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38–389 PDF 2007

OVERDRAFT PROTECTION: FAIR

PRACTICES FOR CONSUMERS

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 11, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–49

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

4PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

JULIA CARSON, Indiana 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

PAUL E. GILLMOR, Ohio 

TOM PRICE, Georgia 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

(V)

C O N T E N T S 

Page 

Hearing held on: 

July 11, 2007 ..................................................................................................... 1

Appendix: 

July 11, 2007 ..................................................................................................... 25

WITNESSES 

WEDNESDAY, JULY 11, 2007

Cunningham, Mary, President & CEO, USA Federal Credit Union, on behalf 

of the Credit Union National Association .......................................................... 15

Feddis, Nessa, Senior Federal Counsel, American Bankers Association ............ 11

Fox, Jean Ann, Director of Consumer Protection, Consumer Federation of 

America ................................................................................................................. 17

Halperin, Eric, Director, Washington Office, Center for Responsible Lending .. 5

Ireland, Oliver I., Partner, Morrison & Foerster LLP .......................................... 7

Ludwig, Sarah, Executive Director, Neighborhood Economic Development Advocacy Project ....................................................................................................... 13

Wu, Chi Chi, Staff Attorney, National Consumer Law Center ........................... 9

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn .................................................................................... 26

Carson, Hon. Julia ............................................................................................ 29

Cleaver, Hon. Emanuel .................................................................................... 30

Cunningham, Mary .......................................................................................... 33

Feddis, Nessa .................................................................................................... 40

Fox, Jean Ann ................................................................................................... 56

Halperin, Eric ................................................................................................... 67

Ireland, Oliver I. ............................................................................................... 78

Ludwig, Sarah ................................................................................................... 89

Wu, Chi Chi ...................................................................................................... 94

(1)

OVERDRAFT PROTECTION: FAIR 

PRACTICES FOR CONSUMERS 

Wednesday July 11, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:03 p.m., in room 

2128, Rayburn House Office Building, Hon. Carolyn B. Maloney 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Maloney, Moore, Green, Clay, 

Miller, Scott, Cleaver; Gillmor, Price, Hensarling, and Garrett. 

Chairwoman MALONEY. This hearing will come to order. 

I would like to welcome my colleagues and to welcome all of the 

witnesses and thank them very much for being here today, for their 

time and for their expertise, and for their testimony. 

As a New Yorker, I am keenly aware of the many services financial institutions and credit unions provide their customers. 

Banking is my home town industry, from New York City, and I 

want it to grow and prosper. 

I appreciate that banking in the United States is more accessible, 

affordable, and efficient than perhaps any other place in the world. 

In my view, banks should be able to charge for their services, including the service of overdraft protection, but consumers, individuals should have notice of this charge ahead of time, and the opportunity to reject the transaction before incurring the charge. It’s 

that simple. 

Hidden overdraft fees are unfair, and fairness is an important 

component of a safe and sound banking system. 

Customers should be told when they are about to take out more 

money than they actually have, and customers should be able to 

choose if they want overdraft protections or if they would rather 

not pay the fees and not have the transaction. 

Customers should be given information about how much overdraft protection plans cost so that they have the opportunity to 

compare the cost to other forms of overdraft protection, such as 

linking their checking account to their savings account or opening 

a line of credit. 

These are commonsense, almost due process principles, and they 

are the basis of the bill that I have reintroduced in this Congress 

with Chairman Frank, H.R. 946, the Consumer Overdraft Protection Fair Practices Act. 

2

Not surprisingly, the data shows that consumers overwhelmingly 

want what this bill provides. They want to know if they are going 

to pay an overdraft fee, and to be able to cancel the transaction if 

they do not wish to pay more. 

According to a report released today by the Center for Responsible Lending, overdraft fees accounted for $17.5 billion in 2006, an 

increase of 75 percent from the $10 billion annually that the CRL 

calculated banks made on overdraft fees in 2004, and again, I am 

speaking about numbers that were in the Center for Responsible 

Lending’s report that they issued today. 

Again, my concern is not that banks shouldn’t charge for this 

service. I think they have every right to charge for services that 

they provide the public. But consumers should have the right to decline the service and the fee if they do not wish to have this service. 

This bill is modeled on my successful initiative to require disclosure of ATM fees. Everyone is now perfectly comfortable with the 

ATM notices that tell you that you may be charged a fee for using 

the ATM. 

Lots of us use ATMs happily every day. I am very appreciative 

of the ability to withdraw money in Washington from my New York 

account, and I feel the fee that I opt-in to pay is very fair. Yet, it 

is my decision to do so. 

When that legislation was first introduced, there was tremendous opposition to it. What some in industry seem to be saying is 

that they just do not want to tell the public how much you have 

in your account, so they can’t tell you if you’re going to be overdrawn or not. This strikes me as straining credibility. 

First, at most ATMs, you can ask for your balance. That’s part 

of the service that they provide. 

Secondly, not so long ago, if a customer asked an ATM for more 

money than they had in their account, the ATM machine would 

simply say no and announce that you were about to overdraw, and 

if you wrote a check for more than you had in your account, it 

would bounce. This was a service that used to be there, and many 

people still mistakenly think that it is still the case. 

What I basically want to say is that I believe very strongly in notice, and in the free market process, but I feel that consumers, customers should be notified about a fee or a service and they should 

have a chance to decide whether they want to pay that fee or have 

that service. 

I feel that it is balanced and that it is fair, and I have submitted 

this legislation, and I look forward to the comments of my colleagues and the witnesses today on this particular approach. 

I thank you all for coming and I yield to my colleague, and ranking member, Mr. Gillmor. 

Mr. GILLMOR. Thank you very much, Madam Chairwoman. 

I want to thank the chairwoman for calling this hearing to examine recent trends in the use of overdraft protection plans. This is 

an issue that I think does deserve committee consideration. Over 

the years, the financial services industry has evolved dramatically. 

Consumers today are presented with many options to manage their 

money. 

3

Whereas just a decade or so ago, most bank accounts required a 

maintenance fee, today the vast majority of banks no longer charge 

one, and during this evolution, consumers were also moved away 

from the historic overdraft protection in which the bank offered 

overdraft coverage only to those customers that it subjectively believed to be reliable. 

Currently most consumers have the ability to have their bank account protected in some form or another. 

Also, some consumers, under recent Federal guidance, have the 

ability to opt-out of this type of protection. 

There is little doubt that some Americans are unable to responsibly handle the financial services available to them. That being 

said, I do not believe this is a reason to eliminate products from 

the market. 

The vast majority of consumers with overdraft protection on their 

checking accounts use the protection occasionally or never. It is a 

benefit to them. 

A small minority of consumers, however, repeatedly use the product as a short-term loan. 

This is unfortunate and I think it calls for greater consumer education to prevent that, and I look forward to hearing from the industry what solutions are in place for those consumers who fall 

into this habit. 

With that, I yield back the balance of my time and I thank you 

for calling this hearing. 

Chairwoman MALONEY. I grant 3 minutes to Congressman 

Green. 

Mr. GREEN. Thank you, Madam Chairwoman, and I thank the 

ranking member as well, and the witnesses who are appearing 

today. 

