[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE OVERDRAFT PROTECTION ACT OF 2009
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-89
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55-815 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
October 30, 2009............................................. 1
Appendix:
October 30, 2009............................................. 53
WITNESSES
Friday, October 30, 2009
Blaine, Jim, President, North Carolina State Employees Credit
Union.......................................................... 14
Bloom, Ellen, Director, Federal Policy and Washington Office,
Consumers Union................................................ 17
Colley, Mark A., President and Chief Executive Officer, Tulsa
Postal & Community Federal Credit Union, on behalf of the
National Association of Federal Credit Unions (NAFCU).......... 19
Dollar, Dennis, Principal Partner, Dollar Associates, LLC........ 16
Feddis, Nessa, Vice President and Senior Counsel, Center for
Regulatory Compliance, American Bankers Association (ABA)...... 7
Fox, Jean Ann, Director, Financial Services, Consumer Federation
of America (CFA)............................................... 6
Halperin, Eric, Director, Washington Office, Center for
Responsible Lending............................................ 9
Hunt, Richard, President, Consumer Bankers Association (CBA)..... 21
Ireland, Oliver I., Partner, Morrison & Foerster LLP............. 13
Menzies, R. Michael S., Sr., President and Chief Executive
Officer, Easton Bank and Trust Company, on behalf of the
Independent Community Bankers of America (ICBA)................ 22
Staatz, Rodney, President and Chief Executive Officer, State
Employees Credit Union of Maryland (SECU), on behalf of the
Credit Union National Association (CUNA)....................... 11
APPENDIX
Prepared statements:
Blaine, Jim.................................................. 54
Bloom, Ellen................................................. 58
Colley, Mark A............................................... 85
Dollar, Dennis............................................... 99
Feddis, Nessa................................................ 105
Fox, Jean Ann................................................ 114
Halperin, Eric............................................... 136
Hunt, Richard................................................ 150
Ireland, Oliver I............................................ 158
Menzies, R. Michael S., Sr................................... 167
Staatz, Rodney............................................... 176
THE OVERDRAFT PROTECTION ACT OF 2009
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Friday, October 30, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 9:41 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Maloney, Green,
Cleaver, Ellison, Perlmutter, Himes; Bachus, Royce, and Posey.
The Chairman. There is a very plausible reason that I am
late: I am getting forgetful. And I am sorry. I got engrossed
in something else. I apologize.
You honor us by coming here on a Friday. I feel badly and I
am sorry.
We will begin with our opening statements. We will have 10
minutes on each side. And I recognize the gentlewoman from New
York, Mrs. Maloney, the main author of this legislation, and so
many other consumer protections, for 5 minutes.
Mrs. Maloney. Thank you so much, Mr. Chairman, for your
support and leadership on this important issue. And thank you
for having this hearing on H.R. 3904, the Overdraft Protection
Act of 2009.
The overdraft problem is significant and getting worse
because the quantity of debit card transactions now exceeds the
quantity of credit card transactions. Just yesterday, a
headline in the American Banker Newspaper read, ``Dependence on
debit is the new norm.''
The Center for Responsible Lending has found that overdraft
fees have increased 35 percent in the last 2 years, and they
estimate that 27 million Americans overdrew their checking
account more than 5 times in a 12-month period.
From start to finish, the consumer is too often kept in the
dark, not allowed to choose how he or she spends their own
money. This bill brings sunshine and permission into the
process, restricting deceptive practices and empowering
consumers to manage their own lives and their own financial
accounts.
Let me briefly explain the overdraft cycle. As a consumer
opens an account, according to a study by the FDIC, most banks,
75 percent of banks, automatically enroll them in an automated
overdraft program which charges a fee from $10 to $38 for each
overdraft and, sometimes, another fee if an account stays at a
negative balance, even though the consumer does not even know
it is in a negative balance.
So what this bill does is give consumers more tools to
better make their own decisions about how to manage their own
money. Then, consumers begin to use their debit card just as
they have advertised: for groceries, for gas, for a cup of
coffee and movie tickets, to run a Sunday's worth of errands,
and many people use their debit card at a point of sale half a
dozen times or more. And because they were enrolled
automatically in overdraft protection and are using ATMs or
point-of-sale terminals, they don't or cannot tell if a
transaction is about to drive them into a negative balance and
they incur a fee.
Consumers often do not know that they have even incurred
overdraft fees until they get the bills, sometimes as much as
$300 to $600 for overdraft fees for one weekend.
What the consumer does not know, unless they keep very
strict track of their balance after each and every transaction,
is that they could have racked up half a dozen or more
overdraft fees in just a single day. So that $5 cup of coffee,
an extravagance in its own right, then turns into a $35 cup of
coffee because of the overdraft fee.
What is more, the consumer does not find out about the fee
that was automatically charged until later, because the
overwhelming majority of banks, 81 percent according to the
FDIC, will allow an overdraft to occur at an ATM or point of
sale but only notify the consumer after the transaction has
been completed and the overdraft fee has been charged.
Finally, the overdraft problem culminates when the
transactions are posted to accounts back at the bank. You might
think that the transactions would be posted in chronological
order, but you would be wrong. They are usually posted by size,
from the largest amount spent to the smallest, driving people
into overdraft fees quicker, which means that the transaction
fee has the effect of driving the account into a negative
balance faster, and each smaller transaction that occurs while
the account is in a negative balance incurs a new, separate
overdraft fee.
The FDIC study reports that 53.7 percent of large banks
process overdraft fees in large-to-small fashion, therefore
driving up the cost to the individual.
The bill that Chairman Frank and Chairwoman Waters and I
have introduced meets the overdraft problem head on from start
to finish. First, this is a bipartisan effort; Walter Jones
joined us in the introduction of this bill--it brings automated
overdraft plans under the Truth in Lending Act, requiring
financial institutions to obtain permission of consumers before
enrolling them in the overdraft program.
It requires that ATMs notify the consumer if the cash
withdrawal would incur an overdraft fee, and allows the
consumer to reject the withdrawal before the fee is incurred,
thereby giving the consumer more control over their own
finances. It limits overdrafts at the source, the financial
institution, to no more than 1 per month or 6 per year. It
prohibits the manipulation--
The Chairman. The gentlewoman is recognized for an
additional minute.
Mrs. Maloney. Oh, my goodness.
I feel strongly about this. Let me just say that it
requires that overdraft fees be proportional to actual harm, so
that a $5 cup of coffee isn't charged what amounts to a 700
percent interest rate in the form of a $35 fee.
And I want to applaud the efforts of some of the large
banks that have worked to address this problem by voluntarily
limiting the fees. But we feel that overdraft protections must
be extended to all customers of all financial institutions.
Even some of the banks which have dialed back overdrafts still
permit up to 4 overdrafts per day.
As the FDIC study has shown, the problem is so wide and so
deep, encompassing the majority of banks and affecting tens of
millions of consumers, Congress must address this problem
across-the-board systemically.
The bill is the largest--my latest version of my
legislation on this issue; I have introduced it in several
other Congresses. And I thank the chairman for sponsoring it
and for having this hearing.
I also want to welcome all of the witnesses. I believe this
is the largest panel in the history of the Banking Committee--
the Financial Services Committee, showing the deep concern and
attention, so I thank you all for being here.
The Chairman. I thank the gentlewoman.
I appreciate--I thought it was best to do it this way,
there being a small number of members. I will say we had
originally contemplated our being in session today, but I don't
mind that because I think we will be able to focus with the
small amount of members.
But if we have unanimous consent--I have checked with the
ranking member--each member will have 10 minutes rather than 5
to question, to accommodate. There aren't that many people
here, so that way we will be able to accommodate that; and we
will have a 10-minute question period--I am afraid we can't get
used to that, given the size of this committee--and we might
even be able to do a second round. So I do want to take up for
that.
And the gentleman from Alabama is now recognized for 10
minutes.
Mr. Bachus. Thank you, Mr. Chairman.
I will just touch on some brief thoughts. I am interested
in hearing from the panel, because this is obviously an issue
that I think all of us are interested in.
As far as an alternative, if you don't have overdraft fees,
what do you have? And what I have is a line of credit, and I
think that is a far wiser and sounder money management tool.
And I am not sure; I think one approach would be if the banks--
and I think with the financial literacy, if we said to people
there is a better alternative than overdraft fees.
I would be interested in you--maybe either in the questions
or addressing why aren't there more lines of credit or are
people not aware of that.
I will say, one other alternative to overdraft fees is not
a good alternative, and that is issuing a worthless check
charge, which is a criminal charge. When I started practicing
law in the mid-1970's, you had to take a certain number of
appointed cases, and about a third of the docket in criminal
court were people issuing worthless checks. You would go to a
municipal court and you would find that was sort of the
predominant charge. There were just people even in small towns
who for one reason or another wrote a bad check. And I don't
think any of us want to return to that.
The fees, I think all bank fees, we all know that over the
past 10 years those fees have--all fees have either doubled or
tripled. I think that is pretty much a given. And maybe that is
not true. I would like to hear if I am wrong about that.
And the other thing about the overdraft fees is they are
all $35. I think that seems to be the general charge. And every
time the fee at every bank is $35, you wonder why that is. And
maybe that is close to the cost.
The ATM or point--either a debit card when you go in a
grocery store, it is my understanding from some of the banks
that you have a problem at that point telling people that they
are overdrafting. I am certainly interested in that. Obviously,
if you could tell them, I think it would be a good thing.
Now, at the ATM machines it is also my impression that you
can tell them there. And I really can't see anything wrong with
a requirement that you tell them that they are overdrafting
when they use their ATM card. But I think some of the smaller
banks may have more difficulty, or the credit unions, with this
because of technology.
And the last thing I would ask is, how do we address this?
The banks that are making money today are the old investment
banks. They are making money trading, they are making money
speculating, which can be a dangerous thing.
The commercial banks are losing money. They may have a good
quarter, but they are apparently not making a lot of money on
lending even though the cost of money from the Fed is awfully
cheap.
But if they are losing money, where do they make that up?
And that is--so the timing of all this is a challenge,
particularly when so many of our banks are losing money. Yes,
they may be charging $35, and we may think that is too much,
but we don't want to put all our banks out of business.
So, Mr. Chairman, I do appreciate you having this hearing,
and I look forward to hearing from the witnesses. And I
personally am more in just a listening mode and would be
interested in your comments.
But I want to go right back to what I started with, and
that is that I still remember in the late 1970's when I would
be representing somebody on an appointed case, and they would
have all these bad checks and a lot of times they would
actually be in jail. And I don't think you see any of that, I
don't think you see that like you used to. Now, I could be
wrong. I would be interested in if some of the consumer groups,
particularly whether you have sort of taken a look at that, and
whether one unintended consequence of not having some safety
net would result in people going to jail.
And particularly college kids who can't seem to--many of
them can't seem to manage their money; you certainly don't want
a criminal record, and issuing a worthless check is a criminal
record, which actually in many cases would disqualify them from
jobs. So $35 fees are one thing; a charge that disqualifies you
from an occupation is a much more serious alternative.
So, with that, thank you, Mr. Chairman.
I thank the witnesses.
The Chairman. I just want to announce there had been some
discussion of scheduling a markup of this bill on Tuesday. That
will not happen now because we have the New York, Virginia, and
New Jersey elections on Tuesday, and those are all within easy
commuting distance of here, so a number of the members from the
committee will be working that day. And the gentlewoman from
New York, in particular, is very important obviously to this
bill.
So we will not be marking this bill up next week, which
means we won't be marking it up, people for their own calendars
should know, for at least a couple of weeks, because the week
after it being Veterans Day coming in the middle of the week,
we are very unlikely to be in.
So we will proceed.
I will just recognize myself for a brief comment, which is,
I would urge my friends in the Banking Committee--we wouldn't,
I believe, be in a situation where we are talking about
legislation if you would have had an opt-in regime from the
beginning. I guess I would make it a general rule that I have
learned in politics: Don't do people favors without asking
them.
Early on in my career as a Member of Congress, I received a
phone call from a woman who said her daughter was about to be
married--this is a true story--and her husband-to-be was in the
military, and he was about to be shipped out, and could I get
that date postponed so that the wedding could take place before
he was shipped out.
And being new at this, I tried to do that, whereupon I got
a phone call from the groom-to-be that said, ``Mind your own
business; don't do me a favor without asking me.'' I would urge
that on you.
I have to say, I am skeptical. People say, oh, we have to
give them this overdraft without asking them. It is in their
interest. That is another I have had as a Member of Congress.
When people come to me to argue for something that benefits
them, which is entirely legitimate, that is what people ought
to be doing, we need to know how what we do affects people.
But when we go to the next step and say, this is not only
good for me, this is good for the people who will be paying me
to do it, my answer is now invariably, when they come and tell
me that, I will believe that. But unless you have a signed
proxy form in which you are empowered to tell me that it would
be a good thing for them to pay you, I am skeptical.
So I really urge you to do this a lot. And part of it is it
is human nature. It is not simply a question of how much money
it is. It is indignation. It is the sense that people's
integrity and autonomy has been impaired when you do this to
them and then tell them you did it for them.
So I would just urge you on all of this, have an opt-in,
have it in clear language.
I continue to get two types of mail from banks:
solicitations to do things that will bring them money in very
large type; and explanations of conditions that apply to things
I do in very much smaller type. It is a very old joke and a
very bad one.
So you can save yourselves a lot of problems by that, and I
would encourage you to do that going forward.
With that, we will begin with the witnesses. And, as I
said, we will have 10 minutes to question. I do have one
preliminary question for Mr. Menzies, whom we welcome back,
having been here yesterday.
Who is running the bank, Mr. Menzies? We have you down here
all week.
Mr. Menzies. Thank you, Mr. Chairman. We have a very strong
little community bank.
The Chairman. We appreciate you. You have been a good
witness, and we are glad to have you freed up for that.
Let's begin with Ms. Fox.
STATEMENT OF JEAN ANN FOX, DIRECTOR OF FINANCIAL SERVICES,
CONSUMER FEDERATION OF AMERICA (CFA)
Ms. Fox. Thank you, Mr. Chairman, Ranking Member Bachus,
and members of the committee. I am Jean Ann Fox, director of
financial services for the Consumer Federation of America. I am
testifying today on behalf of the national consumer groups
listed on my testimony. We are here to express enthusiastic
support for Representative Maloney's H.R. 3904, the Overdraft
Protection Act of 2009.
Banks extend credit when they cover an overdraft and then
charge a fee. Instead of denying a debit purchase, banks are
permitting it to go through and then are charging about $35 for
each occurrence. Banks pay overdrafts on paper checks, on
point-of-sale debit purchases, ATM withdrawals, automated
clearinghouse transactions to pay bills. And due to Federal
Reserve action on this, consumers are not protected under the
Truth in Lending Act.
These are very small loans. The FDIC study says that the
typical debit card purchase is just $20, so consumers are
paying $35 to borrow $20 for just a few days. The largest of
overdrafts is just $78 for an ACH payment.
So these are very small loans, and they are very expensive.
In our most recent look at the largest banks' overdraft fees
practices, the top fee was $39 for the initial overdraft, the
lowest was $34. The typical fee is $35. Ten of the largest
banks charge a second fee if consumers don't pay the overdraft
back in as little as 3 days.
The sustained overdraft fees are either one-time fees--for
example, Bank of America started this June charging a second
$35 fee if the overdraft was not repaid in 5 business days.
Some banks charge $8 a day after a few days if the overdraft
has not been repaid. This makes a single mistake, a single
overdraft, turn into a financial disaster for consumers.
These are very short-term loans. The bank takes payment out
of the next deposit into your bank account to repay your loan
if you haven't come down with cash to pay them off right away.
And, as Representative Maloney noted, consumers do not
affirmatively sign up for this program. This is the only form
of involuntary credit that we know of that is so widespread.
And, of course, the largest banks process payments large to
small, or reserve the right to do that, which means that if
they don't process payments out of your account as they come
in, they wait a couple of days to have lots of little debits
and one pretty good-sized check. You can wipe out the balance
very quickly and then charge people a fee for each one of the
smaller payments that overdraw.
This is not what consumers want to have happen.
