regulation DD.
    We believe that the industry's initiative, along with the 
industry's guidance, and important changes to Regulation DD, 
have addressed concerns about overdraft protection programs.
    Madam Chairwoman, the ABA appreciates the opportunity to 
present our views on this subject. We believe that overdraft 
accommodation services are important to our customers and we 
will continue to work, as we've done in the past, to make sure 
that customers understand the responsibilities for tracking 
accounts, the fees associated with overdrafts, and the 
strategies to avoid them.
    I will be happy to answer questions that you or the 
subcommittee members may have.
    Thank you.
    [The prepared statement of Ms. Feddis can be found on page 
40 of the appendix.]
    Chairwoman Maloney. Thank you so much.
    Ms. Ludwig.

  STATEMENT OF SARAH LUDWIG, EXECUTIVE DIRECTOR, NEIGHBORHOOD 
             ECONOMIC DEVELOPMENT ADVOCACY PROJECT

    Ms. Ludwig. Chairwoman Maloney, Ranking Member Gillmor, and 
members of the subcommittee, thank you for holding today's 
hearing.
    My name is Sarah Ludwig, and I'm executive director of 
NEDAP, the Neighborhood Economic Development Advocacy Project, 
which is based in New York City.
    NEDAP believes that everyone has the right to live in a 
decent, safe, and thriving community, and that fair access to 
credit and financial services is key to ensuring a community's 
vitality and economic inclusion for all its residents.
    I'm here today to tell you about NEDAP's on-the-ground 
experience working with low-income New Yorkers who have been 
harmed by abusive overdraft loans.
    Through our extensive community financial education 
programs, as well as our consumer law hotline, we encounter 
people with problems with overdraft protection every day.
    I will also share with you New York State's recent 
experience with respect to deregulating bounce protection for 
State-chartered institutions and underscore why it is so 
crucial for Congress to enact legislation like H.R. 946.
    In the 11 years since NEDAP was founded, we've observed a 
dramatic shift in the nature and delivery of financial services 
in New York City and around the country.
    New York City neighborhoods that were historically cut off 
from access to fair and affordable financial services are now 
flooded with solicitations for high-cost, often fringe and 
predatory financial services and credit.
    We've all seen the advertisements: ``Bad credit? No 
problem.'' ``Need cash fast? Call us.''
    NEDAP therefore dedicates considerable resources to 
educating lower-income consumers on how to avoid abusive credit 
and asset stripping products and services, and how they can 
make sound financial choices and understand their rights as 
financial services consumers.
    It used to be a no-brainer for us to recommend to people 
who don't have bank accounts that they should go out 
immediately and get a bank or credit union account, but bounce 
protection blurs the lines between mainstream and fringe 
banking, and it can be a financial land mine for people living 
on limited means.
    Seeing the hardship that abusive overdraft protection has 
caused so many of our workshop participants and so many of our 
consumer law hotlines, NEDAP is now hard-pressed to recommend 
categorically that people open bank accounts. Too many people 
end up learning that their account has bounce protection the 
hard way, after they've overdrawn and fees have mounted.
    Routinely, they don't know that they have an overdraft 
protection feature on the account. They didn't apply for it. 
It's not disclosed, as it would be under H.R. 946.
    Many people believed they had sufficient funds in their 
account, understandably, because the transaction, either at the 
ATM or the point of sale, was approved.
    Many families have told us their accounts were closed 
because they could not afford to pay hefty bounce protection 
fees, which bear no relation to the amount overdrawn or to the 
risk to the financial institution.
    When bounce protection is triggered and an account is 
closed ultimately, if that happens, the information is reported 
to Check Systems, which is a reporting agency that tracks and 
sells information on a person's bounced checks, their debts 
owed to a bank, and any other so-called account mishandling.
    Check Systems functions effectively as a bank account 
blacklist, and NEDAP can cite numerous examples of low-income 
New Yorkers who are now blocked from opening a bank account 
because of past difficulties they've had with bounce 
protection, and it is next to impossible for account holders to 
opt-out of bounce protection or to get a bank to remove it if 
they request it.