This is an important hearing, because it impacts a lot of persons 

who obviously are not among those who have the most money, because if they were, they wouldn’t have some of these fees attached 

to their accounts. 

So I thank you for being here. I’m looking forward to what you 

have to say in terms of testimony. 

I approach this with an open mind and look forward to the questions that will follow after we’ve heard your comments. 

I yield back the balance of my time. 

Chairwoman MALONEY. The Chair recognizes Congressman Price 

for 3 minutes. 

Mr. PRICE. I thank the chairwoman, and I want to thank the 

chairwoman and the ranking member for holding this important 

hearing on really what I see as an important issue of overdraft protection. 

Thanks to thoughtful amendments to Regulation DD, and interagency guidance since 2002, consumers are now provided with uniform and adequate disclosure information concerning bounced 

checks and courtesy overdraft protection services. This has allowed 

consumers to continue to enjoy what has become an increasingly 

fast, accessible banking system. 

The benefits these programs provide is that consumers will avoid 

a merchant’s returned check fee and will stay in good standing 

with those with whom they do business. 

4

Many consumers already realize the importance of this protection because most have been charged a fee by their bank for inadvertently exceeding their overdraft limit, and I don’t believe it’s 

necessarily limited to those with lower financial means. I suspect 

that this runs the gamut across our society. 

Many banks, as well as savings and loans and credit unions, indeed offer courtesy overdraft protection or bounce coverage plans so 

that the checks do not bounce, and individuals’ ATM and debit card 

transactions go through, and with these plans, people obviously 

still pay an overdraft fee or bounce coverage fee to the bank or 

credit union or savings and loan for each item. 

This is a service provided by the banks and the credit unions to 

their valued customers, but it may be one that costs them money. 

It certainly does cost them money, which is then appropriately 

charged to the consumer. 

We may hear today from some witnesses and other members that 

there needs to be a legislative solution to overdraft charges for consumers. 

It strikes me that Congress needs to be very careful when wading into the marketplace because overreaching on our part with 

legislation would very possibly cause banks and credit unions to 

stop offering overdraft protection as a product and I doubt that 

anyone here today wants that. 

I, for one, don’t want to have to go back home to my constituents 

and explain why their bank no longer is offering them overdraft 

protection. 

I do have a number of questions and I hope to be able to stick 

around for the question and answer period, but one I’d like to hear 

the entire panel’s thoughts on, my understanding is that under 

many loan terms, a failure to pay for which a bounced check would 

qualify often makes the loan due. 

For example, if you fail to make a car loan payment, that would 

likely make the car loan due. Wouldn’t that, isn’t that more expensive and burdensome to consumers than a market-driven overdraft 

fee? 

And I would ask you to consider giving an opinion about the unintended consequences of meddling in this area. 

I want to thank the entire panel for coming. I look forward to 

your testimony and to the Q&A period, and I yield back the balance of my time. 

Chairwoman MALONEY. The Chair recognizes Mr. Scott from 

Georgia for 3 minutes. 

Mr. SCOTT. Thank you. 

This is a very important hearing. Overdraft fee protection is very 

important, and we hear a lot of complaints about it from consumers. 

Banks have their challenges in terms of whether or not they 

have the technology in place to do it at the right time and under 

the right circumstances. And I understand the importance of personal responsibility of one’s financial life, very important. 

There are certain practices, however, occurring in the industry 

that do seem to be misleading and could be interpreted as being 

unfair. 

5

For example, I think it would be good for us to discuss today why 

most banks are not automatically warning, or rather most banks 

are not allowing a transaction to go through when a customer does 

not have the sufficient funds. That’s sort of at the core of the matter. 

The bank knows there are not sufficient funds there. Why would 

you let the transaction go through anyway, and especially when we 

know that there’s a fee being paid for that overdraft? 

In other words, are we in the banking industry trying to make 

money off of the fact that the person doesn’t have the money there, 

and the bank knows the person doesn’t have the money there, so 

why couldn’t there be an automatic warning to that effect? 

And believe me, I’m not here to beat up on banks, because they 

have their challenges, and for the most part really are doing a very 

important job and providing an extremely important service. 

However, I do want to express concerns regarding the fact that 

many banks have claimed one of their most profitable services is, 

in fact, overdraft lending, especially just at the residential mortgages. 

This is an area that I think we really need to examine very, very 

closely, for when a customer sees his statement that says, ‘‘Your 

funds have not yet cleared,’’ this can be frustrating, and further, 

receiving a clear answer from the bank is often quite difficult. 

So, Madam Chairwoman, I think this is a very important and 

timely hearing, and I look forward to exploring that central question further as we go forward, which I think gets to the core of the 

matter. 

Thank you. 

Chairwoman MALONEY. The gentleman’s time has expired. 

We have a distinguished panel today: 

Mr. Eric Halperin, director of the Washington Office of the Center for Responsible Lending; 

Mr. Oliver L. Ireland, who is a partner of Morrison & Foerster, 

and was formerly an attorney with the Federal Reserve, the Associate General Counsel; 

Ms. Chi Chi Wu, staff attorney for the National Consumer Law 

Center; 

Ms. Nessa Feddis, senior Federal counsel for the American Bankers Association; 

Ms. Sarah Ludwig, executive director of Neighborhood Economic 

Development Advocacy Project—a New York based organization 

that helps low and moderate income people with their credit concerns; 

Ms. Mary Cunningham, president and CEO, USA Federal Credit 

Union, on behalf of the Credit Union National Association; 

And Ms. Jean Ann Fox, director of consumer protection, Consumer Federation of America. 

I thank all of you for coming. 

Mr. Halperin. 

STATEMENT OF ERIC HALPERIN, DIRECTOR, WASHINGTON 

OFFICE, CENTER FOR RESPONSIBLE LENDING 

Mr. HALPERIN. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the committee, thank you for holding this hearing 

6

and bringing to light an abusive banking practice that now costs 

Americans $17.5 billion a year. 

I serve as the director of the Washington office of the Center for 

Responsible Lending, a nonprofit research and policy organization 

that is committed to protecting family wealth. 

We’re also an affiliate of Self-Help, which has a nonprofit loan 

fund and a credit union. 

Today I will summarize CRL’s research on overdraft loans and 

offer our strong support for H.R. 946. 

H.R. 946 will make a simple, yet powerful improvement in the 

marketplace by giving consumers important information and also 

providing them the opportunity to choose whether or not to take 

out a high-cost overdraft loan. 

Common banking practices now increase the number of overdrafts rather than minimize them, and can cost account holders 

hundreds of dollars in a matter of hours. 

Under the old system, fees were primarily assessed to discourage 

overdrafts. If a customer wanted their overdrafts regularly covered, 

they arranged to have a line of credit or a transfer from a savings 

account to cover those overdrafts. Now, banks automatically enroll 

people in an overdraft loan program. 

When a customer who is an overdraft loan program goes to make a purchase, for example, in a store, for $20, with their debit card, 

even if they only have $5 in their account, the bank will now let 

that transaction go through, where in the past they would have 

perhaps denied that transaction without charging a fee. They do 

not warn. And then they extend the customer a loan of $15, for a 

fee of $34. That loan is repaid automatically when the customer’s 

next deposit hits their account. 