CFA commissioned a poll by ORCI this past July and asked
what consumers thought banks should be doing: 71 percent
support that banks should get permission before they pay an
overdraft; 85 percent say that banks should be required to
disclose on the ATM screen that a withdrawal will overdraw the
account and trigger a fee; 70 percent say that banks should be
required to pay checks in the order they receive them; and 53
percent strongly support that position.
Your bill meets what consumers want to have happen.
And the folks who are harmed by this are the folks who can
least afford to pay the highest cost for overdraft coverage of
any bank products. These are low-income consumers, these are
young people, these are folks who are renters and likely to be
single.
In the polls that we did this summer, twice as many people
who said they paid for an overdraft were African American,
compared to the sample as a whole.
So this impacts a fraction of bank customers. According to
the FDIC study, about a fourth of Americans are paying this
$24-billion-a-year tab for credit they did not request, did not
know they had, or were unable to make informed decisions.
Your bill adds protections that consumers need.
In addition to consent, which should be a given--that
consumers should give consent to be able to borrow from their
banks, the other protections help keep overdrafts from becoming
a debt trap for unwary consumers--banks would have to comply
with Truth in Lending and treat this fee as a finance charge.
There would be a ban on manipulating the order of
processing payments. Banks have a lot of different tactics that
result in more fees, and they are instructed to use those in
order to maximize income.
Your bill provides a cap on fees so that a bank can't
charge more than once a month if they have covered an
overdraft, with a limit of 6 per year. This implements the
safety and soundness guidelines that the FDIC provided a few
years ago when banks were making a similar type of very short-
term, very high-cost credit to consumers.
Thank you, Mr. Chairman.
[The prepared statement of Ms. Fox can be found on page 114
of the appendix.]
The Chairman. Our next witness is Nessa Feddis, who is vice
president and senior counsel of the Center for Regulatory
Compliance, American Bankers Association.
STATEMENT OF NESSA FEDDIS, VICE PRESIDENT AND SENIOR COUNSEL,
CENTER FOR REGULATORY COMPLIANCE, AMERICAN BANKERS ASSOCIATION
(ABA)
Ms. Feddis. Thank you, Chairman Frank, Ranking Member
Bachus. My name is Nessa Feddis, and I appreciate the
opportunity to testify on behalf of the American Bankers
Association.
Americans enjoy the most affordable, accessible banking
system of any country in the world. They have access to full
service checking accounts at little or no cost.
Now, in the best of all worlds, people would only make
payments when they have money in their accounts to cover the
transaction. But this isn't a perfect world. When inadvertent
overdrafts occur, most consumers value institutions paying
their overdrafts, and they have come to expect it. Indeed, 96
percent of consumers who had an overdraft paid were glad that
it had been paid.
Similar studies by the Federal Reserve found most
participants expect and value coverage. Payment rejection means
embarrassment, inconvenience, merchant fees, and other adverse
consequences. Rejection means payment recipients refusing their
checks or electronic payments in the future, or having negative
information put into a credit report.
Customers also often want their debit card transactions to
go through, whether it is for groceries already selected and
bagged, a meal already eaten, emergency purchases, or a bill
they want to pay through a debit card.
Overdraft fees are easy to avoid, and most consumers avoid
them. In fact, in a survey of 1,000 bank customers, 82 percent
said they hadn't paid one in the past 12 months.
For customers who find it challenging to manage their
accounts and avoid overdraft, there are many options available,
including keeping a little extra money in the account or
linking their account to a savings account or a line of credit.
And, as the FDIC found, most institutions permit customers to
decline overdraft services.
ABA is very concerned about the potential unintended
consequences of H.R. 3904. It presents significant challenges
for all banks and will mean a complete redesign of checking
account features and pricing. The result would be more hassle
and cost for customers who find payments returned or rejected
and will have significant unintended consequences on the
availability of services and cost to all checking account
customers.
For example, the bill limits overdraft fees to those that
are reasonable and proportional to the cost of processing the
transaction. Such an approach misses critical elements of the
pricing.
First, the cost of pricing ignores the deterrent value of
overdrafts. Just like a parking or speeding ticket, overdrafts
are meant to be a deterrent. Like any penalty, they are
designed to get the person's attention in a way that a nominal
fee does not.
Second, the cost of processing does not reflect the risk of
loss nor the lost income earned from balances which help pay
for the cost of providing the account. This lost income makes
it more expensive to offer accounts and means that those who
manage their accounts well absorb those costs in the form of
higher fees.
Another provision which limits monthly and yearly
overdrafts limits consumer choice by prohibiting overdrafts
they want paid from being paid. Banks would reject overdraft
transactions once the maximum fee has been met or just reject
all. This means consumers suffer the consequences discussed
earlier: the hassle, inconvenience, cost and embarrassment of
rejected items, the very reasons that consumer testing has
found people value and want this service. Such artificial
limitations would lead to significant unintended consequences.
As history has shown, government price fixing does not work and
ends up hurting the people it is intended to help.
H.R. 3904 also appears to require an APR calculation. As
explained in greater detail in my written testimony and as
government testing supports, calculating an APR for overdrafts
would mislead and confuse consumers. The shorter the repayment
period, the greater the APR will appear in instances involving
a fixed fee. This means that the sooner the consumer repays,
the greater the APR--a difficult concept to explain as it
appears that paying earlier increases the cost and it is better
to delay repayment; or the greater the overdraft, the less
costly it is because, of course, the APR is going to be lower.
In summary, ABA believes that overdraft protection services
provide a valuable service. The bill will mean a complete
redesign of checking accounts, more hassle and costs for
customers who find payments rejected, less access to checking
account services for some, and higher prices. Because of these
and other unintended consequences, ABA opposes the bill in its
current form.
We are ready to work with this committee to address ways to
improve the bill. Thank you.
[The prepared statement of Ms. Feddis can be found on page
105 of the appendix.]
The Chairman. Next, Mr. Eric Halperin, who is the director
of the Washington office of the Center for Responsible Lending.
STATEMENT OF ERIC HALPERIN, DIRECTOR, WASHINGTON OFFICE, CENTER
FOR RESPONSIBLE LENDING
Mr. Halperin. Good morning, Chairman Frank, Ranking Member
Bachus, and other members of the committee. Thank you for
inviting me to testify on H.R. 3904, the Overdraft Protection
Act of 2009. The Center for Responsible Lending
enthusiastically supports this bill as it will provide
important protections for consumers from abusive overdraft
fees.
The Center for Responsible Lending is a nonprofit research
and policy organization dedicated to protecting family wealth.
We also are affiliated with Self-Help, which is a nonprofit
loan fund and a credit union. Self-Help does not charge
overdraft fees and routinely denies debit card and ATM
transactions that would overdraw the account for no fee.
In the midst of a recession, abusive overdraft practices
are making the dire financial situation of families even worse.
Banks are making loans that consumers never asked for at
astronomical prices. In 2008, consumers paid nearly $24 billion
in overdraft fees. This represented a 35 percent increase over
the number of fees paid in 2006 and is now more than consumers
spend on many basic household staples.
The effect of overdraft fees is widespread. An estimated 50
million people will overdraft their account at least once each
year, and 27 million people will overdraw their account at
least 5 times each year.
To understand the growth of overdraft fees over the last 5
years, it is important to understand the growth of debit card
transactions which were key to this increase. Debit card
transactions now account for nearly 50 percent of all
transactions that trigger an overdraft, and they are growing
every year as debit card transactions become more common.
Checks, on the other hand, account for only about a quarter
of all transactions that lead to an overdraft. And the number
of checks written each year is shrinking, especially among the
younger demographic.
Debit card overdrafts are particularly indefensible because
financial institutions could deny those transactions without
charging their customers a fee. And this is, in fact, what most
financial institutions did just 5 years ago. In 2004, 80
percent of financial institutions routinely denied transactions
that would overdraw the account that originated through a debit
card. The FDIC found that in 2008, 81 percent of institutions
now routinely approve those transactions.
Debit card overdrafts are also more likely to be small-
dollar transactions. On the average, a debit card overdraft
results in a $17 loan, the average fee paid is $34, and that
loan is paid back in 3 days. You pay your bank $34 to loan you
$17 for 3 days. It is an expensive and unsustainable way to get
credit.
When the debit card first came onto the market, we told
consumers that this was an excellent tool to manage your
finances; it is a way to make your purchases without going into
debt on a credit card. But because of the widespread prevalence
of debit card overdraft programs, we have turned that debit
card into the most expensive credit card on the market although
it lacks the basic consumer protections that we have for a
credit card.
Debit card transactions drive overdraft fees in every
demographic including those consumers 55 and older. It is the
leading cause of overdrafts for those consumers. People 55 and
over, on all types of transactions, paid $6.2 billion in
overdraft fees. But, most importantly, $1.4 billion in
overdraft fees is paid by seniors who are heavily dependent on
Social Security for their income. People who worked hard their
entire lives and paid into the system are seeing $1.5 billion
taken out of their Social Security check by their financial
institutions.
Overdraft programs are structured to encourage rather than
discourage use. Their high fees and short repayment time often
trigger a debt cycle for people who overdraft repeatedly, where
overdraft fees simply beget more overdraft fees, because once
the fees and the loan amounts are taken out of their check,
they are left with less money to make it to the next payday.
H.R. 3904 contains important protections that go beyond the
baseline of consent that you must consent to participate in the
credit program. Reasonable and proportional fees will ensure
that we will not have any more $35 fees for $5 overdrafts.
The six overdraft limit, as Ms. Fox testified, is analogous
to what the FDIC did in the payday lending context where they
determined that providing high-cost, short-term credit for
long-term credit needs is an unsafe and unsound banking
practice.
Certainly, we have learned over the last several years that
providing high-cost, unsustainable credit is not just bad for
consumers; it is bad for the financial institutions and bad for
our economy in general.
Both a reasonable, proportional requirement and the limit
have precedent in the CARD Act, recently passed by this
committee, where we provided protections to credit card
recipients.
At their best, banks and credit unions provide Americans
valuable services and access to credit on fair and appropriate
terms. We want to encourage people to enter the banking system,
but they need to have confidence that those accounts are safe.
The Overdraft Protection Act will ensure fair and transparent
pricing for overdraft coverage and save Americans billions of
dollars that is currently being taken from their hard-earned
paychecks.
Thank you. I look forward to your questions.
[The prepared statement of Mr. Halperin can be found on
page 136 of the appendix.]
Mrs. Maloney. [presiding] Thank you very much.
Next, Mr. Rod Staatz, president and chief executive officer
of the SECU Credit Union in Maryland; and he is speaking on
behalf of the Credit Union National Association.
Welcome.
STATEMENT OF RODNEY STAATZ, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, STATE EMPLOYEES CREDIT UNION OF MARYLAND (SECU), ON
BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION (CUNA)
Mr. Staatz. Thank you. Madam Chairwoman, Ranking Member
Bachus, and members of the committee, thank you very much for
having me today. As you said, I am Rod Staatz, president and
CEO of State Employees Credit Union of Maryland. I am also a
member of CUNA's board of directors.
CUNA strongly supports the ability of credit unions to
offer overdraft protection plans as a means to help their
members resolve short-term financial problems. While the terms
of the credit union overdraft protection programs may vary,
they are structured to help pay rather than return
nonsufficient funds transactions in exchange for fees that are
similar to those charged for returned items. This spares the
members the embarrassment of returned checks as well as
additional fees charged by merchants.
Such programs, when used appropriately by consumers, serve
as a valuable alternative to overdrawing checking accounts or
relying on payday lenders or check cashing businesses and are
fully consistent with the philosophy and principles of the
credit union system.
CUNA recognizes there is a considerable interest in
Congress in enacting a law to address abusive practices.
However, we are convinced that H.R. 3904, as drafted,
particularly the provisions that limit the number of overdraft
fees, would simply end these programs.
If the bill were law, consumers would incur more NSF fees
and none of the benefits of having the transactions honored.
They would pay more merchant return check fees and have more
bad checks reported to credit bureaus. Inevitably, other
adjustments will have to be made in checking account services
and maintenance fees that will impact a wide range of account
holders.
I am very concerned that all consumers will lose under this
scenario. We believe most credit unions approach overdraft
protection in a manner that is in the best interest of the
participating member as well as the overall membership of the
credit union.
Several years ago, CUNA adopted a policy calling on credit
unions offering overdraft protection service to adopt standards
that emphasize the credit unions' consumer orientation. This
policy is included in my written testimony.
Madam Chairwoman, my credit union offers an overdraft
protection service which is similar to overdraft protection
programs used by credit unions throughout the country. The
objective of this program is to permit members on an occasional
basis to have transactions completed even when they temporarily
lack sufficient funds in their checking accounts or to spare
them from merchant and collection agency fees incurred for
return checks.
A member can prearrange to have funds drawn from a selected
savings account or establish a line of credit. And if he or she
writes a check without enough funds in his checking account,
the necessary funds are withdrawn from the other account or
line of credit.
There is no fee--zero--for these transfers. Our overdraft
program allows SECU to pay an item after all funds in a
member's accounts have been exhausted or a prearrangement
transfer plan has not been established.
However, SECU does not allow members to draw their balance
into the negative at the teller line, through ATMs, or through
their debit card. Our program only pertains to written checks
and preapproved ACH transactions.
The member's checking account is debited in the amount of
the overdraft plus a $27 fee. The member is sent a
nonsufficient funds notice explaining the account is negative
and a deposit is required to bring the account into a positive
status. If the account is not positive within 30 days, all
future items will be returned NSF with the $27 fee.
SECU does not market overdraft protection because we do not
want to encourage members to live beyond their means. Knowing
this is an option to cover overdrafts may lead some members to
view it as available funds.
If a specific member contacts SECU for a refund, we review
the account and consider the specific circumstances. Also, we
refer many of our customers to free counseling services. Those
members who demonstrate repeated overdraft behavior will have
progressive notification from warnings to account closure for
overuse. In 2008, we had to close almost 500 checking accounts
for overuse and abuse of the overdraft privilege.
While we strongly agree overdraft abuses should be
addressed, H.R. 3904 will have a dire unintended consequence
which will result in harming consumers.
As addressed in my written statement, some of the
provisions of the legislation are positive and we would welcome
the opportunity to work with you on them. We also think that
the Federal regulatory system, which allows for a notice and
comment process, should play a leading role to protect
consumers from unintended consequences of Federal restrictions
on overdraft programs.
In addition to our strong objection to the limits on
overdraft transactions that this legislation would impose, we
have several additional concerns regarding the bill, which are
described in my written testimony.
Madam Chairwoman, you will hear horror stories about how
bad overdraft protection is, and you will also hear many
heartwarming stories about how it has helped many credit union
members. I encourage you to do an independent, unbiased survey
of consumers. Go to the people who are really affected by this
and ask them what they really think about overdraft protection.
Thank you for the opportunity to testify today, and I look
forward to answering any of the committee's questions.
[The prepared statement of Mr. Staatz can be found on page
176 of the appendix.]
Mrs. Maloney. Thank you very much.
Next, Mr. Oliver Ireland, who is a partner at Morrison &
Foerster.
Thank you for being here.
STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER
LLP
Mr. Ireland. Thank you, Madam Chairwoman, Ranking Member
Bachus, and members of the committee. I am a partner in the
financial services practice of Morrison & Foerster, and I
worked for the Federal Reserve System for 26 years, 15 as
Associate General Counsel of the Board in Washington. I am
pleased to be here today to discuss H.R. 3904 concerning paying
of overdraft fees.
While paying overdrafts enables consumers to meet
unexpected expenses and avoid failing to make timely payments,
overdraft programs have been criticized as costly and unfair,
particularly for small debit card transactions. H.R. 3904 would
amend the Truth in Lending Act to require that consumers opt-in
to overdraft programs, limit overdraft fees to 1 per month and
6 per year, require that overdraft fees relate to the actual
cost of processing the overdraft, prohibit charges for ATM and
debit card transactions that are declined, and regulate the
order in which transactions are paid.
The Federal Reserve Board has proposed to address
overdrafts at ATM and debit card transactions, but H.R. 3904
would go well beyond the Board's proposal.
Applying the Truth in Lending Act to overdrafts is likely
to be confusing to consumers, however. When checks result in an
overdraft, the consumer would have Truth in Lending billing
error rights and UCC rights; but when the check didn't result
in an overdraft, only the UCC would apply. A similar problem
would occur for debit card transactions.