    In my written testimony is a case example that I won't go 
into right now, but it's of a client of ours named David A., 
and I'll tell you just broadly that he is a man who is deaf, 
whose sole source of income is Supplemental Security Income, 
SSI, and he triggered bounce protection 2 years ago with a 
charge of $3.44 that he was unaware of, and didn't know until 
many weeks later, after he had a spiral of overdrafts, that he 
had in fact triggered this provision that he didn't know that 
he had. After many months of difficulty, he ended up with $1.83 
in his account and the account was closed for failure to 
maintain a positive balance.
    His account contained only his SSI benefits, income that 
should be statutorily protected and should not have been 
debited from his account to set off the overdraft charges. 
Again, this is more detailed in the written testimony.
    NEDAP supports passage of a law like H.R. 946, which would 
set a strong and sorely needed Federal standard.
    In 2005, the New York State Banking Board deregulated our 
State's longstanding prohibition against bounce protection as a 
defensive measure to retain State chartered banks that 
reportedly were threatening to give up their State charter and 
go for a national one so that they, too, could offer this 
lucrative product.
    Then-Superintendent Diana Taylor explained the New York 
State Banking Department's impending deregulation this way, and 
I quote:
    ``The ability of the federal banking regulators to preempt 
state law has increasingly meant that state regulators must 
choose between allowing their banks to do whatever federal 
regulators allow national banks to do or face the prospect that 
banks in the state will achieve the same result by simply 
switching to the federally regulated or national charter.''
    Chairwoman Maloney. The Chair grants the gentlelady 30 
additional seconds. Your time has expired.
    Ms. Ludwig. Thank you.
    H.R. 946 would halt this race to the bottom at the State 
level and fill the Federal regulatory vacuum we now face.
    In sum, during the debate over whether New York State 
should allow bounce protection a couple years ago, industry 
representatives stated that account holders were in fact 
clamoring for overdraft protection--I'm not talking about lines 
of credit, but the bounce protection and the courtesy 
overdraft--and that banks that offered it were simply 
responding to consumer demand.
    But they failed to produce any evidence to substantiate 
that consumers were clamoring for this bounce protection or 
this courtesy overdraft. On the contrary, whenever we explain 
it to people at consumer workshops, they tell us that they 
consider it an exploitative product, one to be avoided at all 
costs.
    The industry representatives failed to explain why, if 
consumers are so eager to have the product, it's tacked onto 
accounts without consumers' knowledge or consent, and why if 
they have consumers' best interests in mind, they market free 
checking accounts with bounce protection so aggressively to 
young people and others with low incomes whom they count on to 
overdraw.
    I look forward to answering any questions that you may 
have.
    [The prepared statement of Ms. Ludwig can be found on page 
89 of the appendix.]
    Chairwoman Maloney. The gentlelady's time has expired.
    Ms. Cunningham.

STATEMENT OF MARY CUNNINGHAM, PRESIDENT/CEO, USA FEDERAL CREDIT 
   UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION 
                             (CUNA)

    Ms. Cunningham. Chairwoman Maloney, Ranking Member Gillmor, 
and members of the subcommittee, thanks for holding this 
hearing on H.R. 946. My name is Mary Cunningham, and I actually 
work for a financial institution that handles these programs--I 
am president and CEO of USA Federal Credit Union in San Diego.
    I am here on behalf of CUNA, which is the Nation's largest 
credit union advocacy organization representing over 90 percent 
of the Nation's 8,800 State and Federal credit unions.
    We are predominantly a military based credit union, 
servicing 60,000 members. We operate a network of 23 branches, 
including 11 branches in Japan and Korea, all located on 
military installations.
    We provide a wide variety of financial services to meet the 
needs of our unique market, including low-cost payday loan 
alternatives, affordable mortgage products, small business 
services, this overdraft protection service, as well as many 
other things for the members.
    Madam Chairwoman, credit unions have long been involved in 
providing some form of overdraft or bounced check protection. 
However, these programs vary, due to the unique fields of 
memberships of credit unions. Many of these programs have 
changed over time in response to the members' needs and usage.
