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56–975 PDF 2010

S. HRG. 111–502 

PROTECTING CONSUMERS FROM ABUSIVE 

OVERDRAFT FEES: THE FAIRNESS AND 

ACCOUNTABILITY IN RECEIVING OVERDRAFT 

COVERAGE ACT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE FAIRNESS AND ACCOUNTABILITY IN RECEIVING OVERDRAFT COVERAGE ACT IN ORDER TO PROTECT CONSUMERS FROM 

ABUSIVE OVERDRAFT FEES 

NOVEMBER 17, 2009 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

AMY FRIEND, Chief Counsel 

CATHERINE GALICIA, Counsel 

LYNSEY GRAHAM REA, Counsel 

DEBORAH KATZ, OCC Detailee 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
C O N T E N T S 

TUESDAY, NOVEMBER 17, 2009 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Prepared statement .......................................................................................... 31 

Opening statements, comments, or prepared statements of: 

Senator Vitter ................................................................................................... 4 

Senator Brown .................................................................................................. 4 

Senator Reed ..................................................................................................... 6 

Senator Merkley ............................................................................................... 6 

Senator Bunning 

Prepared statement ................................................................................... 32 

WITNESSES 

Mario Livieri, Consumer, State of Connecticut ..................................................... 8 

Prepared statement .......................................................................................... 32 

Jean Ann Fox, Director of Financial Services, Consumer Federation of 

America ................................................................................................................. 8 

Prepared statement .......................................................................................... 33 

Frank Pollack, President and Chief Executive Officer, Pentagon Federal 

Credit Union ......................................................................................................... 10 

Prepared statement .......................................................................................... 51 

John P. Carey, Chief Administrative Officer, Citibank NA ................................. 12 

Prepared statement .......................................................................................... 52 

Michael Calhoun, President, Center for Responsible Lending ............................ 14 

Prepared statement .......................................................................................... 56 

(III)

(1) 

PROTECTING CONSUMERS FROM ABUSIVE 

OVERDRAFT FEES: THE FAIRNESS AND ACCOUNTABILITY IN RECEIVING OVERDRAFT 

COVERAGE ACT 

TUESDAY, NOVEMBER 17, 2009 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 3:07 p.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. Senator 

Shelby, I have been notified, is not able to be here right now, but 

he wanted us to start and go ahead, and I appreciate that very 

much. And let me welcome our witnesses this afternoon to our 

hearing on ‘‘Protecting Consumers from Abusive Overdraft Fees: 

The Fairness and Accountability in Receiving Overdraft Coverage 

Act.’’ That is a long title. There is an acronym in there someplace 

here for all of this. We appreciate your being here. We welcome the 

audience who is here as well. I welcome my colleague Sherrod 

Brown of Ohio, a Member of the Committee, and members of staff 

who are here and other members who will come in and come out. 

I should notify my colleagues as well that I am told there may be 

a vote around 3:45. What I will try to do is continue the hearing, 

and we will try and stagger people here so we do not interrupt the 

flow of this and allow our witnesses to be able to proceed. Senator 

Reed of Rhode Island has just joined us as well. 

Let me begin with a brief opening statement after which I will 

ask my colleagues if they have any quick opening comments they 

would like to make, and then we will turn to our witnesses and 

hear from them, and then have a series of questions for you this 

afternoon regarding this bill and related matters. 

I will begin by again thanking each and every person for being 

here this afternoon. Our job on the Banking Committee, this Committee, is to make sure that regular folks get a fair deal from their 

lending institutions and other financial institutions. The whole notion that depositors in a bank, people who buy insurance policies, 

people who buy shares in our public companies, people who have 

mortgages, all of those financial activities we have got to keep in 

mind as we talk about the stability of our financial institutions, the 

safety and soundness of financial institutions. It is also critically 
2 

important to talk about the safety and security of consumers who 

depend upon these institutions serving their interests well. And 

this brings us to the subject matter this afternoon. 

For too long, credit card companies have made tremendous profits—excessive profits, in my view—by charging consumers outrageous fees or raising rates whenever they felt like it, it seemed. 

Our Committee approved legislation to stop those abusive practices, legislation that passed the Senate earlier this year with overwhelming bipartisan support, and it was signed into law by President Obama later this spring, and we thank him for that. 

Today we need to discuss another practice that I find in too 

many instances abusive, and that is, misleading overdraft programs that encourage consumers to overdraw their accounts and 

then slam them with too high fees. 

Now, let us be clear. People have a responsibility. You begin 

there. It is a responsibility each one of us has to manage our personal accounts as well as we possibly can and to spend within the 

means that we have available to us. And banks have a right to 

charge a fair fee for legitimate services that they provide. To do 

otherwise would expect them to perform or conduct activities that 

would leave them disadvantaged. 

But lending institutions often add overdraft coverage to consumer accounts without informing them or giving those consumers 

a choice in whether or not they want to have an overdraft fee or 

be notified, in fact, that they have overdrawn and allow them then 

to deal with it accordingly. 

The overdraft charge is usually a high fee. A consumer can pay 

as much as a $35 fee for overdrawing on a $2 transaction, and we 

are going to hear specifically about just such a case this afternoon. 

In some cases, a consumer can rack up multiple overdraft fees 

in a single day without ever being notified until days later that, in 

fact, they have overdrawn their accounts. Many institutions also 

charge additional fees for each day an account is overdrawn. The 

longer it takes you to realize there is a problem, the more fees, of 

course, you can be charged. 