In addition, it is not clear how the Truth in Lending Act
disclosures would apply before an overdraft, and disclosing an
annual percentage rate after an overdraft would be similar to
the historical annual percentage rate that has been eliminated
for credit cards because consumer testing found that it was not
effective.
H.R. 3904 applies the opt-in and the limitation on fees to
check and ACH transactions as well as ATM and debit card
transactions. The limitations on fees should not apply to check
and ACH transactions. Businesses receiving these transactions
typically charge significant fees for returned checks and ACH
transactions that, when added to the NSF fees, lead to costs
that significantly exceed overdraft fees. In addition, failure
to make bill payments on time due to a returned transaction may
lead to other costs or the inability to obtain some services.
H.R. 3904 would prohibit overdraft fees due to debit holds.
This practice has been an issue with respect to pay-at-the-pump
gas station transactions. Although there has been progress in
addressing debit holds such as the VISA real-time clearing
program, if fees for overdrafts due to debit holds are
prohibited, merchants should have a duty to submit transactions
promptly to help avoid these overdrafts.
H.R. 3904 would require overdraft fees be reasonable and
proportional to the cost of processing the transaction.
Overdraft fees should be reasonable if the consumer has chosen
to opt-into them, I would think, and in any event should
reflect the credit risk inherent in these transactions as well
as the processing costs.
In addition, the limitation on fees in H.R. 3904 may
prevent the payment of overdrafts that some consumers want
paid. At a minimum, a limit should not apply to ATM
transactions where the consumer proceeds with the transaction
after the notice that the transaction will cause an overdraft.
Finally, overdraft fees are an important source of revenue
to both large and small banks and credit unions. Loss of
overdraft revenue is likely to lead to the repricing of
checking account services in the form of lower interest rates,
more and higher account maintenance fees, and perhaps even per-
transaction fees. In addition, consumers will need to manage
their account balances more carefully and perhaps maintain
higher balances to avoid timing errors.
Thank you for the opportunity to be here today. I would be
happy to address any questions that members of the committee
may have.
[The prepared statement of Mr. Ireland can be found on page
158 of the appendix.]
Mrs. Maloney. Thank you for your testimony.
Our next witness is Mr. Jim Blaine, president of the North
Carolina State Employees Credit Union.
STATEMENT OF JIM BLAINE, PRESIDENT, NORTH CAROLINA STATE
EMPLOYEES CREDIT UNION
Mr. Blaine. Thank you, Madam Chairwoman. I appreciate the
opportunity to testify today. I will not use your valuable time
to read the testimony already submitted, but I would like to
make a few brief comments about the need and importance of this
bill and several of its provisions.
As to the need for limits and the potential for abuse,
personally I believe the overdraft protection service, such as
Courtesy Pay, should be entirely banned, not because this
service does not do some good, but because I am convinced the
harm caused by the product far exceeds any good achieved.
Having said that, this bill offers a compromise which seeks
to retain the good of overdraft while controlling for that
potential abuse. I would note that all members of this panel in
their testimony acknowledged that abuse does exist in this
product. This is why limits and proportional costs are so
important in this regulation.
As to opt-in, since this august panel has great difficulty
in agreeing on just what this product is--disagrees on its
definitions, disagrees on its impact, and disagrees on the best
course forward, since this experienced professional panel
cannot agree--we can all hopefully agree that it is very, very
likely that the consumer has no idea about this product and has
no understanding of it. Therefore, there is a definite need for
consumer opt-in into this product.
The consumer needs to make an informed choice. That can
best be achieved by a chance to review options and have the
product clearly explained by their institution.
As to coming under Truth in Lending, this product is alone,
and no sleight of hand, no semantics nor any Federal Reserve
regulatory reluctance can ever alter that fact.
As financial institutions, we will further damage our
credibility by refusing to tell the consumer the blunt truth
about this product. It is a loan. Truth in Lending is an
established, well-understood regulation, and placing overdraft
protection within that existing regulation, within that legal
framework, will reduce that much-dreaded increase in potential
regulatory burden. Let's use the existing legal regulatory
framework of Truth in Lending to manage this product in the
future.
As to personal financial responsibility, I am all for it,
and I hope we all are--but the product being offered is
discretionary at the whim of the lender. The lender when
offering this product accepts no responsibility to the
consumer. There is no contract for this product, no listing of
rights, no listing of duties by either party. Absent those
contracts and those agreements, there is an absence of
transparency, there is an absence of disclosure.
Lack of acknowledgement of responsibility by either party
on this product is financially, commercially, and legally
insane. In this economic environment, the banking industry
might find that citizens of this country consider their
pontification on personal and financial responsibility not only
rings hollow, but sounds hysterically absurd.
Lessening of service, higher banking costs. Can they get
any more expensive than what we are dealing with now? Our
organization serves as an example that institutions can thrive
and can prosper without offering the overdraft service product.
Representative Bachus, we also have indicated several
initiatives we will take later next year to try to eliminate
those NSF charges.
Claimants for the demise of free checking, the free market,
and perhaps the entire free world, may be a bit overstated if
this product is reduced in the future. It is worrisome that
some panelists indicate that the survival of their institution
hinges on the income from this product. Why is it a concern? It
is a concern because their institutions' fate hinges on the
future misbehavior of their customers and members.
Lastly, wealth and earnings achieved through the misfortune
and the misery of others should always be highly suspect, if
not held in outright contempt.
I look forward to your comments and questions.
[The prepared statement of Mr. Blaine can be found on page
54 of the appendix.]
Mrs. Maloney. Thank you for your really remarkable
testimony.
Mr. Dennis Dollar from Dollar Associates, LLC.
STATEMENT OF DENNIS DOLLAR, PRINCIPAL PARTNER, DOLLAR
ASSOCIATES, LLC
Mr. Dollar. Good morning, Madam Chairwoman. My name is
Dennis Dollar. I served as a member of the National Credit
Union Administration board from 1997 to 2004. I have been
before this committee before, and it is a pleasure to be
invited back.
I also was the chairman of the National Credit Union
Administration from 2001 to 2004. Prior to that appointment, I
was president and CEO of the Gulfport VA Federal Credit Union,
a relatively small--at that time--$32 million credit union with
approximately 12,000 members in Gulfport, Mississippi.
Since leaving NCUA, I formed a consultancy that works with
credit unions and other financial service entities in their
strategic initiatives. I guess you could say, from my
experience, I have had the opportunity, Madam Chairwoman, to
view the overdraft protection issue--as Judy Collins famously
sang in the 1960's--``from both sides now.''
Today, I have been asked by Ranking Member Bachus to come
before you representing no particular group or organization,
only as a former credit union CEO and a former regulator who
now sees overdraft programs in action on a daily basis and
whose experience indicates that while there are always ways in
which such programs can be structured better for the consumers
and the financial institutions they do business with, in my
opinion, it would not be good public policy to completely
eliminate them from the marketplace, as H.R. 3904 might
effectively do.
During my years in credit union management, there was no
overdraft protection program in place, Madam Chairwoman. If a
member wrote a bad check, we charged an NSF fee, and we
returned the item. Needless to say, the members who, like all
consumers, are always opposed to any user fees imposed on them,
didn't like this fee arrangement. They not only faced our NSF
fee, but they were also charged with an additional returned
check fee by the merchant to whom they wrote the item. Often,
they faced late charges if the returned item was for their rent
or their insurance.
But these folks weren't slugs or deadbeats. They were good,
hard-working members who, on occasion, ran out of money before
they ran out of month. It was for these members that the
overdraft protection programs we are here today to discuss were
originally developed to assist.
Rather than being charged an NSF fee, the member would be
charged an identical fee. And it is important to recognize
here, Madam Chairwoman, that, if structured properly, an
overdraft fee is not an additional fee above and beyond an NSF
fee. It is an identical fee that they would be charged
otherwise to honor the overdrawn item up to a specific fully
disclosed limit, and that the item then must be settled within,
according to credit union regulations, 45 days, or it has to be
written off and formal collection efforts begun.
Credit union members, as did many bank customers, saw value
in these programs because they were able to realize those
additional cost savings associated with avoiding the merchant
fees and the late charges, the cancellation of service, and
even possible prosecution, Mr. Bachus.
A well-structured--and, again, I use that term because
there certainly is abuse, and we have all seen those documented
examples where there was manipulation of item clearance solely
to maximize profits, or assessing the $35 in overdraft fees on
a $5 debit purchase of a venti cup of latte at Starbucks.
Those exceptions should be corrected and appropriately
regulated. But overdraft programs, if done right--they can be
done right and they should be done right--consumers and
financial institutions benefit.
There are standards that I provided in my written testimony
that outline the way most responsible financial institutions,
and certainly the credit unions that I work with, handle their
overdraft programs today. Now, because some institutions don't
follow these best practices doesn't, in my view, make a case to
overregulate those who do with punitive or burdensome
legislation that will result in many of their consumers losing
their checking accounts and many institutions forced to
transfer the cost of overdrafts from the consumers who use the
program to the vast majority that do not.
Now, my regulatory experience, Madam Chairwoman, does give
me some pause about the potential impact on the long-term
safety and soundness of some institutions that could come from
effectively eliminating this source of earnings, but that is
not why I am here today. My primary reason for supporting these
types of programs is the benefit to the consumer that I saw
taken away under the old, antiquated days of the NSF fee and
legal prosecution in return to get their check or debit honored
up to a clearly defined, clearly disclosed--and if institutions
would do their jobs in financial education and making sure that
the disclosures are appropriate and the members understood how
this program is used, we would probably would not be sitting
here today.
But we do have to remember this: If there is no deterrent
in the system, bad check writing will grow. A half century of
NSF fees, often increasing in amount, proved to us that the
number of overdrafts wouldn't be lowered simply by charging
fees. Overdraft programs with the proper disclosures and a
financial education commitment as a part of the program
offering can provide greater consumer value and, in my opinion,
I think that it could enable us to avoid having to return to
those dark days of the costly NSF fees.
There is a way that a balanced regulatory approach, handled
through the regulatory agencies without a statutory mandate,
can keep consumers within the traditional finance institutions,
but yet ensure that these programs are fully understood and
transparent.
That is what we would like to see.
[The prepared statement of Mr. Dollar can be found on page
99 of the appendix.]
Mrs. Maloney. Thank you very much for your testimony.
The next witness is Ms. Ellen Bloom, director of the
Washington Office and Federal Policy, Consumers Union.
Welcome.
STATEMENT OF ELLEN BLOOM, DIRECTOR, FEDERAL POLICY AND
WASHINGTON OFFICE, CONSUMERS UNION
Ms. Bloom. Thank you, Madam Chairwoman, Ranking Member
Bachus, and members of the committee. I am Ellen Bloom,
director of Federal policy in the Washington Office of
Consumers Union, which is the nonprofit, independent publisher
of Consumer Reports magazine. Our organization strongly
supports H.R. 3904, the Overdraft Protection Act of 2009. We
appreciate the chance to add our perspective on the impact
current fee-based overdraft programs are having on consumers.
First, I would like to briefly touch on telephone poll
results from a nationally representative survey conducted by
Consumer Reports National Research Center in February. This
poll underscores two points: Consumers are often unaware of the
consequences of overdrawing their accounts. When asked,
however, they express a very strong desire to have more
decision-making control over these fee-based overdraft
programs. Here are just a few of the findings:
Only 52 percent of those surveyed who use debit cards had a
correct understanding that a bank typically allows the
transaction to proceed, covers the shortage from the next
deposit, and charges a fee for doing so.
According to our poll, consumers appear even more
misinformed about ATM overdrafts. Only 31 percent know that the
bank will permit a transaction, subsequently dock the account
and charge for the loan. It was clear that many consumers
simply didn't expect to be charged a fee when they overdraft
their account. To us it seemed clear, consumers would be
unlikely to opt-out of a program of which they are unaware. And
that is why CU strongly supports the opt-in language in H.R.
3904.
At the same time, our poll reveals that consumers
overwhelmingly want choice when it comes to their bank
accounts. Two-thirds of consumers polled said they would prefer
to expressly authorize overdraft coverage so that there would
be no overdraft loan or fee unless they opted-in to the
service. Two-thirds also said that banks should deny a credit
card or an ATM transaction if the checking account balance is
too low. In addition to our polling, we have had consumers
share their frustrations with us about automatic overdraft
programs. I have attached a compilation of these stories to my
written testimony.
I will highlight three now. Rachel from North Carolina
explained to us that her bank manipulates the order in which
they clear transactions in order to maximize the number of
times she overdraws her account. A married mother of three,
Rachel at one time found 7 overdraft charges for debit card
transactions. Each of these was for purchases of less than $20,
and at least half were under $10. One charge was even for a $1
beverage at a gas station. However, each of these transactions
was penalized with a $35 fee. As Rachel explained to us, ``They
cleared the largest amounts first because they want to charge
the fee on the $1 purchase.'' Rachel went on to tell us, when
you are taking $300 from us in 2 weeks, we get behind on other
expenses. It literally took us 2 months to catch up.
Justin from New York told us why he believes it is
important to place strong limits on the number of times an
institution can charge a fee for covering an overdraft. Justin
told us that he was charged $385 for 11 overdrafts over a 10-
day period. Some of these transactions were for less than $10.
All but 2 were worth less than $50. Eventually, after multiple
calls to the bank, Justin was refunded $100 of his $385 total
overdraft fees. Justin told us that he wishes he could just
choose whether the bank covers the transactions when they
overdraw his account.
Don from Ohio described the snowball effect of overdraft
fees. Don and his wife rely on a limited income, the paycheck
from his part-time job, and the Social Security payment his
wife receives for disability. Don checks his account balances
regularly, but he was recently hit with a flurry of overdraft
fees. One year ago this month, Don used his debit card and
overdrafted his checking account by 35 cents. Before the bank
had opened the next day, Don deposited $30 at the ATM to cover
the 85-cent overdraft. A day later, he discovered he had
incurred two overdraft fees, one for the 85 cents, and the
other because the $30 deposit had not covered the deficit
caused by the first fee. The second overdraft even triggered
another overdraft fee and an additional $5 per day fee for each
was added. After haggling with his bank, Don reached a
compromise and only paid for one of the $35 overdraft fees, but
it was grueling.
Mr. Chairman, members of the committee, the Overdraft
Protection Act will go a long way to stop the abusive practices
experienced by Rachel and Justin and Don and thousands of other
consumers across the Nation. We applaud its introduction and
urge its prompt passage. Thank you.
[The prepared statement of Ms. Bloom can be found on page
58 of the appendix.]
Mrs. Maloney. Thank you very much for your testimony.
Our next panelist is Mark A. Colley, president and chief
executive officer of the Tulsa Postal and Community Federal
Credit Union, on behalf of the National Association of Federal
Credit Unions.
STATEMENT OF MARK A. COLLEY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, TULSA POSTAL & COMMUNITY FEDERAL CREDIT UNION, ON
BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
(NAFCU)
Mr. Colley. Good morning, Madam Chairwoman, Ranking Member
Bachus, and members of the committee. My name is Mark Colley
and I am here today to testify on behalf of the National
Association of Federal Credit Unions, or NAFCU. I am the
president and chief executive officer of the Tulsa Postal &
Community Federal Credit Union, headquartered in Tulsa,
Oklahoma.
Tulsa Postal was chartered in 1923, making us the oldest
credit union in the State of Oklahoma. We are a small credit
union with 11 full-time employees and approximately $23.6
million in assets. U.S. Postal Service employees and retirees,
as well as their family members, make up most of our membership
base. The rest of our members are people who live, work, or
worship in Tulsa County and are classified as underserved.
Most credit union members welcome and appreciate the
opportunity to benefit from a courtesy pay or an overdraft
protection program and consider it useful and a convenient
service. Overdraft programs can prevent high fees and penalties
that result from bounced checks, and provide important
financial coverage in unexpected circumstances when members may
need it the most. At Tulsa Postal, we currently offer courtesy
pay programs to 936 of our 1,440 checking accounts. Only 2 of
the 936 members have chosen to opt-out of our courtesy pay
program.
In order to be enrolled in the program, a member must first
select a transfer from another deposit account as the first
overdraft coverage option. Courtesy pay is not triggered until
all transfer options have been exhausted. We have several
casinos in our area, and if we notice frequent casino activity,
we shut off the debit cards and the courtesy pay program to
them. We also do not report any of our overdraft protection
balances to ATM or debit networks.