    Shortly after introducing our program in the fall of 2003, 
early results were, in fact, troubling; 26 percent of those 
using privilege pay were less than 25 years of age. For a 
military credit union, we considered this to be disturbing 
news.
    Forty-four percent of our users accessed the service 
between two and five times per month. Thirty-seven percent of 
these users were chronic overdrafters prior to implementation 
of the product. Once implemented, an additional 28 percent 
became chronic abusers.
    We also learned that roughly 75 percent of all of our 
overdrafts resulting in privilege pay were triggered by ATM 
activity.
    Credit unions have a rich history of providing a fair deal 
to consumers--low rates on loans, high savings rates, and 
modest fees. But instead of privilege pay being used as we had 
intended, a number of our members chose to use it as a no-
qualifying line of credit.
    For a member who lives paycheck-to-paycheck, these fees add 
up very quickly. Once a member maxed out his privilege pay 
limit, the next paycheck was automatically spent once 
deposited, thereby creating a downward spiral for the member. 
When that happens, we are no longer offering the fair deal. 
We're adding to his problems.
    To be fair, we've also received testimonials from members 
who were very grateful that the math errors in their checkbook 
didn't result in the embarrassment and expense of a returned 
check.
    So our challenge was this: How do we offer a sensible 
product that members can rely on to save them the embarrassment 
of having a check returned, while at the same time ensuring 
that controls are put in place to help members to help 
themselves?
    We made several modifications to our product, many of which 
mirror the main points in your proposed legislation.
    Number one, our privilege pay product is offered to members 
at the time the checking account is opened, along with the 
transfer from savings option and the overdraft line of credit 
loan option.
    The member is informed that they will qualify for privilege 
pay after 30 days in good standing and aggregate deposits of at 
least $750, unless they choose not to have the service.
    Your bill would require members to proactively enroll in a 
program. They would be provided disclosures. Credit unions 
would agree with this.
    Number two, we follow a practice of liberally refunding 
fees while educating the members about the service. We also 
encourage members to opt-out if they decide they don't want the 
service. Free financial counseling is also made available.
    Number three, part of that education consists of explaining 
to members how the clearing process works. At our credit union, 
all items are cleared in ascending order by dollar amount with 
the smallest dollar amount being cleared first. We always post 
credits to the accounts first, and then debits. This helps to 
minimize the fees. Your bill would prohibit financial 
institutions from manipulating the process of posting these 
items to generate overdrafts and fee incomes. Credit unions 
would agree.
    Number four, we also inform the member that our system 
first attempts to transfer from savings, then to a line of 
credit overdraft loan, and then finally, to privilege pay as a 
last resort.
    While these programs are offered at the time the checking 
account is established, none are overtly marketed to members, 
which is consistent with your bill. Once again, credit unions 
would agree.
    Number five, when the member makes a withdrawal at an ATM, 
the actual balance is disclosed, not the available balance 
through privilege pay. We did ask our processor if a notice 
could be provided at the ATM warning the member that they were 
triggering privilege pay, but we were told this was 
unavailable.
    While I agree with your bill's recommendation that such a 
notice should be provided, I will tell you that few credit 
unions operate their own ATM networks, and would be unable to 
ensure compliance on their own, so I would encourage sufficient 
time for phasing in this provision to enable third party 
providers to make the necessary adjustments.
    Finally, your bill attempts to ensure that fees for 
privilege pay be conspicuously disclosed in a separate periodic 
statement with the calculation of the APR. Credit unions would 
agree and clearly support disclosure of all costs related to 
these programs.
    However, depending upon how that fee is defined and 
included in the APR calculations, it could easily exceed the 
credit union's statutory 18 percent--
    Chairwoman Maloney. The Chair grants the gentlelady an 
additional 30 seconds.
    Ms. Cunningham. --rate ceiling, and this would force most 
credit unions to stop providing this service.
    My written testimony would outline alternatives for your 
consideration.