As I mentioned this morning, we released a report putting the cost of overdraft loans at $17.5 billion a year. In a system that is 

enormously out of balance, that $17.5 billion in fees is only for 

$15.8 billion in credit extended. The loan fees are more than the 

amount that people are borrowing. And most of that $17.5 billion 

is paid by low and middle income families. 

In a 2006 CRL report, we found that just 16 percent of the overdraft users pay 70 percent of the fees. There is a small group of 

users that pay almost all the fees, and those users are more likely 

to be low and middle income families. 

And it is no longer about the check, although these systems 

started by primarily focussing on covering a paper check. Now, 

ATM and debit card point-of-sale transactions account for almost 

half of all transactions that trigger an overdraft. 

This shift, a dramatic shift in the market, occurred since 2003 

or 2004, when it was estimated that 80 percent of financial institutions would not routinely cover overdrafts through debit cards. 

Debit card overdrafts are also extremely expensive for consumers. Because the transaction amounts for debit card purchases 

are often very small, consumers end up paying approximately $2 

in fees for every dollar of credit they get when they do a debit card 

overdraft. 

This accounts for $7.8 billion in fees paid per year, and these fees 

are easily preventable, either with a warning or a return to the 

system where those transactions were denied without a fee being 

7

charged unless the consumer had chosen ahead of time, affirmatively made the choice ahead of time to enroll in a program such 

as a line of credit or a transfer from savings that would allow their 

overdrafts to be covered. 

H.R. 946 provides a straightforward and commonsense solution 

to many of these abuses. Truth in Lending Act coverage will give 

the consumers the important information they need to make a decision. 

Requiring that a consumer give their written consent to participate in these programs will ensure that a consumer is making the 

decision about participating in the most expensive credit program 

that their bank offers. 

Providing a warning at the ATM and on a debit card purchase 

before an overdraft occurs will ensure that the consumer decides 

whether they want to pay $33 for a cup of coffee. 

And finally, prohibiting financial institutions from manipulating 

the order of checks when they come into their account, changing 

the order into the largest check clearing first to the smallest, will 

prevent consumers from needlessly paying overdraft fees merely 

because their bank changed the order in which their checks were 

processed. 

Thank you again for inviting us in to testify, and I look forward 

to answering your questions. 

[The prepared statement of Mr. Halperin can be found on page 

67 of the appendix.] 

Chairwoman MALONEY. Mr. Ireland. 

STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & 

FOERSTER LLP 

Mr. IRELAND. Thank you, Chairwoman Maloney, Ranking Member Gillmor, and members of the committee. 

My name is Oliver Ireland, and I’m a partner in the financial 

services practice of Morrison & Foerster here in Washington. 

I have over 30 years experience in financial services issues, over 

25 of those years with the Federal Reserve system, and 15 years 

as an Associate General Counsel with the Board here in Washington. Since the year 2000, I’ve been in private practice. 

I have to say that the issue that has probably occupied more of 

my attention during those 30 years than any other single issue has 

been payment practices, including overdraft practices, overdraft 

practices ranging from retail overdrafts to overdrafts by banks at 

Federal Reserve banks and even overdrafts by Federal agencies at 

Federal Reserve banks. 

I share your aspirations, Chairwoman Maloney, for payment systems that deal in real time, final funds, so everybody knows what 

their account balance is and can make informed decisions about it 

at the time they do a transaction. 

Unfortunately, that’s not the world we live in today. It’s not the 

world we’ve lived in in the past. And I think it’s still a ways away. 

Overdrafts are a fact of life in the payment process. Businesses 

incur overdrafts. Banks incur overdrafts. High and low-income consumers incur overdrafts. 

The banks I’ve talked to that offer overdraft services to their customers tell me that those services are used across the economic 

8

spectrum, that they’re not concentrated in any particular economic 

strata such as low or moderate income consumers. 

And as I indicated, even government agencies have been known 

to overdraw their accounts for short periods of time. 

Many of these overdrafts result because of imprecisions in the accounting and posting process, mail delays, all kinds of operational 

issues that arise in the payment process where people think they 

have money or should have money by a given point in time, but 

it’s not yet available to cover payments. 

Banks have been providing overdraft services and paying overdraft services in order to deal with those kinds of problems for decades, and the reason they’ve done that is the importance of completing transactions in the real economy. 

The consequences of a failed transaction are not apparent to the 

bank who is processing the payment. 

Nevertheless, those consequences can be orders of magnitude 

larger than the amount of the transaction which itself may be orders of magnitude larger than the overdraft that would be created 

by completing the transaction. 

So banks have historically endeavored to pay overdrafts for their 

customers as a payment service associated with managing transaction accounts for their customers. 

To be sure, those products and that practice has been abused in 

the past. 

We have had dramatic examples of individuals who find out that 

their banks will accommodate those overdrafts and use them as a 

vehicle for short-term loans or even longer-term loans if they can 

hold off the bank’s collection efforts. 

However, the principal focus of overdrafts in the banking system 

has historically been the making and completion of payments, rather than as a lending and credit vehicle. 

Today the overdraft process has become automated. It used to be 

a manual process. Payment processing itself is highly automated 

and is highly efficient. 

That automation in the overdraft process has made the ability to 

complete payments through overdrafts available to all bank customers or many bank customers that it was not available to before, 

where it was limited to select groups that may be known to individual bank officers. 

There are also significant consequences to making mistakes in 

the payment process. 

For these reasons, and the degree of automation, the policy options that are available for changing payment processes and current payment procedures have to be considered very carefully, and 

tend to be limited. 

I can remember when I was at the Federal Reserve and we were 

trying to put in effect our own overdraft payment process for Fed 

Wire transactions, which are large dollar corporate payments initiated by banks, and the Fed Wire software manager would sit in the 

room and we’d come up with a policy program to reduce overdrafts, 

and he’d say, ‘‘You can’t do it,’’ he had to veto, simply because the 

operation wouldn’t support it. 

Operations obviously can change. 

9

Chairwoman MALONEY. The Chair grants the gentleman 30 additional seconds. Your time has expired. 

Mr. IRELAND. Operations can change, but I think it’s going to be 

a difficult process. 

I would like to say, however, that I do think you’ve identified another important issue, and that is that fees for overdrafts can, 

which have been imposed, can often exceed the value of the service, 

and there needs to be some way to control those fees. 

Banking agency guidance today requires banks both to cap the 

fees and to give customers an opportunity to opt-out of overdraft 

payment. 

Thank you. I’d be happy to answer any of your questions. 

[The prepared statement of Mr. Ireland can be found on page 78 

of the appendix.] 

Chairwoman MALONEY. Thank you very much. 

Ms. Wu. 

STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL 

CONSUMER LAW CENTER 

Ms. WU. Madam Chairwoman, Representative Gillmor, and 

members of the subcommittee, thank you very much for inviting 

me here today. I’m testifying on behalf of the low-income clients of 

the National Consumer Law Center. 

Madam Chairwoman, thank you for holding this hearing and for 

introducing H.R. 946. This bill will go a long way in addressing the 

abuses of overdraft loan programs, and unfortunately, these abuses 

are many. 