Sometimes banks will even rearrange the order in which they 

process your purchases, charging you for a later, larger purchase 

first so that they can charge you repeated overdraft fees for earlier, 

smaller purchases. So the truth is that the service of overdraft protection often serves as nothing more than a way for lending institutions to profit by taking advantage of their very own customers. 

Last year, American consumers paid $24 billion in overdraft fees, 

and the Financial Times recently reported that banks stand to collect a record $38.5 billion in overdraft fees this year—almost double what they collected a year ago. According to the Center for Responsible Lending, nearly $1 billion of those fees will come from 

young adults; another $4.5 billion will come from senior citizens 

like Mario Livieri, one of our witnesses today and a resident of 

Branford, Connecticut. We thank him for being with us. 

I will let Mario tell his own story about how an initial overdraft of $2 ended up in $140 overdraft coverage fees in just a matter of 

days. The method his bank used will sound familiar to many, many 

Americans. Families in my State of Connecticut and across the 

country are already struggling, of course, to make ends meet. We 
3 

all know that, and these unfair and excessive charges are making 

it even harder on them. 

Last week, the Federal Reserve, to its great credit, announced 

that they will require banks to get a consumer’s consent before enrolling them in an overdraft coverage program. This was a welcome 

but long overdue announcement for American consumers, and we 

need to do far more to protect them from these abusive practices. 

And that is why I introduced the Fairness and Accountability in 

Receiving Overdraft Coverage Act. My colleagues Senator Schumer, 

Senator Reed of Rhode Island, Senator Brown, Senator Merkley, 

Senator Menendez, Senator Levin, Senator Reid of Nevada, and 

Senator Franken have joined us as cosponsors of this bill. And like 

the Federal Reserve’s rule, our legislation would establish an optin rule for overdraft coverage for ATM and debit transactions. Customers would now have to consent before overdraft coverage is applied to their account. 

Our legislation would go further, however, and limit the number 

of overdraft fees that banks can charge to one per month and to 

no more than six per year, and that fee would have to be reasonable and proportional to the cost of processing the overdraft. Our 

legislation would also put a stop to the practice of manipulating the 

order in which the transactions are posted and require banks to 

warn customers if they are about to overdraw their account, giving 

them a chance to cancel the very transaction they are about to engage in. 

Finally, our legislation would require banks to notify customers 

promptly when they have overdrawn an account through whatever 

means the customer chooses—e-mail, text messages—so that they 

can quickly restore their balances and avoid unnecessary future 

fees. 

Abusive overdraft policies are blatantly unfair, in my view, and 

the banks know it. After it came out in the press that I was working on this legislation, a few of the large institutions took their own 

steps toward responsible reform, I assume out of the kindness of 

their hearts, and I welcome it as well. It was a thoughtful thing 

to do. 

Last week, the Federal Reserve released a new rule that will require banks to get a customer’s consent before enrolling them in an 

overdraft coverage program. That is a very good start, and, again, 

I applaud them for doing so. 

But our legislation goes further, and I remain committed to ensuring that American consumers are going to be further protected. 

And let us just remember, regulators did little while consumers 

were taken advantage of by these very misleading and unfair overdraft programs for years, despite the fact these regulators had the 

power for years to step in and put an end to these practices. 

This is exactly why we need, in my view, an independent Consumer Financial Protection Agency that would be focused on preventing these abuses and addressing them quickly rather than having to wait week after week, month after month, for the Congress 

to pass legislation. It should not take that. Folks such as Mario 

Livieri deserve a lot better. He is one person here today, but there 

are literally millions like him across the country. And I remember 

committed, as my colleagues, I believe, do, to ensuring that Amer-
4 

ican consumers are protected, and I look forward to our discussion 

that we are going to have this afternoon. 

With that, let me turn to my colleagues. Senator Vitter, would 

you care to be heard on this at all for a minute or so? We are going 

to give our colleagues a chance to be here, and then we will get to 

our witnesses. 

STATEMENT OF SENATOR DAVID VITTER 

Senator VITTER. Thank you, Mr. Chairman. Thanks for holding 

this hearing, and I wanted to come by and offer a few thoughts. 

Unfortunately, I will not be able to stay for the entire hearing. 

This is an important topic, and I am sure there are abuses in 

this area of banking. I am very concerned, however, as Congress 

often does, that we are going to push the pendulum to another extreme and create problems—perhaps as we are solving others, but 

create other problems. I believe that happened with some aspects 

of the credit card legislation. I would rather it not happen here. 

In particular, I am concerned about closing certain services and 

opportunities to consumers and also shifting the cost that should 

be borne by consumers, depending on their behavior, to consumers 

more broadly. I am very concerned about that. It seems to me there 

is no way that this legislation, as it is currently drafted, would do 

that since, as the Chairman just said, it sets a limit on overdraft 

charges and fees no matter what a particular consumer’s practice 

is, no matter what number of overdrafts may happen. 

Now, it seems to me if that is the case at the end of the day, 

then we are going to shift costs from less responsible consumers to 

the entire class of consumers, including those who act more responsibly. And I do not think that is the proper direction to move in. 

I would hope we can focus on real problems and real abuses and 

close those without that massive cost shifting and without closing 

the door of certain opportunity and service to consumers who may 

want them. 

So those are my thoughts and concerns going into the process at 

the front end, and I look forward to working with the Chairman 

and the entire Committee as we move forward. Thank you, Mr. 

Chairman. 

Chairman DODD. Well, Senator, thank you. Actually, you raise 

very legitimate issues, and that is why we have hearings like this, 

to hear these ideas and thoughts, and I welcome them. So I thank 

you for raising them. You will not be surprised to hear it is not the 

first time I have heard them, as have others who have expressed 

those very concerns as well, so I appreciate your bringing them up. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, for convening this 

hearing and for your leadership on this issue. Thank you all, to all 

five members of the panel. 