    In summary, Madam Chairwoman, we view privilege pay as one 
of those programs that, like many things in life, can be a 
wonderful tool if the consumer uses it in the appropriate way, 
but also like many things, when taken to excess, it can 
certainly do damage to the consumer and add to their financial 
burdens.
    From our perspective, your bill would protect the interests 
and pocketbooks of consumers. Credit unions share this goal and 
applaud your efforts.
    Thank you very much. I'm available for questions.
    [The prepared statement of Ms. Cunningham can be found on 
page 33 of the appendix.]
    Chairwoman Maloney. Thank you.
    Ms. Fox.

  STATEMENT OF JEAN ANN FOX, DIRECTOR OF CONSUMER PROTECTION, 
                 CONSUMER FEDERATION OF AMERICA

    Ms. Fox. Chairwoman Maloney, Ranking Member Gillmor, and 
members of the subcommittee, I'm Jean Ann Fox, director of 
consumer protection for Consumer Federation of America, an 
association of 300 consumer groups who represent 50 million 
consumers.
    I appreciate this opportunity to speak in support of H.R. 
946, the Consumer Overdraft Protection Fair Practices Act.
    I make three main points in my testimony:
    One, consumers strongly oppose bank overdraft practices, 
according to national polls that CFA has conducted;
    Two, big banks charge high fees, they use tactics to cause 
more overdrafts, and they structure fees to trap consumers in 
debt;
    And three, the Federal Reserve is failing to protect 
consumers from abusive overdraft loans.
    We're not talking about your traditional overdraft 
protection that consumers apply for and qualify for, and that 
use the consumer's own money to cover the occasional overdraft.
    Your legislation will stop banks from operating as payday 
lenders, trapping their most vulnerable customers in a debt 
spiral while charging astronomical interest rates on short-term 
loans to consumers. A $100 overdraft repaid in 2 weeks at a $35 
typical overdraft fee translates to 910 percent annual 
interest.
    Consumers think that bank practices with overdraft loans 
are unfair. Almost 70 percent of consumers in a national poll 
told us that it is unfair for banks to permit overdrafts 
without obtaining their customers' consent. Eighty-two percent 
of consumers in the poll said it is unfair for banks to permit 
overdrafts without any notice at the ATM, and 68 percent of 
them--excuse me--63 percent of them said it was very unfair.
    Over 80 percent of the largest banks in the country have 
fine print in their account agreements that permit overdrafts 
for a fee. The 10 largest banks charge fees ranging from $20 to 
$35.
    The current average is $33.75 per overdraft, once you've 
done it more than a couple of times during a year. These fees 
have gone up over $5 in the last 2 years, so fees are on the 
increase.
    Bankers claim that fees are set high in order to deter 
misuse of bank accounts, but bankers have given their customers 
permission, and encourage them to overdraw their accounts, 
which removes this justification for such high fees.
    Banks also charge tiered fees, which adds to the debt trap 
for consumers. For example, Bank of America charges $20 for 
each of up to 5 overdrafts in a single day in the 12-month 
period. After that, if you overdraw, you'll pay $35 each for up 
to 5 overdrafts in a day, and it's easy to have 5 overdrafts if 
you've used your debit card as you've gone through the day.
    Many banks also charge sustained overdraft fees so that 
after you've been overdrawn for a few days, you'll start paying 
by the day. For example, First Third Bank charges $33 when you 
overdraw, and $6 a day until that overdraft is repaid.
    Banks continue to come up with more ways to charge 
overdraft fees. Bank of America just notified its customers 
that starting in August, customers will be charged for 
prospective overdrafts when pending debit transactions tied up 
customers' funds currently available in their bank account.
    Bankers also manipulate the order of processing deposits 
and withdrawals in order to maximize the number of transactions 
that trigger an overdraft fee.
    CFA's 2005 study of the 33 largest banks found that almost 
three-quarters of large banks either process withdrawals 
largest to smallest or reserve the right to do so. This 
processing order can result in multiple fees for consumers who 
are living paycheck-to-paycheck.
    For example, one bank's customer had a $100 check clear 
that he hadn't expected to go to the bank. It caused 8 small 
transactions totaling $50 to overdraw and triggered $264 in 
overdraft fees. If that bank had cleared smallest to largest, 
he would have only paid one $33 fee.