One of the abuses is that overdraft loans are one of the few forms 

of involuntary credit. They are ‘‘crammed,’’ or imposed on consumers who have not requested them. Consumers who don’t want 

this form of credit are forced to actively contact their banks to optout. 

Some consumers may not be aware, until they overdraw their account, that they’re accessing a high-cost credit product, especially 

true in the ATM or debit card context, where transactions that 

would overdraw an account were previously declined and no fee 

was imposed. 

Now, Mr. Ireland talked about how overdrafts are unavoidable, 

and implying so even in the ATM and debit card context. 

There may be accidental overdrafts, but what is the egregious 

and unconscionable practice is when a bank intentionally programs 

their computers to approve an ATM or debit card withdrawal when 

they know the transaction will overdraw the account. 

And to show that is happening, here is a statement from Bank 

of America in 2005: 

‘‘In our ongoing efforts to make banking easier with us, our goal 

is to authorize more transactions made using your ATM or check 

card, even if it creates an overdraft on your account.’’ 

This is not accidental. This is deliberate. 

Now, there has been an issue raised as to whether overdraft 

loans are a form of credit. They are unquestionably a form of credit. They are credit as defined under the Truth in Lending Act, the 

right to incur debt and defer its payment. 

10

When a bank lets a consumer use the banks’ funds to pay for an 

overdraft and then requires the consumer to repay the bank, it’s 

granting the right to incur debt and defer its payment. 

Regulator after regulator, from the OCC to State banking departments, including the Federal Reserve Board, have stated that overdraft loans are a form of credit, and even the Fed Wire overdrafts 

that Mr. Ireland talked about are considered a form of credit. 

Furthermore, when banks ‘‘cram’’ these overdraft loans onto 

banking accounts, it’s a default product. They typically don’t engage in any underwriting. 

Unlike traditional, affordable lines of credit, banks don’t assess 

a consumer’s ability to pay. They make sure these programs are 

profitable by charging huge fees, providing huge profit margins as 

well as covering any alleged risk. 

Now, despite the fact that overdraft loans are credit, banks don’t 

need to make Truth in Lending disclosures. You see, in 1969, the 

Federal Reserve Board exempted overdraft fees from the definition 

of finance charge. 

This exemption was reasonable, maybe, in 1969, when all we had 

was the traditional bankers’ courtesy of occasionally paying an 

overdraft on an ad hoc basis as a customer accommodation. But 

banks have exploited this exemption, creating high-cost, automated 

credit programs while avoiding Truth in Lending disclosures. 

Now, the Fed had the opportunity to close this gaping loophole 

and require Truth in Lending disclosures. Instead, the Fed chose 

to regulate them under the less effective Truth in Savings Act, 

which undermines the Truth in Lending Act’s core purpose in promoting the informed use of credit. 

Without the APR disclosure required by Truth in Lending, consumers have no way to compare an overdraft loan to other credit 

transactions, such as a payday loan, an auto title loan, or a credit 

card cash advance. 

Under the Fed’s regulation, the disclosed APR for a typical payday loan is 400 percent, but for an overdraft loan program, the 

lender can disclose that the account is actually earning interest 

under Truth in Savings. 

And under Truth in Lending, as well as for all practical purposes, ATM and debit cards that access overdraft loans are transformed into super-expensive credit cards. 

For example, this is a typical debit card. It even has a 

MasterCard logo on it. If my bank allows me to use its money to 

pay for purchases, what makes it different from other credit cards 

in my wallet, except for the steep fee? 

Now, by the way, I’ve heard some argument that it would be difficult to calculate an APR because the bank doesn’t know how long 

in advance the loan is outstanding for. 

But you have the same issue with credit cards fees, like cash advance fees, and Congress built into the Truth in Lending Act a way 

disclose an APR for credit card fees. 

In fact, H.R. 946 actually deals with this issue and requires overdraft loan fees to be disclosed using a fee-inclusive APR similar to 

credit cards. 

11

Finally, I want to talk about how overdraft loans can cause financial hardships when they seize Social Security or other Federal 

payments to repay them. 

Federal law is supposed to protect these benefits, and indeed, the 

only creditors that can touch them are the U.S. Government itself 

and banks when they take or offset protected Social Security and 

other benefits to pay for overdraft loans and fees. 

H.R. 946 would address many of the problems discussed today 

and prohibit the cramming of overdraft loans by requiring banks 

to obtain real consent. It would require Truth in Lending disclosures and it would require banks to warn consumers and give them 

an opportunity to cancel before an ATM or debit card transaction 

will overdraw an account. 

We thank you for the opportunity to testify and look forward to 

working with the chairwoman and other members of the subcommittee on H.R. 946. Thank you. 

[The prepared statement of Ms. Wu can be found on page 94 of 

the appendix.] 

Chairwoman MALONEY. Ms. Feddis. 

STATEMENT OF NESSA FEDDIS, SENIOR FEDERAL COUNSEL, 

AMERICAN BANKERS ASSOCIATION 

Ms. FEDDIS. Thank you. 

Madam Chairwoman and members of the subcommittee, my 

name is Nessa Feddis, and I am the senior Federal counsel for the 

American Bankers Association. I am pleased to be here today to 

represent the ABA on the issue of overdraft policies and practices 

of banks. 

As you note, Madam Chairwoman, the American consumers 

enjoy the most affordable, efficient, and accessible banking in the 

world. Consumers can open a checking account with a small deposit and have access to an entire menu of payment services at little or no cost. They can write checks, use debit cards to withdraw 

cash or make purchases, pay bills, and make funds transfers day 

or night, around the globe. 

In the best of all worlds, people would only write a check or 

make an electronic payment when there are sufficient funds in 

their account. Of course, this isn’t a perfect world. For this reason, 

banks have traditionally accommodated customers when they inadvertently overdraw their account. Consumers value banks’ practice 

of paying overdrafts. Indeed, they expect it. 

They avoid the embarrassment, hassle, costs, and other adverse 

consequences of having a payment returned or a transaction denied. Returning a payment for a merchant, for a mortgage company, a credit card company, usually means the consumer pays additional fees charged by the person receiving the payment. 

Consumers also value having debit card transactions approved 

even when there are insufficient funds. For example, many consumers would rather their deposit institution authorize the debit 

transaction than face the consequences of not being able to pay for 

a meal they’ve just consumed or the groceries that have already 

been rung up and bagged. 

Consumers are in control and can avoid overdraft fees. Keeping 

track of transactions is critical to overdrawing an account. This, of 

12

course, is not always a pleasant task, and most of us would like 

to avoid it altogether, but doing so is an important responsibility 

of using a transaction account. 

The bottom line is that consumers are in the best position to 

know what their actual balance is. Only they know which checks 

that they have written, automatic payments they have authorized, 

and debit transactions they have approved. 

However, even if individuals do not keep an accurate, up to date 

record of their transactions, it’s easy for them to check their balance. They can check their balances by phone, at the ATM, online, 

or using the Internet browser on a phone or other handheld device. 

Customers who find it challenging to manage their accounts have 

other options available to them. Many simply maintain a cushion. 

Others establish a line of credit or arrange for overdrafts to be covered by automatic transfers from a savings account or to a credit 

card account. 

In addition, most banks permit customers to opt-out of having 

overdrafts authorized or paid. 