I am proud, as Senator Dodd is, to be an original cosponsor of 

the FAIR Overdraft Coverage Act. We need this bill because too 

many Americans pay too much for a service that is supposed to be 

a courtesy. When I think of the nearly $24 billion in overdraft fees 
5 

Americans paid last year, $900-plus million in my State of Ohio 

alone, ‘‘courtesy’’ is not the word that comes to mind. 

Fees generated from this so-called ‘‘courtesy’’ have been growing 

by leaps and bounds. The Center for Responsible Lending tells us 

the average overdraft fee was about $35. That means that if a 

woman in Toledo or a man in Akron purchases something and it 

is a few dollars short, they can be charged a fee 10, 20, 30 times 

the amount of the overdraft. One of the things we have to keep in 

mind is that these are real people, real families struggling, when 

banks are placing them deeper in debt by imposing high overdraft 

fees. They are people like Kerry from Toledo, who was overdrawn 

by $6, but ended up paying $113 in fees. If that were a loan, she 

would have paid nearly 1,700 percent in interest. 

The Center for Responsible Lending reports that 93 percent of all 

overdraft fees are paid by only 14 percent of account holders, and 

these account holders are most often folks who have lower income, 

are often young, are often nonwhite. These are people like Charles 

from Wadsworth, Ohio, near Akron. A recent college grad who 

never paid an overdraft fee in his life until a couple months ago, 

his problem was that when he checked his balance through his 

ATM, the balance report he received did not deduct pending transactions. So while he thought he had $80 in his account, he only had 

$15. He paid for three items totaling less than $20, but when the 

bank reconciled the transactions, he had $80 in fees charged to 

him. 

Overdraft protection loses its meaning if consumers are at greater risk with that protection than without it. Understanding the 

cautionary notes or words from Chairman Dodd and the comments 

from Senator Vitter that people need to be responsible, this is 

something that has just gone too far. 

We need to pass the FAIR Overdraft Coverage Act, reduce the 

amount of these fees, and give consumers more control over their 

bank account. 

In closing, I just want to share a frustration that I hear too many 

times from too many people in my State. People believe, rightly or 

wrongly, each of the following things: 

They believe that our economy was almost brought to its knees 

because of the financial services industry. They see that Government bailed out the financial services industry. They see that many 

of the executives of the financial services industry get big bonuses. 

And they see people in the companies in the financial services industry charge these kinds of fees to generally working-class consumers. And that just doesn’t—I just hope the people from the industry on this panel and others in the audience understand the 

frustration, fair or not in those assessments, understand the frustration that so many Americans have with how their Government 

is treating them, how Wall Street is treating them, and how 

banks—and I do not lay this at the feet of the community bankers, 

to be sure, but how banks are treating them and how their lives 

are going in these very tough economic times. 

Chairman DODD. I thank the Senator for that comment, and we 

do not often enough draw the distinction between community 

banks and regional and large investment banks. And I always 

promise myself I am going to draw that distinction when we gather 
6 

because it is important. To use the word ‘‘banks’’ across the board 

draws in an awful lot of people who, frankly, do a very good job 

and are far more customer sensitive in their behavior, so we thank 

you for those comments. 

Senator Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Well, thank you, Mr. Chairman. Thank you for 

holding the hearing, and I want to thank the witnesses, and I want 

to echo your comments about community banks. I was in Rhode Island yesterday, and the two largest participants in our SBA programs are community banks, not the big national and regional 

banks, and they actually have avoided some of the excesses, and 

they are well positioned to help out. So they are an example that 

should be emulated, and I think you are right to point that out. 

I am pleased not only to be here today, but also to be a cosponsor 

of Senator Dodd’s FAIR Overdraft Coverage Act. We are in the 

midst of significant financial reform legislation, and I hope we can 

include aspects of this bill in this legislation, if not pass it separately. The Federal Reserve has taken some steps, but I think we 

have to do more. And the legislation that Senator Dodd has proposed will do that, and I think it will provide a sense of opportunity, transparency, and choice for customers. 

Senator Brown’s comments about perceptions I think are absolutely right. I think most people had a suspicion as they saw during the first decade of this century that no real increases in income, 

yet financial executives were enjoying huge, huge paydays, and 

when they saw insurance deteriorating for working families, that 

the deck was stacked against them. And I think the more we learn 

about what happened in the financial situation, the more that suspicion is buttressed by some evidence about how, when large institutions get in trouble, they get help, but when families across the 

country need help with avoiding foreclosure or avoiding excess 

charges, it is their responsibility. 

So I think this legislation is timely, appropriate, and extremely 

important. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Merkley. 

STATEMENT OF SENATOR JEFF MERKLEY 

Senator MERKLEY. Thank you very much, Mr. Chair. And my 

mind goes back to our credit card discussion earlier this year. I had 

Maggie from Salem, Oregon, who had had a credit card account for 

about 15 years, always paid on time, could not believe it when she 

found out she had a late payment. So she called up her bank and 

said, ‘‘I always pay on time. I always pay at the same time. How 

could I possibly be late?’’ And the credit card representative 

checked and said, ‘‘Well, here is the thing. We got your payment 

on time, but if you will notice in the contract, we can sit on the 

payment for 10 days, and we did, and when we posted it, it is now 

late and you owe us a late fee.’’ 

And Maggie said, I think, the phrase that captures the sense of 

millions of Americans, she said, ‘‘How can that be fair?’’ And that 
7 

is the same standard of reasonableness and fairness that we need 

to bring to this conversation. 