If a member comes to us, concerned that they have
overdrafted their account because of an error, we refund 100
percent of the courtesy pay fee they were charged. If this
happens multiple times, we ask them to come in so we can
educate them about the proper use of the program.
I have read the stories about individuals who have been
charged $35 for spending just a few dollars more than they have
in their accounts. At my credit union, we refund these fees,
provided the member does not abuse the privilege. We have never
had a single member complain about our courtesy pay program.
NAFCU appreciates the Overdraft Protection Act's efforts to
address our concerns regarding the credit union usury ceiling.
We believe the bill is well-intended. H.R. 3904 is still
problematic from a credit union perspective, and NAFCU
maintains several significant concerns with this legislation.
First, the current opt-in provision would impose a
considerable regulatory burden on credit unions and create
consumer confusion among those who believe they already have
this particular product. NAFCU would support language
establishing an opt-out requirement instead, allowing existing
members who are currently covered by overdraft protection
programs to deny the coverage if they wish. We could also
support an opt-in requirement for new members or customer
accounts.
NAFCU is also concerned about provisions in the bill
limiting NSF fees for debit and ATM transactions. These types
of transactions are covered by financial institutions when
made, even if there are insufficient funds in the account when
cleared. Since the transaction is authorized by the merchant at
the time it takes place, the credit union is contractually
liable to post the payment, even though the funds are not
available in the consumer's account to cover it.
Many merchants do not verify balances in real time. This
provision therefore appears impractical and impossible to
comply with. The limitation to one overdraft fee per month is
highly problematic for the vast majority of credit unions that
receive transactions not processed by merchants in real time.
Further, providing same-day notification to members who have
overdrawn their accounts would be another considerable burden
for credit unions, as they may not learn that an overdraft has
taken place until all transactions clear at the end of the day.
NAFCU could support a more reasonable notification time frame.
NAFCU is also concerned about the bill's limitation on the
number of overdraft coverage fees. We believe that the
restriction to 1 overdraft fee per month and 6 per year would
significantly limit consumer choice. An alternative would be to
require financial institutions to send a notification to
consumers who have overdrafted several times during the course
of the month, listing the options available to them.
In conclusion, I would urge the committee to keep in mind
that consumers can avoid overdraft fees, no matter what the law
is, in one simple way, by managing the funds in their accounts.
Increased focus on financial education funds and literacy to
teach consumers this personal responsibility would make the
need for overdraft protection moot.
We urge the committee to take these concerns into account
and make significant changes to the legislation before it moves
forward. I thank you for the opportunity to testify and the
privilege of being here today, and I welcome any questions that
you may have. Thank you.
[The prepared statement of Mr. Colley can be found on page
85 of the appendix.]
Mrs. Maloney. Thank you very much.
Next, Mr. Richard Hunt, president of the Consumer Bankers
Association.
STATEMENT OF RICHARD HUNT, PRESIDENT, CONSUMER BANKERS
ASSOCIATION (CBA)
Mr. Hunt. And a very good morning, Madam Chairwoman,
Ranking Member Bachus, and members of the committee. My name is
Richard Hunt and, like many Americans, I too have overdrafted.
I am president of the Consumer Bankers Association and it
is indeed an honor to appear here today representing retail
bankers.
For more than 90 years, CBA has served as the voice of the
retail banking industry, which provides banking services to
meet the needs of consumers and small businesses. Our members
are regional and supercommunity banks, as well as bank holding
companies. I appreciate the opportunity to appear before you.
I want to provide a little bit of an insight about the
services Americans may not be receiving from the media and the
industry critics. Courtesy overdraft services are just that, a
courtesy that banks have traditionally offered as a service to
their customers. Our members report and statistics show the
vast majority of customers manage their checking accounts in an
appropriate manner, but even the most responsible consumer can
overdraw an account every once in a while. When this occurs,
the bank has one or two options. It can bounce the check, or
deny the debit card transaction, or it can honor the check for
the debit card purchase and assume that risk.
If the bank does indeed deny these transactions, which we
believe will occur at a more frequent rate if this legislation
is enacted, several things will happen to the consumer. They
will pay a fee to the bank; they will find themselves at a
register, possibly the Rayburn Cafeteria, with a plate full of
salad and no possible way to purchase that salad. They will
surely face late payment fees and delinquencies from a merchant
or creditor, and as previously mentioned, the consumer may also
be at risk of violating State laws pertaining to bad checks.
With this in mind, it is easy to understand why bank
customers overwhelmingly prefer the bank to honor overdraft
transactions, even when they result in overdraft fees. It is an
important benefit thousands of banks provide to millions of
customers.
Although it may seem reasonable to expect that a bank
customer will not overdraft an account, more than once a month
or 6 times a year, as this legislation mandates, I can tell you
this is not always the case, even for the most responsible
customers. For example, a consumer can write several checks,
not realizing their spouse also recently made transactions,
whether it was an ATM machine or a check. If a bank is not
allowed to charge an overdraft fee when those checks bounce,
the bank simply may not honor these charges. Indeed it may not
be a safe or sound banking practice to honor the transactions
without charging a fee. The bank is paying money with the risk
of not being paid back.
Yes, there are anecdotes of a $39 cup of coffee resulting
from an overdraft debit card transaction. These are abnormal
cases. They do not reflect how the vast majority of bank
customers manage their accounts. Congress ought not legislate
based on anecdotes, especially when the legislation will harm a
far greater number of customers than it helps.
In closing, Madam Chairwoman, my own personal experience
with overdraft protection was a relief. Despite having numerous
ways to access my account balance, I simply had one transaction
too many. Had it not been for the courtesy extended to me by my
bank, I would have had more hassle and more cost. I paid the
fee and was grateful the service was there. That allowed me to
continue with my life without interruption.
I appreciate the opportunity and look forward to any
questions you may have.
[The prepared statement of Mr. Hunt can be found on page
150 of the appendix.]
Mrs. Maloney. Thank you very much for your testimony.
Our last panelist is Mr. R. Michael Menzies. He is the
president and chief executive officer of Easton Bank and Trust,
and he is testifying today on behalf of the Independent
Community Bankers of America. Thank you. And he is a former New
Yorker, so welcome.
STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF
THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Menzies. Thank you, Madam Chairwoman. It is an honor to
be back with you and Ranking Member Bachus and this
distinguished committee today. I am truly proud to represent
the Independent Community Bankers of America on this important
legislation, and I am beyond thrilled that Mr. Hunt has
introduced the notion that the elimination of overdraft
protection could produce divorce. I hadn't thought of that one.
There are 8,000 community banks in this country, most of
which are at or below $10 billion in total assets. The only
thing my peers and I can do to compete in this industry, the
only thing we can do is to serve our customers better than the
competition, and that includes with the quality and fairness of
the overdraft services we offer.
Three-quarters of community banks provide some form of
overdraft protection, and all of those do so fairly and in a
way that best meets the needs of their customers. However,
community bank customers understand that when they spend money
that does not belong to them, there are consequences and costs.
While community banks always seek to treat customers honestly,
the same expectations must hold true in reverse. Customers
should not, and generally do not, expect a free pass when they
overdraw their accounts.
The alternatives for a customer include merchant returned
check fees, possible credit report and bad check database
blemishes, collection hassles, embarrassment, and the list goes
on and on, as the panelists have suggested. These alternatives
are far worse than incurring an overdraft fee.
ICBA supports provisions of H.R. 3904 and improved
disclosures for consumers, and restrict deceptive advertising,
and encourage excessive use of overdraft programs. These
efforts will go far in preventing unscrupulous providers of
these services from taking advantage of consumers.
However, we are very concerned with other provisions of the
bill. I outlined all of these concerns in my written statement,
but I would like to discuss three of them in my oral statement.
First and most important, this legislation fails to
distinguish clearly between discretionary overdraft coverage
and automated programs that have drawn the ire of many for the
so-called $35 cup of coffee. Discretionary coverage involves a
banker, not a third party vendor or program, evaluating
specific overdrafts on a case-by-case basis. These usually
involve most important consumer bills, like a mortgage payment,
a car payment, the utility bill, paid by a check or an ACH. It
is these situations that demonstrate the strength and
importance of the relationship-driven model of community
banking and how overdraft coverage can be the most personal
service a banker can provide. In fact, the Federal Reserve has
acknowledged that these services should not be lumped into
regulation along with automated overdraft programs.
Second, we are strongly opposed to placing arbitrary price
caps and limits on overdrafts, especially when tied to the cost
of processing versus the amount overdrawn. If caps were
imposed, community banks who are proven risk managers must find
other ways to manage that risk. This could include elimination
of popular checking account features, cutting off debit cards
for overdraft-prone customers, and, more likely, closing
accounts. An unintended consequence of this clearly could be
expanding the ranks of the unbanked.
Third, while we appreciate that the legislation calls for a
study on the feasibility of point-of-sale overdraft for
consumers, the fact remains that even for ATMs and branch
tellers, the means do not exist to verify with 100 percent
certainty that a transaction at a given time will not lead to
an overdraft situation shortly thereafter. Not all banks and
merchants process debit and ATM transactions in the same manner
or at the same time. And banks that use a daily ledger balance,
rather than real-time ledger balances, won't be able to comply
with any real-time requirements.
In conclusion, we are very concerned that this legislation
attempts to restrict the supply of overdraft coverage while
ignoring the fact that community bankers offer these programs
to meet our customers' demand. In a perfect world, consumers
would never find themselves facing an overdraft situation. But
given what we know of consumer behavior, community banks need
to be able to provide all types of overdraft coverage to our
customers, while also receiving a competitive fee for the cost
and risk of paying transactions for customers with the bank's
own funds. Furthermore, any legislation that increases the
number of returned checks and debit transactions, as I believe
this legislation will as currently drafted, is not good for
consumers.
Thank you so much and I look forward to answering your
questions.
[The prepared statement of Mr. Menzies can be found on page
167 of the appendix.]
Mrs. Maloney. I would like to thank everybody for their
testimony, and I would like to yield first to Mr. Ellison who
has a conflict with another important meeting. I yield Mr.
Ellison 5 minutes.
Mr. Ellison. And let me thank the chairwoman who has
distinguished herself in many ways on behalf of the
participants of the American economy at large, including
American consumers. Thank you, Madam Chairwoman, for this
hearing today.
My first question is to Mr. Halperin. How much does it
cost, to the best of our knowledge, to process an overdraft
transaction--an overdraft? How much does it cost, everything?
Mr. Halperin. The processing costs alone for an overdraft
are fairly minimal. At this point, if there is an automated
program, often those things can be handled without human
intervention in terms of the decision to cover the overdraft.
And then if it is a discretionary program, there will be some
staff time.
Mr. Ellison. Okay. If we could from the best that we know--
and I want to ask this of everybody, don't give me a long
answer because I only have a few minutes--is it more than a
dollar to process an overdraft? Let's start with you, Mr.
Halperin. Is it more than a dollar?
Mr. Halperin. If it is more, I don't have a precise number.
If it is more than a dollar, it is not much more than a dollar.
Mr. Ellison. Is it more than $2?
Mr. Halperin. I imagine it would be somewhere in that
range.
Mr. Ellison. Ms. Feddis, I am reading your body language.
Is it more than $2?
Ms. Feddis. Sir, we don't--
Mr. Ellison. Now, don't give me a long answer, because I
will cut you off if you do.
Ms. Feddis. I think you have to go beyond just processing.
I don't know what that number is. I suspect it probably is more
than $2, but you have to go beyond just processing. There are
other costs associated with having an overdraft, whether it is
lost income, because you can't earn interest on a zero balance.
It is much more--
Mr. Ellison. Ms. Feddis, of course, I am very sensitive to
who you represent and why you're here, and that is fine with
me. I think we need everybody in this economy, everybody. But I
am just trying to get information. Is it $5 to transact an
overdraft fee? How much does it really cost?
Ms. Feddis. I don't know, but there are more costs than
just the electronic blip.
Mr. Ellison. $5?
Ms. Feddis. It is probably more.
Mr. Ellison. $7?
Ms. Feddis. It is probably higher.
Mr. Ellison. I have a feeling that if I said it was $100,
you would say it is probably higher.
Ms. Feddis. No, I wouldn't say that. I don't know, but I
have talked to one analyst who suspected it was more; it was
certainly over $10.
Mr. Ellison. Let's say it is $10; let's just say that. Mr.
Halperin says no way; you say $10. Can we all say $10 is in the
neighborhood--
Ms. Feddis. I don't know.
Mr. Ellison. Okay. Well, if you don't know, then you don't
know.
Ms. Feddis. Well, that is what I said.
Mr. Ellison. Okay, fair enough. But you did say--
Ms. Feddis. No, I said I heard from one analyst.
Mr. Ellison. Let's just say it is $11, okay, just so we can
talk about what we are here to talk about. If it is $11, Ms.
Fox, how do they end up with $37, $39--how do they--even if it
is $11, how do they end up with $39?
Mr. Fox. Because they can. Banks put their fee information
in the fine print, as the GAO found when they did their survey
of banks. It is hard for consumers to get that information
before they open an account. So you don't have competitive
pressure on the size of the fee, and consumers don't think they
are going to incur it.
Mr. Ellison. Thank you.
Mr. Ireland, I appreciated your comments. Why can't Ms.
Feddis' organization and other folks who represent the banking
industry support at least the opt-in provision that is
contained in the bill?
Mr. Ireland. I can't speak for Ms. Feddis.
Mr. Ellison. I am not asking you to speak for her. Why
can't the banking industry say, okay, we will support the opt-
in; we are not for everything, but we are for the opt-in.
Mr. Ireland. In my testimony, I didn't argue with the opt-
in.
Mr. Ellison. Okay, I know you didn't. And the reason I am
asking you is because it seemed to me, as I read your piece,
that you sort of were looking at both sides of this thing.
Mr. Ireland. It seems to me you are going to do an opt-in,
and why don't we talk about--
Mr. Ellison. But what I am asking you is, how does it harm
industry for an opt-in--or do you agree that it doesn't?
Mr. Ireland. I think there will be a revenue impact of an
opt-in that will lead to some repricing of the account.
Mr. Ellison. So what is wrong the opt-in, Ms. Feddis?
Ms. Feddis. The ABA does support choice, we have always
supported choice. Most banks, as the FDIC found--
Mr. Ellison. Remember, 5 minutes. If I had 20 minutes, I
would let you talk as long as you wanted.
Ms. Feddis. Oh, I am trying to answer the question. I'm
sorry.
Mrs. Maloney. I grant the gentleman 2 additional minutes so
the lady can answer the question.
Mr. Ellison. Thank you.
Ms. Feddis. Thank you, Madam Chairwoman. We do support
consumers having choice. As the FDIC found, 86 percent of banks
do offer the choice, opt-in or opt-out. Generally--
Mr. Ellison. Thank you very much. And so, I think I am out
of time and I want to thank the chairman again. I want to thank
everyone on the panel, because I think we are all here trying
to get to the right answer. Thank you very much.
Mrs. Maloney. Reclaiming our time, I grant the gentleman,
Ranking Member Bachus, 5 minutes.
Mr. Bachus. I thank the gentlelady. Opt-in, there seems to
be quite a bit of confusion over whether the banks and credit
unions can do this. Are you saying, Ms. Feddis that 80 percent
of the banking institutions allow opt-in?
Ms. Feddis. No. They allow choice, either opt-in or opt-
out. Most of them allow opt-out. About 11 percent, according to
the FDIC numbers, which only represents the banks surveyed,
about 11 percent provided opt-in and 75 percent opt-out.
Mr. Bachus. All right.
Ms. Feddis. I am not sure that, as I said, we support opt-
out, because the consumer testing has found that most people
want overdrafts covered and that the default should be for the
preference of most people. But opt-in is certainly something we
would consider.
Mr. Bachus. Something what?
Ms. Feddis. Something the industry would consider. And some
institutions are already moving toward opt-in. Some even large
institutions don't allow any sort of debit card overdrafts, but
that is something we would consider.
Mr. Bachus. Mr. Colley, you said that it is a problem, opt-
in; is that right?
Mr. Colley. Yes, I did. For our current members who are on
the program, it would be a really large regulatory burden to
try to get in touch with them, and also lead to more confusion
for them to sign up for something that they perceive that they
already have.