    Bankers justify their high to low check clearing practice 
by claiming that consumers want the largest payment to be 
processed first because it might be the mortgage or an 
important payment, so we asked consumers a few years ago 
whether they agreed with the bankers, and only 13 percent of 
them did.
    In our poll, 65 percent of--
    Chairwoman Maloney. The gentlewoman's time has expired.
    I grant the gentlelady 30 additional seconds.
    Ms. Fox. --our consumers think it's extremely unfair for 
banks to clear their transactions high to low.
    I promised you a third point.
    We believe that the Federal Reserve has failed to protect 
consumers from high-cost overdraft loans by failing to cover 
them in Truth in Lending and the other regulators have only 
enacted voluntary best practice guidelines that fail to protect 
consumers.
    We support your bill, and thank you for the opportunity.
    [The prepared statement of Ms. Fox can be found on page 56 
of the appendix.]
    Chairwoman Maloney. Thank you. Without objection, all 
members' opening statements will be made part of the record.
    And I would like to note that we've been called for a vote. 
It's estimated that this voting series will last one hour.
    So I yield to my colleague, Ranking Member Gillmor, to 
begin the questioning.
    Mr. Gillmor. I thank the chairwoman for her courtesy.
    In terms of, I think it was Ms. Ludwig said on education, 
and that's part of what you do, I think that is a very 
important thing, and if you had good consumer education, I 
think a lot of these problems would go away.
    I recently convened a meeting of a large group of Ohio 
financial institutions, regulators, and consumer groups to talk 
about the serious foreclosure problems we have in Ohio, and the 
conclusion of that meeting really surprised me, because all 
three of those groups said that the single most important thing 
you could do to prevent foreclosures would be better education, 
that those consumers who were counseled adequately before they 
got in the deal, didn't have foreclosures.
    And the other thing that came out was that disclosure is 
sometimes nondisclosure. They have so much disclosure in 
mortgages that it amounts to nondisclosure, because nobody 
reads an inch of paper, so it's not effective. So I just 
brought that up to follow up on what you had said.
    Let me ask Ms. Feddis, you state in your testimony that 
consumers want their overdraft checks paid and not returned to 
the merchant. Do you have any statistics or any proof on that?
    Ms. Feddis. Well, the Center for Responsible Lending back 
in February came out with a report that showed that 94 percent 
of people do want their overdrafts paid.
    The question was: Say you make a purchase and did not have 
enough in your checking account to cover it. Given the 
following choices, how would you want your bank to handle your 
overdraft? And it listed, you know, give me an overdraft line 
of credit, and 94 percent of people wanted their overdrafts 
covered.
    Mr. Gillmor. You also touched on in your testimony, and I 
want to follow up, in Ms. Fox's written testimony she said, 
``Deliberate bank practices and advances in technology make it 
harder than ever for consumers to keep track of the balance in 
their bank accounts to avoid overdrafts.''
    Would it also be true that those same advances make it 
easier for consumers to get real-time account updates, either 
by phone or by the Internet or even at their ATM machines?
    Either you or Ms. Feddis or both.
    Ms. Fox. I'm glad to answer the question.
    Consumers may be able to call or use the Internet to access 
their account balance, but the changes in technology that are 
causing problems for people is how fast money flies out of 
their checking accounts.
    A paper check is converted into electronic withdrawal at 
the cash register and the money is out of your bank before you 
get out the door of the store, or your check is converted to an 
electronic withdrawal that you mail in to pay some of your 
bills. So money flies out of people's bank accounts.
    When they pay with a debit card, some retailers put a hold 
on some of the money in their account for a few hours up to a 
few days, which can cause you to overdraft because you think 
you have money when, in fact, somebody else has a claim on it.
    The deposits that people make are still walking into their 
accounts at 1990's speed, because the check hold periods, the 
deposit hold periods have not been shortened to reflect 
increases in electronic processing. So there are a lot of 
things that are changing in the banking environment that make 
it hard for consumers to manage.
