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Bank overdraft fees would be sharply curtailed under a bill introduced in the U.S. Senate on Monday, adding to a raft of regulatory challenges for banks.
The legislation offered by Senate Banking Committee Chairman Christopher Dodd and five other Democratic senators would curb fees that some banks are already backing away from.
Under the Dodd bill, banks could not slap overdraft fees on cash-machine and debit-card transactions unless customers have specifically opted in to an overdraft protection program.
Many banks in recent years have automatically enrolled customers in overdraft coverage programs and then charged them fees ranging from $10 to $38 per incident when they overdraw.
“Consumers are being hit with hundreds of dollars in penalties for overdrawing on their account by just a few dollars. Banks should not be trying to bolster their profits at the expense of their customers,” said Dodd in a statement.
Major banks that have recently announced voluntary caps or other curbs on overdraft fees include Bank of America Corp, JPMorgan Chase and Wells Fargo & Co.
The Dodd bill adds to a fast-growing list of regulatory problems confronting the banking industry as Washington reacts to the worst financial crisis in generations.
By tightening oversight of the financial sector, President Barack Obama and congressional Democrats hope to prevent another crisis in the future and do more to protect consumers.
Democratic Rep. Carolyn Maloney has introduced a bill to rein in overdraft fees in the House of Representatives.
The administration has sent more than a dozen regulatory reform proposals to Capitol Hill, ranging from creating a systemic risk regulator to restraining executive pay.
The European Union is making similar efforts, but progress on both sides of the Atlantic has been slow in the face of stiff industry resistance and fading momentum as markets recover.
The House Financial Services Committee will meet on Tuesday to work on a bill that would create a U.S. Consumer Financial Protection Agency, or CFPA, which supporters say is needed to police issues like overdraft fees, mortgages and credit cards.
Opponents of the proposed agency, including banking industry lobbyists, have attacked it as an unneeded and costly new layer of government bureaucracy.
Analysts say the proposed agency, along with other parts of the Obama administration’s financial regulation reform program, would threaten banks’ profits.
The CFPA bill, as drafted, could expose many banks to increased state regulation. The biggest banks would likely be hit hardest by the agency, while many small banks would be shielded from the full impact of its examinations.
Large banks’ profits from over-the-counter derivatives markets operations are also threatened by legislation approved last week by the committee. Debate resumes this week in the House Agriculture Committee on OTC derivatives regulation.
Bonuses at Wall Street mega-banks have come under attack. Obama aides have stepped up their rhetoric in recent days, blasting recent reports that firms such as Goldman Sachs could hand out record levels of bonuses as “offensive.”
On fees, Dodd’s bill would require that customers “opt in” to overdraft coverage programs on cash machine and debit card transactions, while limiting banks to charging a maximum of one overdraft fee per month and no more than six fees per year.
Joining Dodd in introducing the bill were five other Democratic senators: Jack Reed, Sherrod Brown, Charles Schumer, Carl Levin and Jeff Merkley. “Excessive and unfair overdraft fees are forcing Congress to step in yet again to stop abusive banking practices,” Levin said.
The bill would bar banks from punishing those who reject overdraft coverage by, for instance, denying them favorable terms on other services. Further, it would “require fee amounts be proportional to the cost of processing the overdraft.”
In addition, banks could not manipulate the order in which they process transactions to gain extra fees, while customers would have to be notified when they overdraw at a cash machine or teller and be allowed to cancel the transaction.