Banks will also often waive the fee for an initial or occasional 

overdraft. After the first incident, however, the consumer is then 

aware that debit card transactions, for example, may cause an 

overdraft. 

Of course, consumers dissatisfied with their bank’s services have 

many other banks to choose from in a very competitive industry. 

The banking industry and regulators have been and will continue 

to be responsive to consumer concerns about overdraft fees. 

ABA, in March 2003, in a letter to members, urged caution with 

regard to overdraft practices, and following that, published extensive guidelines for best practices. 

In addition, in 2005, the banking agencies adopted their overdraft protection program guidance, which the industry adopted and 

fully supports. 

The Federal Reserve Board went further to address concerns 

about consumer understanding of the cost of overdrafts by amending the Truth in Savings Act’s Regulation DD. 

We believe that the industry’s initiative, along with the industry’s guidance, and important changes to Regulation DD, have addressed concerns about overdraft protection programs. 

Madam Chairwoman, the ABA appreciates the opportunity to 

present our views on this subject. We believe that overdraft accommodation services are important to our customers and we will continue to work, as we’ve done in the past, to make sure that customers understand the responsibilities for tracking accounts, the 

fees associated with overdrafts, and the strategies to avoid them. 

I will be happy to answer questions that you or the subcommittee 

members may have. 

Thank you. 

[The prepared statement of Ms. Feddis can be found on page 40 

of the appendix.] 

Chairwoman MALONEY. Thank you so much. 

Ms. Ludwig. 

13

STATEMENT OF SARAH LUDWIG, EXECUTIVE DIRECTOR, 

NEIGHBORHOOD ECONOMIC DEVELOPMENT ADVOCACY 

PROJECT 

Ms. LUDWIG. Chairwoman Maloney, Ranking Member Gillmor, 

and members of the subcommittee, thank you for holding today’s 

hearing. 

My name is Sarah Ludwig, and I’m executive director of NEDAP, 

the Neighborhood Economic Development Advocacy Project, which 

is based in New York City. 

NEDAP believes that everyone has the right to live in a decent, 

safe, and thriving community, and that fair access to credit and financial services is key to ensuring a community’s vitality and economic inclusion for all its residents. 

I’m here today to tell you about NEDAP’s on-the-ground experience working with low-income New Yorkers who have been harmed 

by abusive overdraft loans. 

Through our extensive community financial education programs, 

as well as our consumer law hotline, we encounter people with 

problems with overdraft protection every day. 

I will also share with you New York State’s recent experience 

with respect to deregulating bounce protection for State-chartered 

institutions and underscore why it is so crucial for Congress to 

enact legislation like H.R. 946. 

In the 11 years since NEDAP was founded, we’ve observed a dramatic shift in the nature and delivery of financial services in New 

York City and around the country. 

New York City neighborhoods that were historically cut off from 

access to fair and affordable financial services are now flooded with 

solicitations for high-cost, often fringe and predatory financial services and credit. 

We’ve all seen the advertisements: ‘‘Bad credit? No problem.’’ 

‘‘Need cash fast? Call us.’’ 

NEDAP therefore dedicates considerable resources to educating 

lower-income consumers on how to avoid abusive credit and asset 

stripping products and services, and how they can make sound financial choices and understand their rights as financial services 

consumers. 

It used to be a no-brainer for us to recommend to people who 

don’t have bank accounts that they should go out immediately and 

get a bank or credit union account, but bounce protection blurs the 

lines between mainstream and fringe banking, and it can be a financial land mine for people living on limited means. 

Seeing the hardship that abusive overdraft protection has caused 

so many of our workshop participants and so many of our consumer law hotlines, NEDAP is now hard-pressed to recommend 

categorically that people open bank accounts. Too many people end 

up learning that their account has bounce protection the hard way, 

after they’ve overdrawn and fees have mounted. 

Routinely, they don’t know that they have an overdraft protection feature on the account. They didn’t apply for it. It’s not disclosed, as it would be under H.R. 946. 

Many people believed they had sufficient funds in their account, 

understandably, because the transaction, either at the ATM or the 

point of sale, was approved. 

14

Many families have told us their accounts were closed because 

they could not afford to pay hefty bounce protection fees, which 

bear no relation to the amount overdrawn or to the risk to the financial institution. 

When bounce protection is triggered and an account is closed ultimately, if that happens, the information is reported to Check Systems, which is a reporting agency that tracks and sells information 

on a person’s bounced checks, their debts owed to a bank, and any 

other so-called account mishandling. 

Check Systems functions effectively as a bank account blacklist, 

and NEDAP can cite numerous examples of low-income New Yorkers who are now blocked from opening a bank account because of 

past difficulties they’ve had with bounce protection, and it is next 

to impossible for account holders to opt-out of bounce protection or 

to get a bank to remove it if they request it. 

In my written testimony is a case example that I won’t go into 

right now, but it’s of a client of ours named David A., and I’ll tell 

you just broadly that he is a man who is deaf, whose sole source 

of income is Supplemental Security Income, SSI, and he triggered 

bounce protection 2 years ago with a charge of $3.44 that he was 

unaware of, and didn’t know until many weeks later, after he had 

a spiral of overdrafts, that he had in fact triggered this provision 

that he didn’t know that he had. After many months of difficulty, 

he ended up with $1.83 in his account and the account was closed 

for failure to maintain a positive balance. 

His account contained only his SSI benefits, income that should 

be statutorily protected and should not have been debited from his 

account to set off the overdraft charges. Again, this is more detailed in the written testimony. 

NEDAP supports passage of a law like H.R. 946, which would set 

a strong and sorely needed Federal standard. 

In 2005, the New York State Banking Board deregulated our 

State’s longstanding prohibition against bounce protection as a defensive measure to retain State chartered banks that reportedly 

were threatening to give up their State charter and go for a national one so that they, too, could offer this lucrative product. 

Then-Superintendent Diana Taylor explained the New York 

State Banking Department’s impending deregulation this way, and 

I quote: 

‘‘The ability of the federal banking regulators to preempt state 

law has increasingly meant that state regulators must choose between allowing their banks to do whatever federal regulators allow 

national banks to do or face the prospect that banks in the state 

will achieve the same result by simply switching to the federally 

regulated or national charter.’’ 

Chairwoman MALONEY. The Chair grants the gentlelady 30 additional seconds. Your time has expired. 

Ms. LUDWIG. Thank you. 

H.R. 946 would halt this race to the bottom at the State level 

and fill the Federal regulatory vacuum we now face. 

In sum, during the debate over whether New York State should 

allow bounce protection a couple years ago, industry representatives stated that account holders were in fact clamoring for overdraft protection—I’m not talking about lines of credit, but the 

15

bounce protection and the courtesy overdraft—and that banks that 

offered it were simply responding to consumer demand. 

But they failed to produce any evidence to substantiate that consumers were clamoring for this bounce protection or this courtesy 

overdraft. On the contrary, whenever we explain it to people at 

consumer workshops, they tell us that they consider it an exploitative product, one to be avoided at all costs. 

The industry representatives failed to explain why, if consumers 

are so eager to have the product, it’s tacked onto accounts without 

consumers’ knowledge or consent, and why if they have consumers’ 

best interests in mind, they market free checking accounts with 

bounce protection so aggressively to young people and others with 

low incomes whom they count on to overdraw. 