Mr. Bachus. What if there were opt-ins for new consumers?
Mr. Colley. NAFCU does not have a problem with that, sir,
and neither do I personally as a CEO.
Mr. Bachus. What about Mr. Hunt?
Mr. Hunt. Mr. Bachus, we think it would lead to mass
confusion for consumers if you required current customers to
opt-in.
Mr. Bachus. No, I'm talking about new customers.
Mr. Hunt. Sure, that is a viable option. Many of our banks
are in fact doing that. They are opting-in for new customers.
We think it is better for current customers to have the ability
to opt-out of overdraft fees.
Mr. Bachus. No, I'm talking about new customers.
Mr. Hunt. Yes. Many of our banks are already going that
direction, and we think that is a viable alternative.
Mr. Bachus. I know there still--I am trying to maybe get
some things that we could agree on.
Now the debit cards, I think we all would agree that if the
technology was there, we would deny those at the point of sale;
is that basically right? Mr. Ireland?
Mr. Ireland. There is--many banks find that if they check
the balance when the transaction goes through at the point of
sale and there is not money there at the time the debit card is
used, there is money there when the debit settles a day or 2
later. And so there is a lack of precision--you could deny the
transaction, but you would deny a lot of transactions that now
actually get paid.
Mr. Bachus. But what I am thinking, let's just assume a
decision was made from a policy standpoint that they were going
to deny it if they checked at that time.
Mr. Ireland. They could do that.
Mr. Bachus. Can the small banks--Mr. Menzies, you were
telling me that some of the community banks, some of those
don't have that ability?
Mr. Menzies. Absolutely true, Congressman. Many banks
process these items differently and we don't have real-time
capacity, because we are focused on serving our customers, not
just on buying the most expensive technology of the day.
Mr. Bachus. Mr. Halperin--and I don't want to put words--
the larger banks are--they have that ability, right?
Mr. Halperin. Mr. Bachus, all banks have the ability to
deny. Our affiliated credit union is quite a small credit union
and we deny transactions. We currently have a real-time system,
but even when we had a posting system, we denied those
transactions that would overdraft the account. We have heard
other people on the panel today who also have testified that
they deny debit card transactions from smaller institutions.
But there is one very large institution, Citibank, that says
its policy is to deny debit card transactions--
Mr. Bachus. And you like that policy; is that correct?
Mr. Halperin. Yes, we think debit card overdrafts, as the
Federal Reserve found, often provide very little or no benefit
to the consumer; there is no avoidance of a fee, which I know
is one of your concerns in your opening remarks over the NSF
fee and the bad check issue. That simply is not present in the
debit card context. So we think a denied debit card
transaction, unless the consumer has chosen a line of credit or
another method to have that covered, is the preferable outcome.
Mr. Bachus. I think everyone agreed that a line of credit
is a better alternative. And if you did start denying debit
card transactions at the point of sale, that would encourage
people to come in and open a line of credit, I would think. Ms.
Fox?
Mr. Fox. Yes, one of the important side benefits of
requiring opt-in in limiting this problem of overdrafts is that
banks will have an incentive to promote their much more
affordable, more appropriate products. Their line of credit
simply costs about 18 percent a year, and consumers get to pay
it back in installments. Banks have transfer services. If they
have to get you to sign up, they have to offer all their
products. People are likely to get a cheaper option.
Mr. Bachus. Now ATM--can all institutions tell them, when
they use their ATM card, whether or not it will overdraft their
account?
Mr. Ireland. Some institutions can tell on their own ATM. I
am not aware of anybody who has an arrangement that, if you use
another institution's ATM, that they have that communication
facility at this time.
Mr. Bachus. Would we all agree that if you can tell them
that you shouldn't overdraft their account, does ABA agree with
that?
Ms. Feddis. We would support providing the option to
proceed with the transaction at the ATM's--for ATMs owned by
that institution. As Mr. Ireland points out, it is not possible
with today's systems to do it at the point of sale, to give the
option at the point of sale or at another ATM.
Mr. Bachus. Because I do think that if you approach your
ATM--and you used to, but I think the banks have stopped doing
this, but I thought--for a while I think there was actually--
and I think this is very misleading, the balance would include
the overdraft, their ability to overdraft, even the line of
credit, which--
Ms. Feddis. The regulation now prohibits that.
Mr. Bachus. It now prohibits that?
Ms. Feddis. The Federal Reserve did address that.
Mr. Bachus. So if it can be done.
Now, Mr. Menzies, can the small banks let people know at
the ATM, if it is there--obviously, can we agree if it is their
bank's ATM--
Mrs. Maloney. I grant the gentleman an additional 2
minutes. He is well over his time.
Mr. Menzies. Congressman, we do not show our overdraft
privilege customers being available at the ATM, because we
don't want that, quite frankly. We want it there for protection
for checks and debits. But your question was---
Mr. Bachus. When they use their ATM, if it would overdraw
that account, do you know--do they get that note--
Mr. Menzies. They don't have access to the funds at the
ATM, at our ATM. They are not allowed to go to the ATM and use
the debit card and access their privilege account at the ATM.
Mr. Bachus. Oh.
Mr. Menzies. We don't want them using it at the ATM for a
cash fund because the purpose of it is to protect against
bounced checks and debits.
Mr. Bachus. All right. Do the banking institutions have a
problem with processing checks in the order they come in? I
would ask the American Bankers Association.
Ms. Feddis. Well, I guess under this bill it probably isn't
necessary to address the posting because it is capped at one
per month, so it doesn't matter what the posting order under
this bill. It wouldn't be necessary to address it.
Mr. Bachus. I am not talking about under this bill.
Ms. Feddis. It is a very complicated and much litigated
issue.
Mr. Bachus. No, no. But what I am asking is, do you object
to processing them in the order they come in, is that--
Ms. Feddis. Well, I can't give you a straight answer
because it is very complicated, the payment order. In fact, Mr.
Ireland has actually studied it.
Mr. Bachus. My bank processes them in--they used to process
them in a different order. And I actually asked them, I said
you hear all this stuff about how they take the large ones so
they can get--and my bank, which is a large bank, actually said
they quit doing that because they didn't think it was fair to
their customers.
Ms. Feddis. Well, a lot of times people do want--and the
consumer testing has found this--people want important payments
made and they tend to be large--the mortgage, the rent--and so
if they want those paid--and so that is why some institutions
have done that. According to the FDIC, about half of the banks
actually process small to large, about 24 percent under their
survey found that it was--
Mr. Bachus. Okay.
Ms. Feddis. The banks have been sued for both. One large
institution was sued for paying low to high. And what people
really want is--
Mr. Bachus. At least we clarified it, right?
Mrs. Maloney. The gentleman's time has expired.
The Chair grants herself 5 minutes. One of the purposes of
the bill is what the gentleman is trying to clarify; more
information to the consumer will help them, particularly during
this extreme financial time, to better manage their own money.
And the bill does have in it a specific prohibition to having
financial institutions list on ATMs more money than what the
consumer has. If it includes a line of credit, if it includes
other access to capital, people are misled. They think they
have money they don't have. It is one reason that we worked
very hard to have this under the Truth in Lending provision so
that consumers will have more understanding of what is
happening.
I would like to ask Ms. Feddis and Mr. Hunt and others from
financial institutions if you could explain why overdraft plans
are the only financial product now where in essence you take
the consumer's money without the consumer's permission? Why is
that the only service that you have this means of operating?
Mr. Hunt?
Mr. Hunt. Thank you, Madam Chairwoman. I want to tell you,
we want to make sure our customers are always happy. We know in
this time that if a customer is not happy with the services we
provide in this day in time, they can quite frankly go to their
terminal and open an account at another bank to do that.
When a person does sign up for a deposit account, there is
a deposit agreement they do sign, that says we have the
opportunity to offer services for a fee. And that is what we
do. As we have stated many times before, this is a very popular
program we offer to our consumers. We do not like overdraft
fees. We do not want someone to overdraft. That is why when a
person signs up, we tell them about lines of credit, lines of
credit to their savings account, their checking account, and
everything else.
Mrs. Maloney. Mr. Hunt, what we are hearing from consumers
is, why are they paying for a service that they don't want?
These consumers are telling me that they would prefer for their
debit card to be declined, for their check to be declined, as
opposed to being charged the $35 fee for--many times it is an
incidental.
I would like to ask you, how is this action any different
from a Burger King charging you for a hamburger you don't even
want? In that case, it would be called a robbery, taking
someone's money for a product they don't even want. What we are
told is that consumers go to their banks and say, we don't even
want the fee, we don't want the protection, we don't want the
service. And some financial institutions are forcing them into
a program they don't even want.
But I would like to ask you, what if Burger King were to
take your money for a product without asking for it? Wouldn't
you be a little disturbed? That is why we have an opt-in so
people can decide what they want. And how is what some
financial institutions are doing different from McDonalds or
Burger King, automatically charging you for fries or a burger
that you don't even want and you are charged for something that
you would prefer not to have? How is that fair?
Mr. Hunt. Madam Chairwoman, I appreciate the question, and
I will tell you this: If a customer does not want any overdraft
protection, it is very simple. You go to the bank and you tell
them, I want to opt-out. The bank will adhere to your wishes.
I will also tell you, the mention of the $35 fee that
everybody keeps mentioning, that is the maximum fee that a bank
imposes. Most of the time when you an accidental overdraft, a
person who may overdraft 1 time a year, the fee is lower than
that, roughly $10 or $15. And I will tell you, Madam
Chairwoman, if you go to your--
Mrs. Maloney. Again, sir, that may be your institution.The
average we are reporting is $35. And sometimes it can be $35
for each transaction. I have had consumers come to me and tell
me that at the end of the weekend, they were charged $300 or
$600 because they didn't know that the pack of gum, the carton
of milk, the sandwich, the cup of coffee, with each purchase
incurred a $35 fee.
So I would like now to ask some of the consumer groups on
this opt-in and opt-out situation. I would like them to expand
on opt-in and opt-out. And isn't it better to let consumers
make a choice about what products they want?
Mr. Halperin, Ms. Fox, Ms. Bloom, if you could expand
please? The opt-in, opt-out is a big issue, and I would like
you to expand on why you prefer the opt-in over the opt-out.
Mr. Halperin. Madam Chairwoman.
Ms. Fox. You go first.
Mr. Halperin. The opt-in will create a critical moment of
choice where consumers can be given all their options and
choose that cheaper, contractually obligated option, the one
that will always be there, the line of credit or another
option.
One thing consumers experience repeatedly is that they
cannot opt-out of their bank's overdraft programs, especially
at larger financial institutions. There have been some recent
changes announced by large financial institutions where some
are moving towards an opt-out, and we are happy to hear that.
But repeatedly, we hear from consumers that they can't get out
of their program. Opt-in is critical because it creates that
moment of choice.
Ms. Fox. And the interesting thing is that back in 2005,
the bank regulatory agencies issued some guidelines, and they
said banks should get consumers to opt-in to their overdraft
program. And failing that, they should at least let them opt-
out. And as the FDIC survey found, a significant portion of
banks won't even let you opt-out. So what happens is banks also
won't let you close your account or freeze your account when
you owe them an overdraft fee. And that causes a real burden as
well.
Mrs. Maloney. Well, if I could just comment, in the 1960's,
some creditors sent unsolicited credit cards to consumers and
there was an absolute outcry, and Congress had to step in to
stop that and ban that practice. Isn't this basically the same
thing, where they are giving you something you don't want that
actually costs you money?
Mr. Fox. That is right. This is the only form of
involuntary credit we know about. Banks mail out debit cards to
their customers that can be used as credit cards. These were
sold to people as a substitute for cash. People don't know,
they don't think that they can get into debt by using their
debit card. They think their bank will reject it if they don't
have enough money to cover it. That is what the system should
do. This is not a credit instrument. It should be a payment
instrument, and banks should not be permitted to mail out live
debit cards that can trigger debt.
Mrs. Maloney. Thank you. Mr. Posey from Florida is
recognized for 5 minutes.
Mr. Posey. Thank you, Madam Chairwoman. I want to thank
everyone on the panel for some spectacular testimony. Some of
it was a little conflicting, but I think it was all sincere
from your perspective and very enlightening to us. I wish we
weren't here to even have to talk about overdraft, and there
wasn't a need for such a thing, and that there could be no
abuse by the borrower or the lender, but that we know in
reality and in commerce that is going to be necessary
occasionally. And we know that ultimately at the end of the
day, there is, or at least one would think there should be,
some consequences for not paying obligations that you promised
to pay. I hate to use that term, it scares a lot of people, it
is called personal responsibility.
And sometimes, I wonder if more government and more
regulation and less personal freedom also means less personal
responsibility; if at the end of day, we don't really hurt
people more than we help them. And what I want to make sure is
the unintended consequences of what we are looking at don't go
too far overboard. I know the $1 Coke really hit my nerve, it
seemed pretty outrageous. It reminded me of the last time I was
1 minute late for getting my dime in a parking meter, and it
was a lot more than $35, and they do that to poor people and
rich people, it really doesn't matter. The parking meter
doesn't do an analysis on how much it costs City Hall to
collect that thing, whether we think it is fair or not fair.
That is the cost of parking there, and if you don't want to pay
a huge fine, make sure you get your nickel or quarter in there
on time. Again, it is personal responsibility.
I wonder, from any of the consumer organizations, and just
respond if you know this for a fact, has there been a survey
that has just been straight up: Would you prefer overdraft
protection at $35 a crack, or would you prefer nonsufficient
funds at $35 a crack, and possible legal liability? Has anyone
asked their respondees that question and framed it just like
that in this polling? I would like to hear from you if you
have.
Mr. Halperin. Congressman--
Mr. Posey. If you haven't asked that exact question.
Mr. Halperin. That exact question, worded that way? We have
not asked the question worded in that fashion.
Mr. Posey. Because I think that is the bottom line for most
of my people back home. I know I would not want to pay a $35
fee for an overdraft, but I would much less want to pay a $35
nonsufficient funds fee and have my check bounced.
Mr. Halperin. Congressman, we did ask--as I mentioned in my
opening remarks, debit card transactions are driving the
overdraft volume--the analogous question for debit cards, which
is: Would you rather have it declined or have the transaction
processed and pay the fee? And for debit cards, the numbers
were 80 percent of the consumers would rather have it declined;
75 percent of consumers who had overdrafted in the last 6
months would prefer to have it declined in the debit card
context.
Mr. Posey. Okay, the next question. A lot of times I think
it is perceived that we are looking at huge banks exploiting
people in the marketplace, day in and day out up here. But we
have representation here from a lot of community banks and
credit unions. And I would interested in knowing from them what
the unintended consequences might be of this: If we regulate
this to a $10 charge, and if people opt-in and say, look, for
$10 a transaction, we will pay all the bad checks that you ever
want us to pay, what that could mean at the end of the day?
I know Congress used to have a program something like that
and they had to completely eliminate their overdraft protection
because it was so badly abused. Does anybody in the marketplace
want to weigh in on that?
Mr. Staatz. We are concerned, Congressman, that there would
be abuse and that abuse would be even higher than some of it is
today, and the number of overdrafts would increase. And we
really don't want that to happen.
Mr. Posey. We haven't heard today about the loss ratio
either when they do an overdraft protection or an overdraft
notice. How often is that money ultimately recovered? Does
anybody know that, or are there some loses that are sustained,
that are not repaid, that go into that $35 fee?
Mr. Staatz. Absolutely, yes. I don't have the numbers for
you, we could probably get that, but some of those are fairly
substantial, depending on the institution.
Mr. Dollar. Congressman, most of the credit unions that I
work with reserve 6 to 7, perhaps at much as 8 percent, of the
total amount for potential losses.
Mr. Posey. I think, as the lady pointed out before, the
processing fee probably should be quantified generally. And I
think these things need to be quantified, too, to give us a
full picture of what all is involved in this. It is not just
taking $35 and it is all 100 percent pure bottom-line profit.
That is the feeling you get when you hear one side of the
equation, until you hear the other side of the equation. It
doesn't seem to focus as much in the middle.
I would like in the future when we have these discussions,
if we could just get more information like that.
Mrs. Maloney. The gentleman's time has expired. But I would
like to note in Mr. Blaine's testimony earlier, he said his
institution charges $12 for nonsufficient funds and 50 cents
for a transfer from another account, which is the equivalent of
an overdraft.