I think any bank customer who finds out that their bank has reordered their transactions in order to multiply the number of overdraft fees that they are being charged would say, ‘‘How can that 

be fair?’’ 

So certainly this is an important conversation. I am pleased to 

be a cosponsor, and I look forward to the testimony. Thank you. 

Chairman DODD. Thank you very much, Senator. I appreciate 

that. 

I am going to leave the record open for our other colleagues as 

well for any comments they may want to make, opening comments 

as part of the bill. 

Now let me introduce our panel of witnesses. I have already introduced, in a way, Mario Livieri, who is a constituent, as I pointed 

out earlier. He has traveled here from Branford, Connecticut, and 

will testify before us with regard to his own personal experience. 

He and I have talked about this before. We met, actually, in Connecticut several weeks ago, and I thought his story was so compelling that he deserved a national audience for his story. So we 

thank you, Mr. Livieri, for being with us. 

Jean Ann Fox is the Director of Financial Services for the Consumer Federation of America. CFA is a nonprofit association of 300 

consumer groups, and Ms. Fox advocates for issues including financial services, electronic commerce, and consumer protection. 

Frank Pollack is the President and CEO of the Pentagon Federal 

Credit Union, which has close to 1 million members and whose core 

membership comprises men and women of the Army, Air Force, 

Coast Guard, and Department of Homeland Security, and we thank 

you very much, Mr. Pollack for being with us. 

John Carey is the Chief Administrative Officer for Consumer 

Banking in North America at Citigroup. He is responsible for external matters impacting his company’s business, including business 

practices, external affairs, and community, regulatory, and governmental relations, and we thank you very much, Mr. Carey, for joining us. 

Michael Calhoun is the President for the Center for Responsible 

Lending, where he has held that position since 2006. The center is 

a research and policy institute focusing on consumer lending and 

protection. 

Again, we are very pleased to have all of you with us today, and 

we thank you. And, by the way, your full opening statements and 

comments and any supporting information you would like the Committee to have will be included in the record. 

So we will begin with you, Mr. Livieri. Again, we are very grateful to you. You have to pull that microphone close to you. It is right 

in front of you. And there is a button down there that should active 

the microphone. 

Mr. LIVIERI. I got it. 

Chairman DODD. You got it. You are all set. You are on. 
8 

STATEMENT OF MARIO LIVIERI, CONSUMER, STATE OF 

CONNECTICUT 

Mr. LIVIERI. Good afternoon, Chairman, Senator Dodd, and esteemed Members of the Committee. My name is Mario Livieri. I am 

a senior citizen and live in Branford, CT. I am honored to be invited here today to share my story with you. I hope that it will help 

you do right by consumers like me, who have been treated unfairly 

and misled by their bank about overdraft fees. 

Until a few months ago, I was a customer at a prominent bank 

in my town. I am no longer a customer there because I do not think 

they treated me fairly. 

Over the summer, I wrote a check for $200. When the check was 

cashed, it overdrew my checking account by $2.17. My bank 

charged me a $35 fee for my $2.17 mistake. I had no idea I had 

overdrawn my account. If I had known, I would have immediately 

deposited money in the account to cover the overdraft. 

But, instead, it took the bank over a week to notify me of the 

overdraft. By the time they finally got around to telling me my account was overdrawn, I had made a few other transactions with my 

ATM card totaling $100, and the bank charged me $140 in fees. 

Now, I owned a small business—a building and lumber company—when I was a young man, and I had been in business for 

over 50 years. I am quite sure they would have never done this to 

me 50 years ago. And I know that it is important to stick to a 

budget. But I also know that you do not get anywhere in the world 

of business by treating your customers unfairly. 

So I called the bank, and after a whole bunch of arguing, they 

agreed to refund one $35 charge, but insisted that I pay all of the 

other fees. I told them I did not think it was fair. They told me it 

was legal. As a matter of fact, the people that told me it was legal 

was the thrift institution in Washington, DC. 

I have been in business too long for that to be an acceptable answer. If that sort of practice—running up ridiculous charges for an 

overdraft ‘‘protection’’ program I didn’t even sign up for—is legal, 

it shouldn’t be. And it certainly isn’t fair. 

I am glad my Senator, Chris Dodd, is doing something about it. 

And I am grateful to the entire Committee for the opportunity to 

discuss my story with you. There are a lot of folks like me in your 

States who are in the exact same situation. They make a little mistake and get slammed for it by their bank. 

I hope that we can stop abusive overdraft coverage practices so 

that no one else, no matter what bank they use, has to go through 

what I went through. 

Thank you for inviting me here today and thank you for fighting 

the good fight on behalf of us consumers. Thank you. 

Chairman DODD. Mr. Livieri, thank you very much. I appreciate 

that. 

Jean, we thank you for being here with us today. 

STATEMENT OF JEAN ANN FOX, DIRECTOR OF FINANCIAL 

SERVICES, CONSUMER FEDERATION OF AMERICA 

Ms. FOX. Thank you, Chairman Dodd and Members of the Committee. I am Jean Ann Fox, Director of Financial Services for Con-
9 

sumer Federation of America. I am testifying today on behalf of the 

national consumer groups listed on our testimony. 

We enthusiastically support Senate bill 1799, the FAIR Overdraft Coverage Act. We also commend you for the proposal to create a Consumer Financial Protection Agency, which would not only 

implement the FAIR Overdraft Coverage Act, but also enforce the 

law and clamp down on all high-cost loan abuses. So thank you for 

doing that. 