I look forward to answering any questions that you may have. 

[The prepared statement of Ms. Ludwig can be found on page 89 

of the appendix.] 

Chairwoman MALONEY. The gentlelady’s time has expired. 

Ms. Cunningham. 

STATEMENT OF MARY CUNNINGHAM, PRESIDENT/CEO, USA 

FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT 

UNION NATIONAL ASSOCIATION (CUNA) 

Ms. CUNNINGHAM. Chairwoman Maloney, Ranking Member 

Gillmor, and members of the subcommittee, thanks for holding this 

hearing on H.R. 946. My name is Mary Cunningham, and I actually work for a financial institution that handles these programs—

I am president and CEO of USA Federal Credit Union in San 

Diego. 

I am here on behalf of CUNA, which is the Nation’s largest credit 

union advocacy organization representing over 90 percent of the 

Nation’s 8,800 State and Federal credit unions. 

We are predominantly a military based credit union, servicing 

60,000 members. We operate a network of 23 branches, including 

11 branches in Japan and Korea, all located on military installations. 

We provide a wide variety of financial services to meet the needs 

of our unique market, including low-cost payday loan alternatives, 

affordable mortgage products, small business services, this overdraft protection service, as well as many other things for the members. 

Madam Chairwoman, credit unions have long been involved in 

providing some form of overdraft or bounced check protection. However, these programs vary, due to the unique fields of memberships 

of credit unions. Many of these programs have changed over time 

in response to the members’ needs and usage. 

Shortly after introducing our program in the fall of 2003, early 

results were, in fact, troubling; 26 percent of those using privilege 

pay were less than 25 years of age. For a military credit union, we 

considered this to be disturbing news. 

Forty-four percent of our users accessed the service between two 

and five times per month. Thirty-seven percent of these users were 

chronic overdrafters prior to implementation of the product. Once 

implemented, an additional 28 percent became chronic abusers. 

16

We also learned that roughly 75 percent of all of our overdrafts 

resulting in privilege pay were triggered by ATM activity. 

Credit unions have a rich history of providing a fair deal to consumers—low rates on loans, high savings rates, and modest fees. 

But instead of privilege pay being used as we had intended, a number of our members chose to use it as a no-qualifying line of credit. 

For a member who lives paycheck-to-paycheck, these fees add up 

very quickly. Once a member maxed out his privilege pay limit, the 

next paycheck was automatically spent once deposited, thereby creating a downward spiral for the member. When that happens, we 

are no longer offering the fair deal. We’re adding to his problems. 

To be fair, we’ve also received testimonials from members who 

were very grateful that the math errors in their checkbook didn’t 

result in the embarrassment and expense of a returned check. 

So our challenge was this: How do we offer a sensible product 

that members can rely on to save them the embarrassment of having a check returned, while at the same time ensuring that controls 

are put in place to help members to help themselves? 

We made several modifications to our product, many of which 

mirror the main points in your proposed legislation. 

Number one, our privilege pay product is offered to members at 

the time the checking account is opened, along with the transfer 

from savings option and the overdraft line of credit loan option. 

The member is informed that they will qualify for privilege pay 

after 30 days in good standing and aggregate deposits of at least 

$750, unless they choose not to have the service. 

Your bill would require members to proactively enroll in a program. They would be provided disclosures. Credit unions would 

agree with this. 

Number two, we follow a practice of liberally refunding fees 

while educating the members about the service. We also encourage 

members to opt-out if they decide they don’t want the service. Free 

financial counseling is also made available. 

Number three, part of that education consists of explaining to 

members how the clearing process works. At our credit union, all 

items are cleared in ascending order by dollar amount with the 

smallest dollar amount being cleared first. We always post credits 

to the accounts first, and then debits. This helps to minimize the 

fees. Your bill would prohibit financial institutions from manipulating the process of posting these items to generate overdrafts and 

fee incomes. Credit unions would agree. 

Number four, we also inform the member that our system first 

attempts to transfer from savings, then to a line of credit overdraft 

loan, and then finally, to privilege pay as a last resort. 

While these programs are offered at the time the checking account is established, none are overtly marketed to members, which 

is consistent with your bill. Once again, credit unions would agree. 

Number five, when the member makes a withdrawal at an ATM, 

the actual balance is disclosed, not the available balance through 

privilege pay. We did ask our processor if a notice could be provided at the ATM warning the member that they were triggering 

privilege pay, but we were told this was unavailable. 

While I agree with your bill’s recommendation that such a notice 

should be provided, I will tell you that few credit unions operate 

17

their own ATM networks, and would be unable to ensure compliance on their own, so I would encourage sufficient time for phasing 

in this provision to enable third party providers to make the necessary adjustments. 

Finally, your bill attempts to ensure that fees for privilege pay 

be conspicuously disclosed in a separate periodic statement with 

the calculation of the APR. Credit unions would agree and clearly 

support disclosure of all costs related to these programs. 

However, depending upon how that fee is defined and included 

in the APR calculations, it could easily exceed the credit union’s 

statutory 18 percent— 

Chairwoman MALONEY. The Chair grants the gentlelady an additional 30 seconds. 

Ms. CUNNINGHAM. —rate ceiling, and this would force most credit unions to stop providing this service. 

My written testimony would outline alternatives for your consideration. 

In summary, Madam Chairwoman, we view privilege pay as one 

of those programs that, like many things in life, can be a wonderful 

tool if the consumer uses it in the appropriate way, but also like 

many things, when taken to excess, it can certainly do damage to 

the consumer and add to their financial burdens. 

From our perspective, your bill would protect the interests and 

pocketbooks of consumers. Credit unions share this goal and applaud your efforts. 

Thank you very much. I’m available for questions. 

[The prepared statement of Ms. Cunningham can be found on 

page 33 of the appendix.] 

Chairwoman MALONEY. Thank you. 

Ms. Fox. 

STATEMENT OF JEAN ANN FOX, DIRECTOR OF CONSUMER 

PROTECTION, CONSUMER FEDERATION OF AMERICA 

Ms. FOX. Chairwoman Maloney, Ranking Member Gillmor, and 

members of the subcommittee, I’m Jean Ann Fox, director of consumer protection for Consumer Federation of America, an association of 300 consumer groups who represent 50 million consumers. 

I appreciate this opportunity to speak in support of H.R. 946, the 

Consumer Overdraft Protection Fair Practices Act. 

I make three main points in my testimony: 

One, consumers strongly oppose bank overdraft practices, according to national polls that CFA has conducted; 

Two, big banks charge high fees, they use tactics to cause more 

overdrafts, and they structure fees to trap consumers in debt; 

And three, the Federal Reserve is failing to protect consumers 

from abusive overdraft loans. 

We’re not talking about your traditional overdraft protection that 

consumers apply for and qualify for, and that use the consumer’s 

own money to cover the occasional overdraft. 

Your legislation will stop banks from operating as payday lenders, trapping their most vulnerable customers in a debt spiral 

while charging astronomical interest rates on short-term loans to 

consumers. A $100 overdraft repaid in 2 weeks at a $35 typical 

overdraft fee translates to 910 percent annual interest. 