The Chair recognizes Mr. Green for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. I thank the
witnesses for appearing today. And Mr. Blaine, I must tell you
that you have completely destroyed my line of questioning.
Mr. Blaine. Is that good or bad?
Mr. Green. I am concerned about you, Mr. Blaine. You used
terms that we don't hear a lot of from people in your industry;
``fair choice,'' you used the term ``socially conscious,''
``socially responsible.'' You indicate that credit unions ought
to wear white hats. And then you conclude with ``do the right
thing.''
I will tell you that I read it, I heard it, and I was
impressed that someone who is so closely aligned with the
industry would use this type of terminology. And I am impressed
because I think the American public is currently concerned
about what they perceive banking to be all about. I think that
the American public is of the opinion that banks don't have a
social conscience, that they are not fair, that they are not
being responsible at a time when responsibility would be
helpful to the public. And I think that they don't believe and
perceive banks to be the wearers of whites hats.
Having said that, I will tell you that I don't find
overdraft fees, per se, invidious. I think that there may be a
means by which they can be utilized and I think that is what we
are trying to do today, to ascertain how we do this fairly. And
so your testimony was a little bit unusual, given your line of
work and given that I rarely hear it here at Congress. And so I
thank you for your testimony. It meant something to me
personally.
I think that this notion that when you do a person a favor
and you charge a fee, and then you want to appear to be the
Good Samaritan is a bit much. The Good Samaritan did not charge
when he stepped across the street to help the person who had
been beset upon by culprits.
It is a rare thing for me to accept the notion that you do
me a favor. I come up to the gas pump and you say, let me pump
your gas--this happens to all of us I am sure--and once you
pump my gas, you say, by the way, that will be $5, but you were
doing me a favor. And the question becomes, if you are going to
do me this favor and appreciate overdraft protection, I have
overdraft protection, can you at least give me notice that you
are about to accord me a favor? That doesn't seem unreasonable,
to tell me that you are about to do a favor that is going to
cost me, by the way. It just seems fair.
I can use my credit card almost anywhere in the world. And
to say to me that you can't tell me that when I'm about to go
into overdraft, because it is not an electronic device that
your company placed in the marketplace, if that device cannot
say to me, by way of written word electronically that I am
about to go into overdraft--as a matter of fact, it can even
talk to me. We have the technology for it to literally say,
``Al, you are about to go into overdraft.'' That technology
exists. The question is: Do we want to spend the money on it?
And I understand that can be expensive.
But let's talk about a much more empirical experience that
I have had, because I think that intent is measured by your
overt manifestations, so I am still talking about notice. I
want to tell you about a personal experience with notice. I
went to the bank and handed a check to the teller. Yes, the
check went into overdraft; thank God I had the protection on my
credit line. But the teller never said to me, ``You are a few
dollars over with the check, do you want this to go into
overdraft and do you want to pay this fee, which will be more
than your actual amount that we are depositing into your
account?'' Now that kind of notice I just believe a bank can
give.
I am not going to say the name of the bank, but this is an
actual experience. When the teller would not bother to tell the
person who is standing right there in the presence of the
teller, you have gone--this will take you into overdraft. It
just seems fair to borrow Mr. Blaine's terminology to say to
people we are about to do this. The technology exists. I think
it can be done.
May I get 1 additional minute, Madam Chairwoman?
Mrs. Maloney. The gentleman's time has expired. I will
grant an additional minute for the panel to respond to your
question of why they are not providing that service.
Mr. Green. May I pose the question?
Mrs. Maloney. Sure.
Mr. Green. The question is just one of the fairness issue
that Mr. Blaine has raised. Is it fair to tell people that you
are about to charge an overdraft fee? And I will just start
with Ms. Fox and you can go right down the line and be as terse
and laconic as possible.
Ms. Fox. Absolutely.
Ms. Feddis. Yes.
Mr. Halperin. Yes.
Mr. Staatz. Yes.
Mr. Ireland. Yes.
Mr. Blaine. To have a fee market, you must have a free and
fair--
Mr. Green. Mr. Ireland, could your just speak a little
louder?
Mr. Ireland. Yes.
Mr. Green. Okay, thank you.
Mr. Blaine. To have a free market, it must be free and
fair. You can't have one without the other.
Mr. Green. I take it that is a ``yes?''
Mr. Dollar. Disclosure is the key, yes.
Ms. Bloom. Yes, absolutely.
Mr. Colley. Yes, sir. And if you were a member of my credit
union and did that, we would tell you that it was going to
cause you an overdraft.
Mr. Hunt. Yes, sir, we concur.
Mr. Menzies. Yes, sir, our members know what our fees are.
Mr. Green. Thank you, Madam Chairwoman.
Mrs. Maloney. Mr. Royce is recognized for 5 minutes.
Mr. Royce. Madam Chairwoman, I would like to yield to the
gentleman from Alabama for a question.
Mr. Bachus. I thank Mr. Royce. I wish I could submit a
question you all would have said yes to. You were talking about
overdraft privileges. It suddenly occurred to me that I think
that is what the Federal Reserve Board and the Treasury have
given to the ``too-big-to-fail'' banks. That is one overdraft
privilege I wish they had not given. And it is the taxpayers
who pay for that when they overdraft.
My first question maybe sounds like a legal question, but I
do think it has some ramifications. I will ask Mr. Ireland, and
then if any of you want to comment. But this is a legal
question, it is not a policy question of what it should be. Is
an overdraft charge a loan or a penalty?
Now, let me tell you why I am asking that question. Truth
in Lending covers loans, the Truth in Savings Act covers
penalties. So it makes a difference.
Mr. Ireland. Under the Truth in Lending Act, an overdraft
fee, as it is implemented by every banking institution I have
seen, is not considered credit under Truth in Lending.
Mr. Bachus. So it is not considered a loan?
Mr. Ireland. It is not considered a loan under Truth in
Lending.
Mr. Bachus. Is it considered a penalty under Truth in
Saving.
Mr. Ireland. It would be a fee under Truth in Saving. It
would be required to be disclosed under Truth in Savings.
Mr. Bachus. As a fee in the nature of a penalty, I guess.
Mr. Ireland. I don't know that they have a separate
classification for fees that are penalties.
Mr. Bachus. Ms. Feddis?
Ms. Feddis. Well, what they do, Regulation DD as of January
1st will require in every statement for NSF and overdraft fees
to be disclosed, some for the month, and then total for the
year in every periodic statement. So they will be segregated,
but they are not identified necessarily as a penalty. They are
identified as overdraft.
Mr. Halperin. Mr. Bachus, if I can provide some clarity to
Mr. Ireland's statement, the banking regulators have said
clearly that when an overdraft is paid, credit is extended. But
they said it isn't a finance charge under the Truth in Lending
Act because of various restrictions. So it has been called
credit, but not a finance charge, which means it is not credit
under the Truth in Lending Act, as Mr. Ireland said.
Mr. Bachus. So it is sort of an in-between type.
Mr. Ireland. They have called it credit for the purpose of
the credit discrimination laws.
Mr. Bachus. All right. Let me say this. One of the problems
that I am having, and I don't speak for anyone else, is there
seems to be some confusion on the part of the industry on what
happens today and what your capacity is, whether or not you can
tell people at the point of sale. And is may depend on the
agencies. But I think that is a problem that we are having.
Ms. Feddis. Congressman, there is a distinction between
opting out as a general opt-out, telling the bank, I don't want
you to pay any of my overdrafts. There is another distinction
between declining a debit card transaction at a point of sale,
just straight-line decline, yes, no. And then there is a third
option, which is at the point of sale, to say proceeding with
this transaction will cause an overdraft; would you like to
proceed? And I think that is what you are talking about.
GAO has looked at this in a study that came out, and it has
been suggested. Technically, you can do it, I suppose you can
do anything, but it would be a huge cost. Every point of sale--
Mr. Bachus. Well, yes. I think there is a difference in it
being a cost and it not being possible.
Ms. Feddis. The New York subway is a lovely system and
everything, but if you are--
Mr. Bachus. I understand. Because of our--and this is,
obviously, as all you on the panel know, we lack the expertise
that you have.
Ms. Feddis. I would never say that.
Mr. Bachus. Well, I can. It is true. Let me say this, when
we passed the credit card bill, some of us knew there would be
some consequences, that in a few months, people would get
notices that their interest rates are going up or their credit
limit is going down. And it is a good thing in some respects.
It stops some practices that probably should have been stopped.
But there is always a negative. And I will tell you this
when, let me close with this. There is going to be--and the
consumer groups and I am convinced you have the public interest
at heart. And I do believe the banks and the credit unions--the
banks are different from the credit union; there are for-profit
institutions. So I think there is a difference, although some
of the credit unions do make quite a good profit.
But no matter whether you are a consumer group or a
financial institution, I can tell you that having overdraft
privileges, not having them and bouncing a check is infinitely
a worse consequence that I am not sure that most people
appreciate. For people who have money, it is an embarrassment,
and it has negative consequences. But for people who are short
on cash, it can land them in jail.
Mrs. Maloney. The gentleman's time has expired.
Mr. Bachus. Let me just have an additional 30 seconds with
unanimous consent.
Mrs. Maloney. You have taken over a minute-and-a-half. And
so I grant you another 30 seconds. That is now 2 minutes over.
Mr. Bachus. Let me just say--you issue a worthless check,
you get a warrant issued against you. It goes on your record.
There are some pretty severe ramifications. And I am not sure
that the general public realizes that because they have had
overdraft privileges. I am not saying that it was very costly--
it encouraged a lot of--that it was to their benefit but to
issue worthless checks has terrible ramifications.
Mrs. Maloney. The gentleman's time has expired.
And certainly the intent of the legislation is not to take
away any services from consumers but allowing them to decide
which services they want. For example, there could be
alternatives, such as a line of credit. Some people may decide
that they would like the overdraft protection, but others do
not.
I would say that one of my bills, which was very hotly
contested by the industry at one point, was merely a notice at
ATM machines that there was going to be a charge, $1.50 charge
or whatever the charge was, so that consumers would opt-in and
say, yes, I want that service. And it now is the law, and at
every ATM machine, they let the consumer know that they will be
charged for the service if it is not their home bank. I very
gladly pay this fee when I am in Washington so that I can
access my bank.
We are just saying, for the services that you provide, let
the consumers know and let them decide whether or not they want
the service. And if they want to pay $35 for every overdraft,
then let them opt-into the program for the service.
Mr. Cleaver is recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman.
Let me just start off with this. Will all of you who
support this legislation just raise your hands? Okay. Let me
just, before Thanksgiving, express appreciation to all of you
who oppose the legislation. Those who oppose the legislation
are really helping me, and I appreciate it.
The banks right now are preventing the Nation's ire from
falling on Members of Congress. I think as long as you can
continue to do this, it helps us. Thank you. You successfully
bypassed us as the most hated group in America, and I think
that just personally, I want to express appreciation.
Do those of you who oppose the legislation believe that
what is going on, what the overdraft policy is, is the morally
right thing to do?
Excuse me?
Mr. Menzies. Could you restate your question? Did you ask,
Congressman, if we believe that it is immoral to offer
overdraft protection services to our customers?
Mr. Cleaver. Yes, I guess you can rephrase it that way.
Mr. Menzies. I would respond to you that it is not only not
immoral; it is fair, reasonable, responsible relationship
customer-driven, based on taking risks with people whom we know
and we live with and we see in our bank every single day.
Mr. Hunt. And I do believe it is the right thing to do, to
do everything we can to make sure a person is able to pay their
house note, to pay their car note, to purchase food at Burger
King using a debit card.
Mr. Cleaver. So you are able in realtime to tell a person
whether or not he or she has money in the bank and give them
the opportunity to withdraw their transaction, but you don't do
it because you make money, and that is the right thing to do?
Mr. Hunt. That is not--being able to tell someone's balance
in realtime is not entirely correct. There is only one person
who knows how much money you have in your account, how many
checks you have written, how many items you have actually
purchased. Just because a person is authorized to purchase an
item, it doesn't mean they actually purchased it. And we try
and provide technology so you have the right information,
possibly on your Blackberry right now, you can find out your
account balance.
Mr. Cleaver. So when someone uses a debit card at Macy's,
and Macy's runs the check through the machine, you are saying
that the machine cannot tell Macy's whether or not the person
seeking the transaction does in fact have money in the bank?
Mr. Hunt. What that machine would tell the merchant is that
this person is authorized to make a transaction.
Mr. Cleaver. That is not what--no.
Mr. Hunt. The answer to your question is ``no.''
Mr. Cleaver. No, you didn't. You answered somebody else's
question because the question I am asking is--the bank has the
ability in realtime to say whether or not there is money in the
bank, right?
Mr. Hunt. The bank has the ability with--if the merchant
has the technology--that is another thing we haven't discussed.
We don't know if the merchant has the technology. It is not a
one--
Mr. Cleaver. I know you think you are answering my
question, and I don't like to--
Mr. Hunt. I am just trying to answer.
Mr. Cleaver. And you are a nice person. What I am saying
is, you are not answering the question. Let me just--if I am
walking into Macy's and write a check, and they run it through
the machine, will the merchant see that I have money to make
the purchase?
Mr. Hunt. Not at all times, no, sir. They don't. Sorry.
Mr. Cleaver. What do they see?
Mr. Hunt. They run the debit card through their machine.
Mr. Cleaver. What do they see?
Mr. Hunt. They don't see anything. They just look at the
cash register and see if you are approved or not approved for
this transaction. They don't see that you have $123.
Mr. Cleaver. No. Okay. But what does the bank see?
Mr. Hunt. The bank sees a request from the merchant for a
certain amount of money. The bank has already basically
predetermined whether you are going to be eligible to make a
purchase or not.
Mr. Cleaver. So the bank doesn't pay any attention to what
your balance is? They make a predetermination that whatever
comes through here, we are going to pay?
Mr. Hunt. Here is what the bank has done. The bank has
looked at your history. They have looked when you are going to
get paid again, and they are going to see if you are a good
customer of the bank. And if they have seen, sir--
Mr. Cleaver. In a matter of 5 or 10 seconds, the bank is
going to look at your history, look at whether you treat your
dogs nicely? All of this?
Mr. Hunt. We do that every day, sir, every day.
Mr. Cleaver. In 5 seconds?
Mr. Hunt. Sir, they do it all the time based upon your
records.
Mr. Cleaver. I would love to take some cameras from news
agencies, go in the bank with you, and see that happen.
Mr. Hunt. Sir, we would love to host you in your district
to show you what a bank goes through every day.
Mr. Cleaver. Would you host me and some national television
cameras to come in the bank and do that? I think we can solve
this problem and kill Mrs. Maloney's bill. All we have to do--
let me have somebody in Macy's. I am with you and the cameras
and we are on TV right now--we have a chance right now to fix
this deal. We are going to fix it. Do we have an agreement?
Mr. Hunt. Oh, yes, sir, we have an agreement.
Mr. Cleaver. We have an agreement. I am through--I am going
to work this out.
Mrs. Maloney. Mr. Perlmutter is recognized for 5 minutes.
Mr. Perlmutter. I am not sure how to follow that. I think--
and I agree with Mr. Posey. I just appreciate the panel's
testimony today.
There have been different opinions, some very strong
terminology, strong feelings, strong ideas.
And the underpinnings of all of this are, allow business to
engage in commerce, expect people to act as adults and have
personal responsibility.
But then within the Constitution, we understand there are
limits to that, and we have the bankruptcy section of the
powers given to the Congress, and we have no involuntary
servitude. So there is an understanding by the Founding Fathers
and Mothers that people can overdo it, too, that they don't--
they are not going to become indentured servants.
So what we have here is really a benefit, and Mr. Bachus
and I were talking about it, which is to cover overdrafts so
that people don't get bounced checks, don't get treble damages,
don't get potential warrants, don't get denied in bankruptcy to
try to get rid of that particular debt.
But on the other hand, these things get to be very
seductive and can really run up--Ms. Bloom, I think you gave
some anecdotes.
And Mr. Hunt, I know you objected to anecdotes.
The trouble is, Mr. Bachus says we may not have much
expertise, but I can tell you we have a lot of experience. And
my experience with my daughters--I have my nephew here today.