In docket after docket, the Federal Reserve has failed to protect 

consumers from abusive overdraft lending. The rule that was announced last week will be a help, but it is not sufficient to protect 

consumers from the abuses that are inherent to overdraft coverage 

by banks. Along with recently announced changes in big bank overdraft programs, the rules are too little, too late, to provide the reforms that American consumers need and want. 

Banks extend credit when they pay a transaction that overdraws 

a consumer’s checking account. Instead of denying a debit purchase 

at the point of sale or a cash withdrawal at the ATM on insufficient funds, banks permit this transaction to go through, loan the 

bank’s money, and then the largest banks charge a typical $35 fee 

for the extension of that credit. These loans are not authorized by 

consumers. No consumer opts in typically on overdrafts that are 

provided as a ‘‘courtesy’’ by the bank. Consumers do not apply for 

these loans. They do not get truth-in-lending cost disclosures. They 

do not get a contract that the bank promises to cover overdrafts up 

to a certain limit. They do not get a warning when the transaction 

will trigger an overdraft and a fee. And their creditworthiness is 

not evaluated when this credit is extended. 

These loans are for small sums of money. The FDIC study released last year found the typical debit card purchase overdraft 

was just $20, so banks are charging $35 to loan $20 for a few days. 

And the typical overdraft did not exceed $78 in the FDIC study. 

These small loans come at astronomical cost with bank fees up to 

$39, the highest we found in a most recent survey. Banks pile on 

extra fees if you do not repay in a day or two. The majority of the 

largest banks charge sustained overdraft fees. You can be charged 

$35 for your first $5 overdraft. If you do not pay that back in 5 

days, it now costs you $70. And these overdraft loans are taken out 

of the next deposit into consumers’ bank accounts, making the 

banks the first creditor who gets paid out of your next paycheck or 

your Social Security check deposited to your account. And these 

loans are extremely expensive. For the FDIC’s typical $20 debit 

overdraft, if the fee is just $27 and you get a whole 2 weeks to pay 

it back, that is 3,520 percent APR, which leads us to describe bank 

overdraft lending as payday loans as done by banks. 

These loans come with balloon payments. You do not get an affordable repayment schedule. These get paid first, which can cause 

other checks consumers have written to bounce and trigger more 

bounced check or overdraft fees. And banks use tricks and traps to 

drive up the number of transactions that will overdraw by ordering 

the largest withdrawals first so that that wipes out your balance, 

and then they can charge you overdraft fees on all the other smaller transactions. 
10 

This is not what consumers want to have happen. In polling that 

CFA did this summer, we found that 71 percent of American consumers say they want banks to get permission to cover overdrafts 

for a fee; 85 percent of Americans want banks to be required to disclose on the ATM screen if a withdrawal will trigger an overdraft; 

70 percent say that banks should pay transactions in the order 

they receive them; and in polling done for Consumers Union, they 

found that consumers expect that if you do not have enough money 

to cover a transaction and you use your debit card, the bank will 

reject it. That is not typically the case. 

The consumers who are trapped in overdraft are the ones who 

can least afford the most expensive form of credit that banks offer. 

About a fourth of bank customers paid the $24 billion in overdraft 

fees that were collected last year, and they are most likely young, 

low-income, and minorities. 

I would be glad to answer questions later about the specific provisions of the bill, but let me wrap up by saying fee-based overdraft 

lending traps consumers in astronomically expensive debt and deprives families of money that they need to meet their basic needs. 

These are not a convenience. Overdraft loans are dangerous, highcost loans that must be reined in, even for people who agree to use 

them. We urge this Committee to reverse the drain on vulnerable 

consumers’ bank accounts by supporting Senate bill 1799. 

Thank you. 

Chairman DODD. Well, thank you very, very much, Ms. Fox. We 

are grateful to you for your testimony and support. 

Mr. Pollack, we welcome you to the Committee. You are very gracious to be here today, and we are anxious to hear your perspective. 

STATEMENT OF FRANK POLLACK, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, PENTAGON FEDERAL CREDIT UNION 

Mr. POLLACK. Thank you, Mr. Chairman, and thank you to the 

Members of the Committee. On behalf of the board of directors and 

management of the credit union, I would like to thank you for this 

opportunity to testify today. As you mentioned earlier, we serve the 

military and Department of Homeland Security, and we are a conservative institution that is particularly fee averse. Our total fee 

income represents less than 10 percent of our total income in any 

given year. 

While our first priority is to remain safe and sound, our strategic 

objective is to provide products and services that offer high rates 

on savings, low rates on loans, and low fees. We have been recognized in the military community as a leader with our overdraft protection programs. And we have always viewed overdraft protection 

as a particularly valuable service for the military member. In their 

line of work, maintaining good credit is important to their military 

readiness and ultimately their career. Thus, our program dates 

back more than 20 years, preceding most of the overdraft programs 

that have come into question today. 

From the very beginning, we have believe that members should 

either qualify for our low-cost line of credit, or we should not allow 

overdrafting of their accounts. We would note that with more than 
11 

two decades of experience, we find that our members are appreciative of that approach. 

We offer a line of credit attached to a member’s checking account 

with a minimum of $500 overdraft protection. This service is offered to every creditworthy member who opens a checking account. 

Forty-five percent of our active checking account members have 

such a line of credit. As a result, our programs have always been 

opt-in. We believe strongly that every consumer must have opt-in 

rights. 

At the Pentagon Credit Union, we charge 14.65 percent annual 

percentage rate calculated on a simple interest basis with no other 

fees and charges for overdrafts. We believe that by using a line-ofcredit product which is formally recognized as a loan and, thus, 

subject to all of the Federal lending disclosure requirements, the 

cost to the consumer is both fully disclosed and properly proportional to the amount that they overdraw their account by. 