    Mr. Gillmor. Did you want to comment, Ms. Feddis, on that 
question?
    Ms. Feddis. Yes. I think that, just to talk a little bit 
about the payment systems, and transactions, we're not, as Mr. 
Ireland said, we're not at real time.
    The way most transactions are processed is using a batch 
processing method, and that is, after hours, the bank puts in 
all the deposits that have come in for the day and then they do 
the withdrawals.
    So the balance, there's a working balance, shall we call 
it, which is the balance that the bank is working with and the 
consumer is working with, and while it's not perfect, it is 
something the consumer can use to better understand what their 
balance is and whether they're going to overdraw.
    At the end of the day, only the consumer knows their 
balance. Only they know what checks they've authorized, what 
automatic payments they've scheduled, or even what debit cards 
that they have authorized. The transactions may not have come 
into the bank yet, and then when they finally do come in, it 
could cause an overdraft, but the bank won't necessarily know 
it at the time of the transaction.
    Mr. Gillmor. Just one more question, and that's on the 
issue of fees.
    I think there's a feeling among some that the fees tend to 
be higher with the bigger banks than the smaller banks, because 
they make a bigger effort to collect non-interest income.
    So I want to just ask Ms. Fox and Mr. Ireland if you have 
anything that substantiates that statement that I just--
    Ms. Fox. Yes, sir. We surveyed the 33 largest banks in 
2005. They control the majority of deposit dollars.
    Their average overdraft fee is higher than the average in, 
for example, bankrate.com, a fee survey which covered a lot 
more banks.
    And when we went back and compared the 10 largest banks 
overdraft fees for just 2 years ago and today, it has gone from 
$28 and about 40 cents up to $33.75, so they're higher than the 
small banks and they're growing fast.
    Mr. Gillmor. My time has expired, but maybe Mr. Ireland has 
a comment.
    Mr. Ireland. I'd just like to caution against looking at 
nominal fees as indicative of the bank's practice. Banks 
frequently waive fees and assess fees on a discretionary basis.
    And so whether or not that fee is charged for all 
transactions is also a component in the actual charge that the 
bank imposes on the consumer, and just looking at the 
statistics that were quoted won't tell you that component.
    I am not aware that on an overall basis, there's a marked 
difference between larger banks and small banks in that area.
    Chairwoman Maloney. The gentleman's time has expired.
    We will not be coming back after this vote. It's an hour 
period for a vote, followed by a Democratic caucus, so members 
will be offering questions in writing.
    I would just like to offer Mr. Halperin the opportunity to 
respond to Mr. Gillmor's question, since your report was 
mentioned, and then I would like to ask Mr. Ireland or Ms. 
Feddis, if there were no cost issues and no technological 
issues, would you still oppose giving consumers a warning at 
the ATM or point of sale that they would overdraw their account 
and that there would be a fee?
    But first, Mr. Halperin, I think, since your study was 
mentioned, you should be given an opportunity to respond to it.
    Mr. Halperin. Thank you, Chairwoman Maloney.
    Well, in response to that question, the question that was 
asked to consumers was, ``If you had a choice of having your 
overdraft covered or not, what would you prefer?''
    And if Ms. Feddis had kept reading down the answers, what 
would have been apparent is the vast majority of consumers 
would have preferred their overdrafts covered by a line of 
credit or a cash advance from a credit card if they had to have 
it covered from a credit product rather than a transfer from a 
saving account, not the fee-based overdraft programs that we're 
talking about today.
    And we also asked consumers, ``If you're at the checkout 
counter and you had a choice between--you had to make the 
choice ahead of time whether your transaction would always go 
through and you'd be charged a fee with your debit card or 
would it always be denied and you'd be charged no fee,'' 61 
percent of consumers always wanted it denied.
    And then the final piece of information on consumer 
preference, which I think is important to have out today, is we 
asked consumers that, ``If you were at an ATM and you received 
a warning that you were going to overdraft, would you accept 
that fee all the time, never, or would it depend?'' And 84 
percent of consumers said they would always reject the 
transaction at the ATM and not take money out if they were 
going to be charged a fee.