Now, thank goodness, he can do a little better than at least
one of my daughters has done. But the anecdotes there are a
$6.50 cup of coffee at Starbuck's. She had $4.50, apparently,
in her account; $2 overdraft, $35 charge. And if it had only
happened a few times, that would be great. So we said, no more
of this; you have to be on a cash and carry.
My youngest daughter, she is cash and carry. It has been
very successful for her. My middle one, though, we went back
and said, can we get a line of credit for $1,000 so that this
doesn't happen? They said, no, she doesn't qualify for a $1,000
line of credit, but we will give her an $8,000 credit card.
Okay?
So we have to watch the practices here. And I guess my
question really does come back to point of sale, because it
seems to me that debit cards really are becoming the
convenience, but people are paying for that convenience. What
started out as a courtesy becomes a profit center. And this
happens in all kinds of businesses, not just banking. But we
have to watch so that the Abby Perlmutters of the world aren't
always paying that $35 fee and can never catch up.
So, Ms. Feddis, I appreciated your testimony. I think
really Mr. Cleaver's questions about, can we address this--let
us say, in my family, we say, no, if you don't have any money,
boom, that debit card, it just stops; you are going to be
embarrassed. Or at that point of sale, yes, you are going to
overdraw, and you are going to pay a fee; do you really want to
do that? I want to know, do we have the capacity? Is the
technology there to do that?
Ms. Feddis. Certainly, the capacity to opt-in when you open
the account or at some point, that is certainly something that
is doable. With regard to giving somebody the option at the
point of sale, that technology, as the GAO found as a practical
matter, isn't really available. It would require upgrading or
replacing every point at the millions of point of sale
terminals. It would require going into the networks and
creating extra tracks. I am not an operations person, but you
would have to do something to be able to carry--to have the
capacity to carry that extra information.
In your case, it is probably just better if that person
opts out and says, I don't want to ever have my debit card
turned down. To the degree the bank knows that there are
insufficient funds, even with debit cards, it is not a realtime
situation. There will still be debit card transactions that
will overdraw the account that the bank can't stop.
Part of that is the exact sort of transaction you are
talking about. Small dollar transactions, a lot of times the
merchants, to save time and money, they swipe the card to
ensure that it is a good card, but they don't actually take
that extra step to ensure--to get an authorization from the
bank, and the bank doesn't learn that you have drunk that
coffee until the next day. And as a practical matter, they
can't return it at that time.
So those--but you could still--the bank could say, no, to
the degree we stop them, and we just won't charge you, that is
probably what your daughter should do, is just opt-out of the
whole thing. Doing it each transaction is probably as a
practical matter just not doable. GAO did look into that.
Mrs. Maloney. The gentleman's time has expired.
And within the bill, there is another study required to
look at point of sale and how the technology is progressing to
allow us to do that. At one point, they did not have the point
of notification on the ATM machines. Of course, now, they do.
So we will look at it and go forward. Mr. Royce is recognized
for 5 minutes.
Mr. Royce. Yes, thank you, Madam Chairwoman.
I would like to go to Mr. Dollar because he is the former
chairman of the National Credit Union Administration. So he
would know something about how regulators look at this
situation of having customers who routinely commit over--who
are basically underwater or creating risk. If it is the case
that the regulator forces the institutions to set aside 60
percent in these cases to handle those accounts, to handle
individuals with this proclivity to overdraft their accounts,
wouldn't that imply that there is some risk involved for the
institution?
Mr. Dollar. There is no question, Congressman, that there
is risk. And that is the reason why the regulators allow the
institutions to be able to not only charge the fee, but require
them to reserve 6, 7--not 60, but 6, 7 or 8 percent,
somewhere--
Mr. Royce. So it is 6, 7 or 8 percent.
Mr. Dollar. On average, some as little as 5 percent.
Perhaps some as much as 10 percent. But, yes, there is risk
there in answer to your question. And that is why the
regulators do require that. And as I said in my testimony,
perhaps it is because I am a former regulator, but I believe
that the best arena to deal with abuse in this issue is through
the regulatory arena, rather than statutorily. I think that it
is able to reflect--the regulations are able to reflect the
changes in the marketplace, the changes in technology, the
changes in just the consumer perceptions of these issues as
they move forward. I think the Federal Reserve and the Federal
Financial Institutions Examination Council have taken the lead
on this. They are taking it seriously, and I think that their
new rules and guidelines, their regulatory requirements should
be allowed to work.
Mr. Royce. I guess the question--if the credit union is
only going to be able to pass on the cost of processing the
transaction and if you have an 8 percent cost in terms of the
risk, why would they ever offer the overdraft protection?
Because they would be bearing the risk that a customer will not
settle their balance, basically 8 percent of the time on
average, and they can't be compensated for assuming that risk.
So they would be better served by ending the overdraft
protection under that scenario.
Mr. Dollar. I think that for many of those members who were
mostly to take a loss, they would simply close their accounts.
So there would be a ramification for them.
But another point here quickly on bringing this under Truth
in Lending that has not been discussed today is that federally
chartered credit unions have a statutory, again, a problem of
the statutory requirement, rather than leaving it regulatory,
have a statutory 18 percent usury cap. Therefore, if you were
to place overdraft protection under Truth in Lending, every
Federal credit union in the United States of America would not
be able to approve 6 per year as the law indicates. When they
approved the first one, they would be in violation of the
Federal usury laws. So there are unintended consequences that I
think have to be taken into consideration with this
legislation.
Ms. Fox. Mr. Royce, may I add to that?
This bill specifically excludes the credit union usury cap
for coverage under this bill. The bill requires the Federal
Reserve to take into consideration what it costs for a
financial institution to pay an overdraft when they set the
guidelines for what is a reasonable fee.
Mr. Royce. Right. And I am looking at the risk element of
this, and I am wondering, at the end of the day, why would
banks and why would credit unions really continue to offer
these programs if on the risk side, you are not able to be
compensated for assuming that risk? And I guess the thought I
have in this is, what is likely downstream? If you do have that
action out of banks, credit unions, then the loser is going to
be the type of individual who would most be likely to utilize
routinely overdraft protection; who would be the type of
individual who might not notice the accelerator clause in his
mortgage, and suddenly he doesn't have that overdraft
protection anymore, and now he has been late on his mortgage
check, or he is the type of individual who is going to end up
being dinged not by only the merchant and the bank but, in the
most egregious cases, by the district attorney as well. He is
going to have all of these charges to bear because we have
created a scenario where the banks and the credit unions are
not going to offer the overdraft protection or are going to
close the account.
Mr. Dollar?
Mr. Dollar. The regulators see the benefit. They also see
the risk. That is why they are regulating it. They are
regulating it, I think, very well. There is certainly some
additional scrutiny that should come. We have discussed some of
those aberrations here. They are, however, the exception rather
than the rule. But there is risk. There is moral hazard in not
finding a way to discourage the writing of bad checks, and
there are the additional costs that you have mentioned,
Congressman, that are very real.
And that is the reason why there is some disconnect when
folks say that consumers do not like this product, but yet the
financial institutions are making a lot of money on it. Some
way or another, there must be some consumers seeing some value
in this product or else they would not be the earnings that
there is. The answer, again, is disclosure and making sure
those members know, through financial education and through
proper disclosure, how this program works and have the right to
opt-out of it if they do not agree.
Mr. Royce. Thank you, Madam Chairwoman.
Mrs. Maloney. Mr. Himes, for 5 minutes.
Mr. Himes. Thank you, Madam Chairwoman. I want to follow up
on something Congressman Perlmutter said, the sort of concept
of the profit center. I think we have four CEOs, presidents of
banks and credit unions. Could I ask you each to quickly give
me a sense for what the profitability of the overdraft business
in fact is? And I am happy to take an answer in terms of return
on invested capital or margin or whatever makes sense. I am
also happy to take an estimate. Can we just start with Mr.
Staatz, I guess?
Mr. Staatz. I don't have those numbers with me here today,
but a part of our--in our charge is not to cover costs; it is
also somewhat of a penalty to try to discourage people from
using it.
Mr. Himes. Mr. Blaine?
Mr. Blaine. Congressman, the profits are obscene. And I
will give you an example. If these fees were correctly
disclosed under Truth in Lending, everybody agrees that their
interest rate would be at about 300 percent. Even with a 10
percent write-off, as Mr. Dollar just mentioned, the return to
the banks and credit unions is 270 percent. This is a no-lose
proposition for the banks; a definite loss for consumers.
Mr. Himes. Mr. Colley, do you have a margin or return on
investment capital number for me?
Mr. Colley. I don't have that information with me, sir. I
would be happy to get it to you later.
Mr. Himes. Thank you.
Mr. Menzies?
Mr. Menzies. Congressman, we measure profit based on return
of total relationship, not just of the payor overdraft
protection programs, the total relationship. All loans, all
deposits, the total relationship.
Mr. Himes. But surely you break these businesses out, you
need to be able to evaluate their relative profitability. You
break them out, no?
Mr. Menzies. I hate to admit, at a $150 million bank, we
don't run ROE, ROA returns on specific products. I am sure we
should, but we don't. We look at the relationship, the total
profitability of the relationship.
Mr. Himes. I am really not trying to make a point here. I
was just curious about the profitability. I think if the four
of you would be willing to follow up with just your best
estimate of how profitable a business this is within your
institutions, it would be, I think, very helpful to us.
Look, philosophically, I tend to believe that if you have
good disclosure and smart choices being made, that we should be
very light-handed with respect to what products are offered.
This is a special case, though, because it represents a moment
in which a household or an individual transitions from having
assets to having liabilities. And we had a pretty
unenlightening discussion down here and in the media about what
caused the meltdown we are in right now.
Everybody blames it on CRAs, Fannie Mae, or the investment
banks. And there is a grain of truth in much of that. And the
reality is, of course, we have all sorts of factors. What we
don't talk nearly enough about is the incredible increase in
leverage in the American household. You know the numbers. The
last 20 years, most households moving from net asset positions
to very substantial leverage. And that makes all the difference
as we go into one of these things.
And again, I appreciate that if you have--Mr. Dollar, you
say if you have good disclosure and good decisionmaking and
conscious decision making in the face of perfect information,
fine. But here is the moment where somebody's account goes
below zero, and they are now going into debt. So I think we
have a public interest, given how important the leveraging of
the American household, the irresponsible behavior--I am not
blaming you--the irresponsible behavior of many American
households in accumulating a lot of debt, using homes as ATM
machines, etc.
These products can facilitate that. And so despite my
philosophical leanings, I do want to look hard here. And my
question is, why not an opt-in? Let us give everybody perfect
information and let them make an affirmative choice, and if
they have gotten that information, good disclosure, make an
affirmative choice. I don't get the opposition to that because
opt-out we all know. We all live enormously busy lives. We all
know that moment very rarely presents itself where you say,
from 10:30 to 11:00, today, I will read my agreement with my
bank, and I will make an affirmative choice. That just doesn't
happen. Why the opposition to opt-in?
Mr. Staatz. Congressman, we don't have opposition to opt-
in. Certainly on a go-forward basis. As a matter of fact, it
would merely put into place what most credit unions do anyway.
Mr. Himes. Does anybody oppose opt-in? I saw in the
testimony here.
Mr. Dollar. Congressman, I contacted and have over the last
several months when all this publicity came, about a number of
the credit unions that I work with, and there is not a credit
union that I had spoken with that has a problem with opt-in
going forward and a very well disclosed opt-out option for
existing accounts. I think that opt-in going forward would be
very well received by responsible financial institutions.
Mr. Blaine. Congressman, our organization manages 800,000
checking accounts for individuals. We offer only opt-in. We
have for over 25 years; 80 percent of our members are covered
by overdraft by their choice. They are allowed to use their
other savings, other checking, money markets, CDs, credit card,
line of credit, whatever. Every one of those choices is wildly
less expensive than overdraft that is being proposed. And the
only people that we cannot qualify for reasonable overdraft
protection are those who are not credit worthy. And those are
the people who are most often taken advantage of by courtesy
pay.
Mrs. Maloney. The gentleman's time has expired.
Some members have asked for a second round, so I am
recognizing myself for 5 minutes.
And I would like to ask Jim Blaine--I am really struck and
fascinated by your fee structure for your credit union. In your
testimony, you note that you charge 50 cents to transfer funds
for overdraft protection. And in the Overdraft Protection Act,
there is language that says that financial institutions can
only charge fees that are reasonable and proportional to the
cost of processing the transaction; 50 cents seems to me to be
very reasonable compared to a $35 fee that many financial
institutions charge for the same service. Can you tell us how
your credit union arrived at the 50 cent figure?
Mr. Blaine. Madam Chairwoman, it is a sophisticated process
that we employ. Actually, it is a nuisance fee. We would rather
that our members do it for free by going online, so we have
very conservative, careful members, and believe it or not, many
of them will do it themselves to avoid that 50 cent fee. But in
an automated world, the incremental cost of doing those
transfers is a matter of pennies. It covers our costs easily.
Mrs. Maloney. Well, thank you.
Then the difference between a 50 cent fee and a $35 fee is
obviously very, very striking. So why do you think there is
such a huge difference between the credit union practice and
one that serves its customers very well--you said you had
800,000 customers you said or 800,000 customers--and the
practice of larger banks to charge an average of $35 fees?
Why do you think there is such a large discrepancy, Mr.
Blaine?
Mr. Blaine. Madam Chairwoman, I believe that is why we are
here today.
Mrs. Maloney. That is why we are here today.
Mr. Blaine. But I would say, going back to a previous
question, if they offered courtesy overdraft at Burger King, I
think the question would be, where is the beef?
Mrs. Maloney. Okay. I would like maybe Ms. Feddis to answer
or Ms. Fox.
Ms. Feddis. I think I might be confused. The 50 cent fee
isn't for the overdraft. Is that correct? Or is it for
transferring money from a savings account, which is very
different? Many banks do that for free. Usually, it is $5 or
$10. You can pay somebody to make your coffee, or you can make
your coffee yourself. So with the banks in terms of
transferring funds from the savings account to the checking
account, sometimes that is for free in some banks; sometimes it
is $5 or $10.
Mr. Blaine. Madam Chairwoman, Ms. Feddis has caught me. The
50 cents is a transaction fee. The cost of the overdraft is
zero.
Mrs. Maloney. The cost of the overdraft is zero. Okay. It
is a transaction fee. The cost of the overdraft is zero. So
there is a big difference between a zero and a $35 fee.
Ms. Fox, would you like to comment on it? Or Mr. Staatz and
others?
Ms. Fox. The larger banks charge $10 to transfer your own
money from your savings account into your checking account to
cover an overdraft and if I recall correctly, your bill would
have the Federal Reserve look at whether that fee is also
reasonable and proportional because that makes even covering
your overdraft with your own money still a fairly expensive
transaction.
Mrs. Maloney. Mr. Staatz?
Mr. Staatz. I wanted to just clarify, for example, we don't
charge anything when you are transferring your own money. And
as others--some of the credit unions--as Mr. Blaine does, may
charge 50 cents or a little bit more, but we don't charge
anything for your own money.
Mrs. Maloney. For your own money.
Mr. Menzies or Mr. Hunt, would you like to--
Mr. Hunt. Sure, I would, Madam Chairwoman.
Mrs. Maloney. Why is there such a large difference, a
discrepancy between a 50 cent transfer, a $10 transfer, a $35
overdraft fee?
Mr. Hunt. Sure, Madam Chairwoman. I will also tell you that
I have never heard of any of our banks charging you money to
transfer your own money from one account to another. I am a
little bit confused by the gentleman to my right about whether
that is a line-of-credit fee or a strict overdraft fee. Same
thing here. If you do have a line of credit with one of our CBA
bankers tied to your savings account, we charge a minimal fee
of probably $3. Many of our banks charge zero if you have that
line of credit.
Mrs. Maloney. Would you like to clarify for him, Mr.
Blaine?
Mr. Blaine. I am not certain what the question is. The only
overdraft or NSF fee we have is a $12 NSF fee that has been the
same fee for over 20 years. And it is more than sufficient to
cover not only our processing costs but all the fraud and other
losses that are incurred in our 800,000 unit checking program.
Mrs. Maloney. There seems to be a huge discrepancy between
some institutions and others. And I thank you very much for
your service to your customers, Mr. Blaine.