At PenFed, we post transactions smallest to largest to avoid 

charging unnecessary overdraft and nonsufficient fund fees. We 

provide separate mail notifications for each overdraft event so that 

our members are kept fully aware of the status of their accounts. 

We believe that rapid notification is important to those members 

so that they can pay off their overdraft as quickly as possible. 

In short, we have attempted to craft a product that is truly consumer friendly. We would make note of the fact that we have not 

received a single complaint from our membership regarding the 

order in which we process items in more than 20 years. 

Nevertheless, there are members who do not choose to opt-in, 

and there are those who cannot qualify for a line of credit. These 

members are not allowed to overdraft their account with the limited exception of an offline debit transaction where we are required 

by contract to process such payments. In those instances, we do 

charge a $30 fee. This does not happen with great frequency, and 

we recognize that the proposed bill would eliminate that fee. We 

support that. We also recognize that the recent action of the Federal Reserve Bank will prohibit such a fee. However, we do believe 

that merchants and networks should be required to process all 

transactions in real time, which would eliminate this exception circumstance. 

As an organization, we are constantly focused on process improvement. We felt that there was more that we could do for our 

military members in the area of overdrafts. This summer, we made 

a decision to eliminate as many of the nonsufficient fund fees that 

our military members incur as we possibly could. The product we 

created is called ‘‘Warriors Advantage.’’ It waives the checking account fees associated with instances of insufficient funds for up to 

two occurrences in any rolling 3-month period. Importantly, this 

program is separate and distinct from our overdraft line of credit 

and goes beyond the minimum requirements of the proposed legislation. 

Under this program, a military member without overdraft protection can use all of the money available in their checking, plus their 

line of credit, and still have two additional instances of return 

items every 90 days with no fee or charges beyond the interest on 

their loan. Our research indicated that this program would result 
12 

in just over 98 percent of our military members with checking accounts never experiencing a fee. The Warriors Advantage program 

represents only a beginning for us. We intend to extend this program to our entire membership, and we are already at work on our 

next version, which we hope to roll out in the summer of 2010. 

So thank you very much for this opportunity to testify. We are 

indebted to you for the work that you are doing on behalf of the 

American consumer. 

Chairman DODD. Mr. Pollack, we thank you very, very much. 

Mr. Carey, we welcome you to the Committee. I want to point 

out, we say this to you because oftentimes we have these discussions and hearings and people like Citibank and others are the 

subject of our concerns, to put it mildly, but I would like it to reflect here that Citi, overdraft fees from ATM and point of sale, PIN 

transactions, and debit transactions, when there are not sufficient 

funds in the account, real-time posting of debit and ATM transactions are part of Citi’s program. So we compliment Citi for those 

actions. Because we do often sit here and berate you for what you 

are not doing, I want to compliment you when you do something 

right. So I want that to be reflected. 

STATEMENT OF JOHN P. CAREY, CHIEF ADMINISTRATIVE 

OFFICER, CITIBANK NA 

Mr. CAREY. Well, thank you, Senator. I appreciate it. Thank you 

very much for the opportunity—— 

Chairman DODD. There are still other things I want you to do. 

You are not off the hook. 

Mr. CAREY. I understand that. I understand that. 

Thank you very much for the opportunity to talk about the bill 

and to offer some recommendations for improving the choice with 

overdrafts. 

You know, we have heard today that the policies that some of the 

banks employ in applying their overdraft protection, particularly 

with ATM and debit transactions, can be very confusing, frustrating, and often expensive for consumers, especially for those people who don’t manage their daily finances that closely. There are 

many stories that we have all heard where a consumer incurred an 

unexpected fee for a transaction that could easily have been avoided had there been better information at the point of sale. It is the 

$5 cup of coffee that ends up costing $40 after the overdraft fee is 

slapped on. 

So at the outset, it is important for me to be clear, and Senator, 

I think you have made it very clear, is that at Citi, we help customers avoid overdraft fees. We have never authorized—never authorized—ATM or debit transactions if we know the money is not 

there. And therefore, we do not charge an overdraft fee when a customer attempts such a transaction. 

Moreover, through incentive programs with our personal bankers, we encourage our customers at the account opening and 

throughout their relationship with us to link a savings account or 

a line of credit to cover potential overdrafts and avoid either an 

overdraft fee or a bounced check fee. This practice is one of the best 

ways to reduce the risk and the costs of overdrafts. 
13 

Separately, we do allow overdrafts for checks and ACH transactions. We do this because the situation is very different. With 

checks and ACH transactions, customers have the sole control over 

the transactions. We cannot know what amount they are writing 

on the check or exactly when the check was written. In those cases, 

we mitigate risk for our customers and ourselves by allowing customers a cushion to cover a small overdraft. Further, in order to 

avoid large overdraft situations, Citi will not authorize a payment 

beyond a reasonable amount. 

Today, fewer than 20 percent of Citibank customers are charged 

even one overdraft fee a year. Of those, only a few are charged 

more than once annually. We think that the reason for this is because we decline ATM and debit transactions when the funds are 

not available. 

While we have concerns with aspects of the bill, we fully support 

the goal of protecting consumers from unnecessary overdraft fees. 

We support the additional efforts to improve consumer awareness 

regarding overdraft protection and alternative payment options. 

Moreover, we agree that banks should provide more transparent 

and easy-to-understand disclosures so that consumers can better 

manage their own money. We believe in the importance of giving 

consumers the ability to make choices based upon their individual 

circumstances as they manage their finances from 1 day to the 

next. That is why we believe there are opportunities for reform to 

provide consumers with even greater choice and control related to 

overdraft fees. 