    Thank you.
    Chairwoman Maloney. Ms. Feddis and Mr. Ireland.
    Ms. Feddis. One thing about surveys is we tend to respond 
to them in what we would hope to do rather than what we would 
actually do.
    I think most people, if you said, ``Are you going to eat 
the fruit or the ice cream with the chocolate syrup,'' we'd 
say, ``Oh, no, the fruit,'' but then when it was put in front 
of us, we might actually falter. And with ATM transactions and 
overdrafts, that's exactly what we found.
    A couple of banks have piloted programs where they make the 
disclosure at their own ATM, because they can't do it 
elsewhere, and one bank reported that three-quarters of people 
proceeded with the transaction.
    Now, that's different from a point-of-sale transaction, 
where I think we would find a larger percentage approving the 
transaction, because at that point, you've already consumed the 
meal, the groceries are bagged, the kids are crying, the ice 
cream is melting, the barber has already cut your hair. You 
want them to proceed with the transaction.
    Plus, unlike an ATM transaction, it's not an anonymous 
transaction. You're actually looking at somebody in the face 
and saying, ``Oops, I don't have enough money.'' And it's 
embarrassing.
    And so in many cases, while we would hope never to overdraw 
our account, we do.
    But on your other question--
    Chairwoman Maloney. So if you would clarify, from what 
you're saying, I don't want to put words into your mouth, but 
it appears that you would not object to notice to consumers to 
allow them to make a decision whether they want to pay a fee or 
not or--
    Ms. Feddis. We would not, absent the prohibitive costs, we 
would not, but of course--we would not object to the 
disclosure, no, we would agree that disclosure would be better.
    Chairwoman Maloney. So then, do you support the bill?
    Ms. Feddis. Again, it goes down to the cost prohibitiveness 
of the technological challenges. I don't know how much time you 
have. I don't want to--
    Chairwoman Maloney. So if there were no cost issues, and 
there were no technological challenges, then you would support 
the bill?
    Ms. Feddis. As long as there were some exceptions. There 
are still exceptions, for example, there are some places where 
it probably isn't feasible.
    Let's use the example of some emerging developments where 
consumers could use their--
    Chairwoman Maloney. Just a yes or no. If there were no cost 
issues--
    Ms. Feddis. With some exceptions--
    Chairwoman Maloney. --and no technological problems, you 
would support the bill, the notice to consumers?
    Ms. Feddis. The notice to consumers, we would support, so 
long as there were some exceptions, for like the process just 
announced in New York with the New York and New Jersey PATH 
railway, where it's a tap and go card. You probably couldn't 
have a screen. You wouldn't want the delays, because that would 
halt traffic. So you'd have to have some flexibility.
    Chairwoman Maloney. Mr. Ireland, would you like to comment?
    Mr. Ireland. I'm in favor of informed choice for consumers, 
and if I could get there without costs and operational 
problems, I'd love to get there.
    There are--the world we live in has costs and operational 
problems.
    Some of them are--you know, the subway system potential as 
to how you're going to exercise the choice in the line, and the 
balance issues are going to be ongoing, and even if you know 
the balance, quite frankly, I'd go beyond the bill, even if you 
know the balance now and you're going to do an ATM transaction, 
you ought to know how that's going to affect other transactions 
in process, so you can choose which one you want to do.
    If we could get there, I'd love it.
    Chairwoman Maloney. I thank everyone for their testimony. 
I'm afraid I'm going to miss a vote if I don't leave. I've 
really enjoyed learning from you today, and I look forward to 
continuing this dialogue.
    And I would like to note for the record that members may 
have additional questions for this panel which they may wish to 
submit in writing, and without objection, the hearing record 
will remain open for 30 days for members to submit written 
questions to these witnesses and to place their responses in 
the record.
    Again, I thank you for your expertise and your time, for 
being here today, and for your testimony.
    Thank you. The hearing is adjourned.
    [Whereupon, at 3:09 p.m., the hearing was adjourned.]















                            A P P E N D I X



                             July 11, 2007

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