18

Consumers think that bank practices with overdraft loans are 

unfair. Almost 70 percent of consumers in a national poll told us 

that it is unfair for banks to permit overdrafts without obtaining 

their customers’ consent. Eighty-two percent of consumers in the 

poll said it is unfair for banks to permit overdrafts without any notice at the ATM, and 68 percent of them—excuse me—63 percent 

of them said it was very unfair. 

Over 80 percent of the largest banks in the country have fine 

print in their account agreements that permit overdrafts for a fee. 

The 10 largest banks charge fees ranging from $20 to $35. 

The current average is $33.75 per overdraft, once you’ve done it 

more than a couple of times during a year. These fees have gone 

up over $5 in the last 2 years, so fees are on the increase. 

Bankers claim that fees are set high in order to deter misuse of 

bank accounts, but bankers have given their customers permission, 

and encourage them to overdraw their accounts, which removes 

this justification for such high fees. 

Banks also charge tiered fees, which adds to the debt trap for 

consumers. For example, Bank of America charges $20 for each of 

up to 5 overdrafts in a single day in the 12-month period. After 

that, if you overdraw, you’ll pay $35 each for up to 5 overdrafts in 

a day, and it’s easy to have 5 overdrafts if you’ve used your debit 

card as you’ve gone through the day. 

Many banks also charge sustained overdraft fees so that after 

you’ve been overdrawn for a few days, you’ll start paying by the 

day. For example, First Third Bank charges $33 when you overdraw, and $6 a day until that overdraft is repaid. 

Banks continue to come up with more ways to charge overdraft 

fees. Bank of America just notified its customers that starting in 

August, customers will be charged for prospective overdrafts when 

pending debit transactions tied up customers’ funds currently 

available in their bank account. 

Bankers also manipulate the order of processing deposits and 

withdrawals in order to maximize the number of transactions that 

trigger an overdraft fee. 

CFA’s 2005 study of the 33 largest banks found that almost 

three-quarters of large banks either process withdrawals largest to 

smallest or reserve the right to do so. This processing order can result in multiple fees for consumers who are living paycheck-to-paycheck. 

For example, one bank’s customer had a $100 check clear that 

he hadn’t expected to go to the bank. It caused 8 small transactions 

totaling $50 to overdraw and triggered $264 in overdraft fees. If 

that bank had cleared smallest to largest, he would have only paid 

one $33 fee. 

Bankers justify their high to low check clearing practice by 

claiming that consumers want the largest payment to be processed 

first because it might be the mortgage or an important payment, 

so we asked consumers a few years ago whether they agreed with 

the bankers, and only 13 percent of them did. 

In our poll, 65 percent of— 

Chairwoman MALONEY. The gentlewoman’s time has expired. 

I grant the gentlelady 30 additional seconds. 

19

Ms. FOX. —our consumers think it’s extremely unfair for banks 

to clear their transactions high to low. 

I promised you a third point. 

We believe that the Federal Reserve has failed to protect consumers from high-cost overdraft loans by failing to cover them in 

Truth in Lending and the other regulators have only enacted voluntary best practice guidelines that fail to protect consumers. 

We support your bill, and thank you for the opportunity. 

[The prepared statement of Ms. Fox can be found on page 56 of 

the appendix.] 

Chairwoman MALONEY. Thank you. Without objection, all members’ opening statements will be made part of the record. 

And I would like to note that we’ve been called for a vote. It’s 

estimated that this voting series will last one hour. 

So I yield to my colleague, Ranking Member Gillmor, to begin the 

questioning. 

Mr. GILLMOR. I thank the chairwoman for her courtesy. 

In terms of, I think it was Ms. Ludwig said on education, and 

that’s part of what you do, I think that is a very important thing, 

and if you had good consumer education, I think a lot of these problems would go away. 

I recently convened a meeting of a large group of Ohio financial 

institutions, regulators, and consumer groups to talk about the serious foreclosure problems we have in Ohio, and the conclusion of 

that meeting really surprised me, because all three of those groups 

said that the single most important thing you could do to prevent 

foreclosures would be better education, that those consumers who 

were counseled adequately before they got in the deal, didn’t have 

foreclosures. 

And the other thing that came out was that disclosure is sometimes nondisclosure. They have so much disclosure in mortgages 

that it amounts to nondisclosure, because nobody reads an inch of 

paper, so it’s not effective. So I just brought that up to follow up 

on what you had said. 

Let me ask Ms. Feddis, you state in your testimony that consumers want their overdraft checks paid and not returned to the 

merchant. Do you have any statistics or any proof on that? 

Ms. FEDDIS. Well, the Center for Responsible Lending back in 

February came out with a report that showed that 94 percent of 

people do want their overdrafts paid. 

The question was: Say you make a purchase and did not have 

enough in your checking account to cover it. Given the following 

choices, how would you want your bank to handle your overdraft? 

And it listed, you know, give me an overdraft line of credit, and 94 

percent of people wanted their overdrafts covered. 

Mr. GILLMOR. You also touched on in your testimony, and I want 

to follow up, in Ms. Fox’s written testimony she said, ‘‘Deliberate 

bank practices and advances in technology make it harder than 

ever for consumers to keep track of the balance in their bank accounts to avoid overdrafts.’’ 

Would it also be true that those same advances make it easier 

for consumers to get real-time account updates, either by phone or 

by the Internet or even at their ATM machines? 

Either you or Ms. Feddis or both. 

20

Ms. FOX. I’m glad to answer the question. 

Consumers may be able to call or use the Internet to access their 

account balance, but the changes in technology that are causing 

problems for people is how fast money flies out of their checking 

accounts. 

A paper check is converted into electronic withdrawal at the cash 

register and the money is out of your bank before you get out the 

door of the store, or your check is converted to an electronic withdrawal that you mail in to pay some of your bills. So money flies 

out of people’s bank accounts. 

When they pay with a debit card, some retailers put a hold on 

some of the money in their account for a few hours up to a few 

days, which can cause you to overdraft because you think you have 

money when, in fact, somebody else has a claim on it. 

The deposits that people make are still walking into their accounts at 1990’s speed, because the check hold periods, the deposit 

hold periods have not been shortened to reflect increases in electronic processing. So there are a lot of things that are changing in 

the banking environment that make it hard for consumers to manage. 

Mr. GILLMOR. Did you want to comment, Ms. Feddis, on that 

question? 

Ms. FEDDIS. Yes. I think that, just to talk a little bit about the 

payment systems, and transactions, we’re not, as Mr. Ireland said, 

we’re not at real time. 

The way most transactions are processed is using a batch processing method, and that is, after hours, the bank puts in all the 

deposits that have come in for the day and then they do the withdrawals. 

So the balance, there’s a working balance, shall we call it, which 

is the balance that the bank is working with and the consumer is 

working with, and while it’s not perfect, it is something the consumer can use to better understand what their balance is and 

whether they’re going to overdraw. 

At the end of the day, only the consumer knows their balance. 

Only they know what checks they’ve authorized, what automatic 

payments they’ve scheduled, or even what debit cards that they 

have authorized. The transactions may not have come into the 

bank yet, and then when they finally do come in, it could cause an 

overdraft, but the bank won’t necessarily know it at the time of the 

transaction. 