The Chair recognizes Mr. Green for 5 minutes. My time has
expired. Excuse me. Mr. Posey.
Mr. Posey. Thank you, Madam Chairwoman. There is definitely
some good stuff in this well-intentioned legislation that is
being proposed and worthy of further consideration for sure.
But some of this stuff that gives me reason for pause, for
example, is, under Part J, a depository institution may charge
not more than 1 overdraft coverage fee in any single calendar
month and not more than 6 overdraft coverage fees in any single
calendar year per transaction account. You wonder what would
happen then if somebody had 12 overdrafts in a year, 6 of them
were free; would they take that maybe as an inference that they
don't need to pay it or they shouldn't be responsible for it?
And the question that begs for an answer is, who would,
even if the fee was exactly matched to the loss and to the
administrative cost, who would then pay for the abuse, the 6
abuses that were not allowed to be charged back to this
customer? And I am afraid the answer is the 99 percent of the
customers who do not abuse the privilege of having a checking
account.
Stealing is still stealing. I hope Congress is not trying
to change that fundamental right. When you tell somebody, you
give me this and I will pay you for it, and if you don't do it,
that is called theft. If it happens at McDonald's or Burger
King or anywhere else, you make an obligation; there is a moral
obligation, I think we all believe, to hold up your end of the
bargain.
And if I get you to loan me money and then say that I am
going to pay you back and I don't in fact do it; if I give you
a bad check, that is stealing. And there have been penalties
for that, I am sure, in every State and severe penalties where
the amounts are severe. So I hope that Congress is not trying
to and cannot minimize the necessity of having responsibility
to pay your debts.
And I hope that we are not trying to, by lowering the
consequences in the interest of consumer protection, we are not
trying to lower the consequences of bad behavior, which is what
caused us to be in the major economic recession that we are in
now. Sometimes, the cure is worse than a disease, and I wonder
if some components here are not a cure in search of a disease.
It is laudatory that Mr. Blaine has 80 percent of his
customers signed up for overdraft protection. That leads me to
suspect that most consumers enjoy knowing that if they should
inadvertently--hopefully--make a mistake and can't cover their
last check, that there will be an opportunity for the
institution to step up. I would be interested in knowing how
often you have to exercise that overdraft protection.
Mr. Blaine. Congressman, I agree with you.
The essence of our program is, it is an opt-in, and as you
say, if you give the consumer a choice, they will make the
right decision. But giving them the choice is very, very
important. We have about 9,000 potential overdrafts every day.
So it is a very, very large number, and if you would multiple
that by $35, then you understand what is at risk in terms of
income to institutions, why there is such a strong discussion.
One other point, in terms of the number of once per month
or 6 per year, as I understand this legislation, you are trying
to strike a balance between the number and the proportional
fee, and the truth is somewhere in between. But you have to
keep the two together when you do the legislation to make it
more reasonable.
Mr. Halperin. Congressman, if I could add, under the
legislation, there is no requirement that institutions continue
to cover any transactions after the sixth limit. So in response
to your question about whether institutions would be forced to
cover transactions without a fee, the legislation would allow
institutions then to deny those transactions, which I think is
a more effective deterrent and a more effective encouragement
for personal responsibility, which you have called for today,
than allowing transactions to go forward without a fee.
The most effective deterrent is denying the transactions.
And at six--under the current system, there seems to be a
misunderstanding that the current system actually covers all
payments. In fact, even under the current e-based overdraft
system, people do get denied if they reach their maximum limit
on a negative. For example, some banks have a negative $500.
And that could just as easily be your mortgage payment or your
rent payment or that important thing, and you were driven down
there by your small debit card. So we are not in a world now
where everything gets paid. But just to be clear, the bill
certainly does not require institutions to continue to pay and
not charge a fee.
Mr. Blaine. Congressman, we very much support personal
responsibility, too. We are all fully behind it. One of the
innovations we are adding later next year is we all have mobile
phones now, cell phones, smart phones, and we will actually
text our members early in the morning. We process at night. And
we know if there is a potential overdraft, and we will contact
you if you are a member and say you need to come see us before
5:30 to give them a second chance because it is a very busy
world, and most folks will do the right thing and come in and
avoid those fees. If not, we have no compunction about
punishing them severely.
Mr. Posey. Do you find competitors following your business
model?
Mrs. Maloney. The gentleman's time has expired, and he is
granted an additional 30 seconds for Mr. Blaine to respond.
Mr. Blaine. I think banks and credit unions are good
people, and they do want to serve their customers and members
well, and as these technologies become available, they will try
to help their customers and members.
Mrs. Maloney. Thank you very much.
And Mr. Green is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
I concur with Mr. Blaine. I think that banks and their
employees are good people, and I sincerely do believe that you
want to serve your customers well.
I do note, however, that the interests and fees that were
at one time charged on one check, as I understand it, perhaps
one, and correct me if I am not correct, at one time you would
pay not only the fee but the money that was placed in your
account, you paid interest on that as well. Is this true?
Ms. Fox. In the way the big bank fee-based overdraft works,
if they permit an overdraft--
Mr. Green. Excuse me. Let me intercede because time is of
the essence. I believe Ms. Feddis broached the issue when she
explained that the Fed no longer allows that.
Is this true, Ms. Feddis?
Ms. Feddis. No longer allows what, sir?
Mr. Green. No longer allows a fee as well as interest on an
overdraft.
Ms. Feddis. I didn't say that, sir.
Mr. Green. You did not? What did you say? I am sorry then.
Ms. Feddis. I have said a lot. I often repeat myself.
Mr. Green. I know you did, but let us just focus on this
one area.
Ms. Feddis. Can you ask the question again? I am not sure
what you are talking about.
Mr. Green. Let me ask the question. If you have an
overdraft and there is a fee paid, let us say $35, and ``X''
number of dollars are placed in the account, do you get
interest on the ``X'' number of dollars as well as the $35 fee?
Ms. Feddis. Interest on the $35 fee.
Mr. Green. The money that is placed into the account to
cover the overdraft.
Ms. Feddis. At that point, it would be just to bring the
balance to zero. So there wouldn't be any interest paid.
Ms. Fox. No. It is just a fee. But a lot of the banks
charge a second fee if you have not paid for the overdraft and
the overdraft fee in 3 to 5 days.
Mr. Green. Let us take this example. This will help. Let us
assume that you--that $100 is required to go into your account
to cover the overdraft amount. A fee of $35 is imposed. On that
$100, do you pay interest?
Ms. Fox. No. No, sir.
Mr. Green. Did you ever pay interest? Did banks ever have
the option of charging interest on the $100?
Ms. Feddis. That is in the checking account?
Ms. Fox. Only if they had an overdraft line of credit where
they were charging interest on the amount that you borrowed.
And typically banks charge about 18 percent annual interest if
you cover an overdraft with a line of credit.
Mr. Green. Ms. Feddis, you were about to--
Ms. Feddis. I think we are getting there. The line of
credit, if that is used to cover the overdraft, interest will
be charged on that line of credit. If it is covered by an
overdraft with an overdraft fee, there wouldn't be interest
charged.
Mr. Green. And there has never been an instance or
circumstance at any point when banks were charging both the fee
and the interest?
Ms. Feddis. Not that I am aware of, if I understand the
question.
Ms. Fox. There are a few banks that charge a transfer fee
for you to access your line of credit, and in that case, you
would pay a flat dollar fee plus the 18 percent interest.
Mr. Green. So you pay the transfer fee?
Ms. Fox. But it is not as big a fee. It is just a transfer
fee.
Ms. Feddis. That is also, again, the line of credit, not
the overdraft. We are talking about two different products.
Mr. Green. Right. If you have a line of credit, the line of
credit charges you, and then you pay the overdraft fee as well.
Ms. Fox. No. Transfer fee.
Mr. Green. Transfer fee. How much is a transfer fee versus
the overdraft fee?
Ms. Fox. For the largest banks, transfer fees start around
$10, and the overdraft fees are $35 for the initial overdraft;
at some banks, $35 in another few days.
Mr. Green. Mr. Blaine, if I may, you charge 50 cents for
your transfer fee?
Mr. Blaine. That is correct. And to finish out your
thought, it may go to our members' Visa card with the credit
union on which we charge 9.7 percent. So we do not charge an
overdraft fee because we are charging interest on the line of
credit.
Mr. Green. Somebody else wants to speak.
Mr. Hunt. We have to make this point very clear. If you
have a line of credit, you do not pay an overdraft fee. That is
why you have the line of credit. That is the beauty of a line
of credit; there is no overdraft fee. So some banks do charge
anywhere from $3 to $10.
Mr. Green. Can I just intercede? The lack of beauty is that
you charge a transfer fee when you are charging me to take
money out of one account that I have and place it in another
account that I have. Do you find beauty in that as well?
Mr. Hunt. I do in the fact that it is better than paying
the $35 fee in that we had to set that up for you and there was
expenses behind the initial setup.
Mr. Green. So you--
Mr. Hunt. The beauty would be if you transferred money
before you had an overdraft. That would be the beauty and there
would be no charge for that.
Mr. Green. That would be the beauty it of. But then if I am
not aware, and I should be--I guess sometimes you don't know
when you need the help and you render the help. But--
Mr. Hunt. And I have needed help before.
Mr. Green. So have I. So have I.
To close, let me share this with you. I don't find
overdraft fees to be repugnant, per se. My concern is that you
don't give the consumer the notice. I think notice is important
to consumers, and if we can get the notice--notice--assuming
that I am about to go into overdraft, if you can give me the
notice at that point--remember the statement about being in a
bank also with the electronic devices. We can give consumers
notice so that they can opt-out at that point and say, well,
look, I really don't want to pay that overdraft fee at this
point. I happen to have money in my pocket and I will cover it.
There are all sorts of options available once you know what the
consequences are. And I find that to be an acceptable solution.
The final comment would be this. With reference to the
manipulating of the order of the transactions, do you agree
that it would be fair not to manipulate the order of
transactions in an invidious way, such that people find
themselves, if the order had been in a different fashion,
wouldn't pay as much?
Mrs. Maloney. The gentleman's time has expired, but he is
granted an additional 30 seconds for Ms. Fox to respond.
Ms. Fox. Absolutely. Consumers think it is just outrageous
for their banks to order withdrawals in a way that maximizes
the number of fees. That is viewed as extremely unfair.
Mrs. Maloney. Thank you. The gentleman's time has expired.
Reverend Cleaver is recognized for 5 minutes.
Mr. Cleaver. Ms. Feddis, are you familiar with a recent
article in USA Today by a consultant advisor to large banks on
credit cards, Mr. Brad Nickum, N-i-c-k-u-m. He wrote an
article, and he said, ``profits, not costs generally drive bank
fees.'' Brad Nickum, consultant advisor to large banks on
credit cards.
Ms. Feddis. I would suggest that, for any business, costs
and profits drive fees. The point of a business is in basic
business theory that income has to be higher than expenses.
Mr. Cleaver. No. I am sorry. He is saying that profits from
these fees, the profits from credit card--that--I am sorry--
that banks charge on overdrafts is what drives--
Ms. Feddis. I am sorry. I misunderstood. The costs are
certainly part of it. But part of the purpose of an overdraft
fee is to serve as a penalty. And like any penalty fee, whether
it is the IRS--
Mr. Cleaver. Penalty of what?
Ms. Feddis. A penalty to encourage people, to get their
attention and say, please, pay attention to your account.
Mr. Cleaver. What about slow learners?
Ms. Feddis. That is a very good point. The vast majority of
people manage their credit--their checking accounts very well.
Mr. Cleaver. I am sorry. Mr. Blaine, did you say 9,000?
Mr. Blaine. Per day. That is correct.
Mr. Cleaver. That is a lot of folks. That is $315,000 a
year; $35 per check would be--
Ms. Feddis. I am just getting to the point that the group
you are talking about, which is the vulnerable group--most
people manage it well.
Some people, as has been discussed today, are deliberately
using the overdraft as their cash management, particularly
small businesses because they can't get a loan or they don't
want to get a loan. They are okay. There may be a vulnerable
group. So, yes, we should protect them. But maybe we need to
face the fact that some people maybe shouldn't have a full-
service standard checking account. Maybe they need something
else that is more suited to them.
Mr. Cleaver. I agree with you. So why do you let them have
the checking account and then charge them $35?
Ms. Feddis. I think what you need is something like a
payroll card which is very popular with people. The only
deposit allowed into it is the payroll. They only access it
through a debit card. It is overseen by the employer. It is
very popular.
Mr. Cleaver. So it would work in realtime?
Ms. Feddis. Well, there will be overdrafts. It won't be for
the reasons that I have discussed before. There can be because
it is not possible for the bank to stop every overdraft, and it
is not realtime, as you pointed out.
Ms. Fox. Mr. Cleaver, when a bank decides to lend money to
consumers by letting a debit purchase go through that should
have been denied for lack of funds, the fee is not a deterrent;
it is a profit center. If the bank wanted to deter overdrafts,
they would prohibit a debit card from overdrawing at the point
of sale or at the ATM machine.
Mr. Halperin. Mr. Cleaver, if I can just add, we have that
account, the account you are talking about. It was when the
debit card didn't allow you to overdraft. So instead of driving
people out of the banking system by charging high overdraft
fees, why don't we bring back the debit card as the tool to
only spend the money you have and give consumers the tool to be
able to tell that debit card that it can't be turned into a
credit card?
Ms. Feddis. But there are times when some people do want
their debit cards--excuse me.
Mr. Cleaver. No hitting, no hitting.
Ms. Feddis. It is okay. They do want their overdrafts paid.
And give people the choice, as you point out, that, yes, in a
perfect world, everybody would have enough money in their
account, but sometimes they don't, and they need the medicine,
or they want the groceries paid, or they want the meal that
they just ate to be paid for. So give people the choice. And if
there is another group that is a small group who is vulnerable,
let us focus on them, but don't deny everybody else the choice.
Mr. Cleaver. The choice to pay extra money?
Ms. Feddis. If it is their choice.
Mr. Hunt. To cover their bill, yes.
Mr. Blaine. Representative Cleaver, I hope you have at
least 8 spaces on your calculator, because 10,000 overdrafts
times $35 is $350,000 a day. And that is just one of the
advantages of participating in a credit union when you don't
have to pay those kinds of fees.
Ms. Bloom. If I might add, my experience with consumers is
they get trapped in this cycle and that these--I mentioned some
examples from stories we have heard, people just get into this
cycle and it is 7, 8, 11 fees wrapped up within a 2-week
period. So it is--and they don't really know until it is too
late.
Mr. Cleaver. I agree. Because it is similar to Johnnie's
Check Cashing Company on the street corner.
Mrs. Maloney. The gentleman's time has expired. I will
grant him another minute for his closing question.
Mr. Cleaver. Yes. What I think is difficult to explain is a
report that appeared in a real estate group's publication where
a customer with a $500 balance made 4 debits in the following
order: $15, $10, $150, and $450. Three overdraft fees could be
charged instead of one by posting the largest transaction
first, right?
Mr. Hunt. Yes.
Mr. Cleaver. Why doesn't that happen?
Mr. Hunt. Sir, I will tell you this. Of all the issues
discussed in this bill and in all the meetings I have had
across the country, the most challenging question that I get
from retail bankers, especially retail branch managers is, what
do they post first? If they pay the highest amount, then they
get criticized for charging overdraft on the three lower
amounts. If they take care of the three lower amounts but don't
take care of the mortgage, they get criticized the same way. So
it is a great question. No one has the solution to it. We do
ask this of you, if this legislation is enacted, when you write
the regulations, be crystal clear; what do you want the banks
to do? Do you want the banks to go high-low or low-high?
Mrs. Maloney. Thank you.
The gentleman's time has expired. And the bill is crystal
clear; it says that the order of checks cannot be manipulated
in order to get a higher overdraft fee. So it goes with higher
to lower.
I would like to thank all of the witnesses. This has been
incredibly interesting.
Many members were not able to be here because there are not
votes today. They are invited to submit their questions in
writing. And without objection, we will have an additional 30
days for members to submit questions to the witnesses and to
place their responses in the record. Thank you again. This
meeting is adjourned.
[Whereupon, at 12:33 p.m., the hearing was adjourned.]
A P P E N D I X
October 30, 2009
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