Of course, most consumers do not overdraft and never will. Still, 

consumers may not fully understand the effect of opting into or out 

of overdraft coverage will have on them over time. In the future, 

they may find themselves in the circumstance where they wish 

they could proceed with a specific transaction, even if they know 

they would be charged a fee. I am not referring to the $5 cup of 

coffee that ends up costing $40, but rather, it is about someone 

being stranded without cash in a foreign country and being able to 

access $100 from an ATM even if it costs them $135. Having previously opted out would eliminate the flexibility. 

So it is our position that consumers should be given the choice 

of opting in at the point of sale. The choice and control should lie 

squarely in the hands of the informed consumer. So consumers 

should be alerted at the ATM or debit terminal that the transaction will overdraft their account and they should be able to 

choose at that moment whether or not they want to incur the fee 

and have them go forward with the transaction. In the absence of 

the choice, perhaps the transaction should be denied. 

Understandably, updating the technology to provide such transparency will take time and it will be incumbent upon the merchants, the networks, and the banks to help create this 

functionality at the point of transaction. 

With this point of transaction approach, all the issues in the bill 

about how many fees can be allowed, whether those fees are reasonable, exactly when the customer should be notified, and the 

other concerning policy and business implications of those points 

will all become moot. Informed consumers can decide whether a fee 
14 

is too high or being charged too often based on their personal 

needs. In short, consumers need to decide. 

As I have noted, we agree with the overriding goals of the bill. 

However, we have some important points of concern in the current 

bill that should be addressed. Some, I have noted here, and others 

in more detail in my submission. 

I thank you very much for the opportunity to participate in this 

hearing. 

Chairman DODD. Thank you very much. Very creative thoughts. 

We appreciate that. 

How are you doing this afternoon? It is good to have you with 

us here today, as well, Mr. Calhoun, and we thank you for coming 

before the Committee. 

STATEMENT OF MICHAEL CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING 

Mr. CALHOUN. It is good to be here, Chairman Dodd and Members of the Committee. Thank you for your leadership in protecting 

consumers, especially enacting the CARD Act recently, and thank 

you for inviting us to testify today. 

Nearly 5 years ago, Federal regulators studied overdraft fees and 

found serious problems. They issued joint guidance advising banks 

to consider prohibiting overdraft fees on debit cards and to limit 

the fees. Had this guidance been enforced, we would not be here 

today discussing the explosion in the amount and frequency of 

these fees. Instead, the regulators chose to not enforce the guidance, and in the intervening years, American families have lost an 

additional $70 billion. 

Current overdraft practices are a pipeline out of the pockets of 

American families. Federal regulators have the present authority 

and duty to stop this abuse. Their hands are on the valve to cutoff 

the siphoning of consumers’ money, but they refuse to cut it off. 

I am going to focus my comments today on overdraft fees on 

debit cards, since this is the largest and fastest-growing source of 

overdraft fees. 

Overdraft fees on debit cards are abusing and should be prohibited. It is a penalty fee totally unrelated to the cost, and the bank 

can stop the bank by doing as Citi does, just declining the transaction, and there is no NSF fee for the customer or the consumer 

when that is done. This is a little like a town with an intersection 

with a green traffic light, and then the town imposes a high fine 

on travelers who enter the intersection. 

Today, banks manipulate bank accounts to generate fees and 

then oppose these high penalties. There are lower-cost alternatives, 

as have been mentioned today, but these abusive high fees are 

driving them out of the market. Several banks have discontinued 

alternative products, like lines of credit, because of the revenue 

from high overdraft fees. 

Overdraft fees are turning debit cards into high-cost credit cards 

without the protection of CARD Act. These fees cause immense 

damage to families. More than 27 million families pay over five 

overdraft fees each year. It is taking families out of the financial 

mainstream, as we run into counselors who feel that they cannot 
15 

tell families to get a bank account because these overdraft fees 

drive them into a financial hole they can’t get out of. 

These abusive overdraft fees also harm the banking industry and 

our overall economy. They disadvantage responsible programs who 

don’t charge these fees, and it turns our banks into a competition 

of who can enroll the most customers in overdraft programs and 

then deplete their accounts rather than which bank can offer sustainable credit and fair financial services. One testimonial from a 

banker for overdraft programs went on to say, quote, ‘‘If I had two 

more products like this, I could quit making loans altogether.’’ 

We praise the reforms that are set out in S. 1799. It imposes critical limits on the amounts and number of fees. In contrast, the recent Fed consent rule is too little, too late. There was consent on 

credit cards before the CARD Act, but that did not solve the problem. Substantive protections were needed. 

Again, overdraft abuses demonstrate the need for a Consumer Financial Protection Agency. If overdraft abuses had been a primary 

focus of an agency, they would not have developed in the way they 

have. There is a need for an agency that can act quickly and respond to new problems, and a Consumer Financial Protection 

Agency focused on consumer protection is best suited to do this. 

It is said that to whom much is given, much is required. The 

American taxpayers have given hundreds of billions of dollars to 

the big banks, and taxpayers will pay for this for many years. It 

is not too much to expect that the recipients of this aid will use 

it to restore the American economy that they helped bring down, 

and at the very least, that these banks will not, in return, siphon 

away families’ hard-earned dollars, hurting not only those families, 

but also the many businesses in dire need of the boost those dollars 

would provide if available to purchase useful goods and services. 