Mr. GILLMOR. Just one more question, and that’s on the issue of 

fees. 

I think there’s a feeling among some that the fees tend to be 

higher with the bigger banks than the smaller banks, because they 

make a bigger effort to collect non-interest income. 

So I want to just ask Ms. Fox and Mr. Ireland if you have anything that substantiates that statement that I just— 

Ms. FOX. Yes, sir. We surveyed the 33 largest banks in 2005. 

They control the majority of deposit dollars. 

Their average overdraft fee is higher than the average in, for example, bankrate.com, a fee survey which covered a lot more banks. 

And when we went back and compared the 10 largest banks overdraft fees for just 2 years ago and today, it has gone from $28 

21

and about 40 cents up to $33.75, so they’re higher than the small 

banks and they’re growing fast. 

Mr. GILLMOR. My time has expired, but maybe Mr. Ireland has 

a comment. 

Mr. IRELAND. I’d just like to caution against looking at nominal 

fees as indicative of the bank’s practice. Banks frequently waive 

fees and assess fees on a discretionary basis. 

And so whether or not that fee is charged for all transactions is 

also a component in the actual charge that the bank imposes on 

the consumer, and just looking at the statistics that were quoted 

won’t tell you that component. 

I am not aware that on an overall basis, there’s a marked difference between larger banks and small banks in that area. 

Chairwoman MALONEY. The gentleman’s time has expired. 

We will not be coming back after this vote. It’s an hour period 

for a vote, followed by a Democratic caucus, so members will be offering questions in writing. 

I would just like to offer Mr. Halperin the opportunity to respond 

to Mr. Gillmor’s question, since your report was mentioned, and 

then I would like to ask Mr. Ireland or Ms. Feddis, if there were 

no cost issues and no technological issues, would you still oppose 

giving consumers a warning at the ATM or point of sale that they 

would overdraw their account and that there would be a fee? 

But first, Mr. Halperin, I think, since your study was mentioned, 

you should be given an opportunity to respond to it. 

Mr. HALPERIN. Thank you, Chairwoman Maloney. 

Well, in response to that question, the question that was asked 

to consumers was, ‘‘If you had a choice of having your overdraft 

covered or not, what would you prefer?’’ 

And if Ms. Feddis had kept reading down the answers, what 

would have been apparent is the vast majority of consumers would 

have preferred their overdrafts covered by a line of credit or a cash 

advance from a credit card if they had to have it covered from a 

credit product rather than a transfer from a saving account, not 

the fee-based overdraft programs that we’re talking about today. 

And we also asked consumers, ‘‘If you’re at the checkout counter 

and you had a choice between—you had to make the choice ahead 

of time whether your transaction would always go through and 

you’d be charged a fee with your debit card or would it always be 

denied and you’d be charged no fee,’’ 61 percent of consumers always wanted it denied. 

And then the final piece of information on consumer preference, 

which I think is important to have out today, is we asked consumers that, ‘‘If you were at an ATM and you received a warning 

that you were going to overdraft, would you accept that fee all the 

time, never, or would it depend?’’ And 84 percent of consumers said 

they would always reject the transaction at the ATM and not take 

money out if they were going to be charged a fee. 

Thank you. 

Chairwoman MALONEY. Ms. Feddis and Mr. Ireland. 

Ms. FEDDIS. One thing about surveys is we tend to respond to 

them in what we would hope to do rather than what we would actually do. 

22

I think most people, if you said, ‘‘Are you going to eat the fruit 

or the ice cream with the chocolate syrup,’’ we’d say, ‘‘Oh, no, the 

fruit,’’ but then when it was put in front of us, we might actually 

falter. And with ATM transactions and overdrafts, that’s exactly 

what we found. 

A couple of banks have piloted programs where they make the 

disclosure at their own ATM, because they can’t do it elsewhere, 

and one bank reported that three-quarters of people proceeded with 

the transaction. 

Now, that’s different from a point-of-sale transaction, where I 

think we would find a larger percentage approving the transaction, 

because at that point, you’ve already consumed the meal, the groceries are bagged, the kids are crying, the ice cream is melting, the 

barber has already cut your hair. You want them to proceed with 

the transaction. 

Plus, unlike an ATM transaction, it’s not an anonymous transaction. You’re actually looking at somebody in the face and saying, 

‘‘Oops, I don’t have enough money.’’ And it’s embarrassing. 

And so in many cases, while we would hope never to overdraw 

our account, we do. 

But on your other question— 

Chairwoman MALONEY. So if you would clarify, from what you’re 

saying, I don’t want to put words into your mouth, but it appears 

that you would not object to notice to consumers to allow them to 

make a decision whether they want to pay a fee or not or— 

Ms. FEDDIS. We would not, absent the prohibitive costs, we 

would not, but of course—we would not object to the disclosure, no, 

we would agree that disclosure would be better. 

Chairwoman MALONEY. So then, do you support the bill? 

Ms. FEDDIS. Again, it goes down to the cost prohibitiveness of the 

technological challenges. I don’t know how much time you have. I 

don’t want to— 

Chairwoman MALONEY. So if there were no cost issues, and there 

were no technological challenges, then you would support the bill? 

Ms. FEDDIS. As long as there were some exceptions. There are 

still exceptions, for example, there are some places where it probably isn’t feasible. 

Let’s use the example of some emerging developments where consumers could use their— 

Chairwoman MALONEY. Just a yes or no. If there were no cost 

issues— 

Ms. FEDDIS. With some exceptions— 

Chairwoman MALONEY. —and no technological problems, you 

would support the bill, the notice to consumers? 

Ms. FEDDIS. The notice to consumers, we would support, so long 

as there were some exceptions, for like the process just announced 

in New York with the New York and New Jersey PATH railway, 

where it’s a tap and go card. You probably couldn’t have a screen. 

You wouldn’t want the delays, because that would halt traffic. So 

you’d have to have some flexibility. 

Chairwoman MALONEY. Mr. Ireland, would you like to comment? 

Mr. IRELAND. I’m in favor of informed choice for consumers, and 

if I could get there without costs and operational problems, I’d love 

to get there. 

23

There are—the world we live in has costs and operational problems. 

Some of them are—you know, the subway system potential as to 

how you’re going to exercise the choice in the line, and the balance 

issues are going to be ongoing, and even if you know the balance, 

quite frankly, I’d go beyond the bill, even if you know the balance 

now and you’re going to do an ATM transaction, you ought to know 

how that’s going to affect other transactions in process, so you can 

choose which one you want to do. 

If we could get there, I’d love it. 

Chairwoman MALONEY. I thank everyone for their testimony. I’m 

afraid I’m going to miss a vote if I don’t leave. I’ve really enjoyed 

learning from you today, and I look forward to continuing this dialogue. 

And I would like to note for the record that members may have 

additional questions for this panel which they may wish to submit 

in writing, and without objection, the hearing record will remain 

open for 30 days for members to submit written questions to these 

witnesses and to place their responses in the record. 

Again, I thank you for your expertise and your time, for being 

here today, and for your testimony. 

Thank you. The hearing is adjourned. 

[Whereupon, at 3:09 p.m., the hearing was adjourned.] 

(25)

A P P E N D I X

July 11, 2007

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