We again call on the financial regulators, and especially the 

OCC, which oversees the biggest overdraft programs, to enforce the 

overdraft guidance sitting on their shelf and to issue regulations 

with substantive protections for American families. We also urge 

Congress to enact substantive overdraft reform, closing the gap in 

the CARD Act and putting an end to these abusive practices. 

Thank you. 

Chairman DODD. Thank you very much, Mr. Calhoun, and again, 

I thank all of you for your participation today and your thoughts 

and ideas. They have been very constructive and helpful. 

Let me, if I can, why don’t we begin with you, Mr. Livieri, just 

a question or so. I was curious, and you and I have talked about 

this, but I wonder if you had received notice—we talked about this 

week that went by between the time you actually wrote that check 

for $200 and you only had $197.80, or close to 80 cents, in your account, and so you had $2.17 of an overdraw on that account. Would 

you have continued to use your debit card to make additional purchases had you been notified right away—— 

Mr. LIVIERI. Definitely not. 

Chairman DODD. Yes. 

Mr. LIVIERI. Definitely not. 

Chairman DODD. I think you told me at one point that actually 

in the notice you received, that the postmark on the notice—— 
16 

Mr. LIVIERI. The notice was given to me on the 18th and the 

postmark was the 24th. Then they sent me another one on the 

16th, and the postmark was the 22nd. So I didn’t know that I was 

overdrawn. As soon as they told me I was overdrawn, 10 minutes 

later or a half-an-hour later, I brought down money and everything 

was fine. 

Chairman DODD. So it was 6 days after they actually took notice 

of it that they notified you? 

Mr. LIVIERI. Correct. 

Chairman DODD. Yes. And so had you been notified more 

promptly, you would have dealt with it. In fact, I hesitate to ask 

you this, but you have told me this, so I know the answer. You had 

enough money in your own accounts to more than cover these 

things. 

Mr. LIVIERI. Oh, yes. 

Chairman DODD. You weren’t short that amount that was in the 

bank. You just weren’t aware of what limited amount was—— 

Mr. LIVIERI. Was going on, right. 

Chairman DODD. Yes. 

Mr. LIVIERI. I didn’t have it in their bank. I had it in another 

bank—— 

Chairman DODD. Yes. 

Mr. LIVIERI. ——which was close by. 

Chairman DODD. You are a multiple banker here. You are a—— 

Mr. LIVIERI. Well, no, but I didn’t have it in their bank, but it 

was down the street a couple of blocks. So as soon as they told me 

that the thing was overdrawn, I just went and got the money and 

brought down cash to them. 

Chairman DODD. Yes. 

Mr. LIVIERI. So it wasn’t a serious problem. Before this, on many 

occasions—because I was with this bank for 10 years—when I did 

something, and a lot of times it was their mistake, but if it wasn’t, 

as soon as you put your card in and you put your PIN number and 

so forth, it would say ‘‘insufficient funds, go see your banker.’’ It 

didn’t this time. Nothing, like everything was fine. I mean, we are 

only talking $10.60, $30, and $20. That is all the things were for. 

It was not a serious amount. The only thing is the serious amount 

was the $35 to get $10.60. 

Chairman DODD. So the technology existed in your bank where 

actually the machine notified you of insufficient funds? 

Mr. LIVIERI. Sure. Yes. Sure. 

Chairman DODD. That is interesting. 

Let me ask the panel, if I could, Mr. Carey in his testimony 

talked about the frustrations that consumers express is centered on 

ATM and debit transactions where the overdraft coverage fees 

could have been avoided if the customer had only known at the 

ATM point of sale that the transaction would result in a fee. And 

I should let you know, in our bill, by the way, we ask for a study 

of this, to look at this particular point, so we have already accommodated your interest to some degree and recognize—although you 

heard from Mr. Livieri that actually the technology existed at his 

bank at an earlier time where they were able to notify him instantaneously—— 

Mr. LIVIERI. Correct. 
17 

Chairman DODD. ——about whether or not there was an 

amount—there was not an adequate amount of funds there to cover 

that particular transaction. But you make a good point, and as I 

say, we are evaluating it through a study. 

But even if the technology were readily available at a reasonable 

cost, overdraft coverage fees should still be reasonable and proportional. You have got $2.17 and you have got a $35 fee. It seems to 

me if someone is overdrawn by $500, or $250, having an overdraft 

fee that would somehow be proportional to the amount of the overdraft would be more reasonable to me, at least. But the idea that 

even a few cents, where a person—literally, there are examples, 

plenty of these, where a cup of coffee or multiple transactions— 

young people particularly that are more inclined to maybe use that 

card more frequently and they have small transactions—where 

each transaction is at $35, or gets doubled that amount. 

It doesn’t seem that, at least in the interim, before we get point 

of transaction, that what we are trying to do here should be adopted rather than wait for all of that to occur. 

Mr. CAREY. Senator, I guess the question is directed at me, so 

I will give it a shot. 

Chairman DODD. OK, because you made the point—— 

Mr. CAREY. I made the point. That is fair. At Citi, at this point, 

if you were to go and buy that $4 cup of coffee and you did not 

have $4 in your account, we wouldn’t authorize the transaction. Basically, the transaction wouldn’t go through and the customer 

would have this decision to pull out another means of basically 

paying for it. 

Chairman DODD. Yes. 

Mr. CAREY. What we are essentially saying is that is what ought 

to happen until the technology is there at any point of sale, just 

to simply deny the transaction in its entirety and have the customer go someplace else or use some other mechanism to pay for 

it. 

Chairman DODD. Right. 

Mr. CAREY. That way, when you do that, when the customer literally—when this technology gets built, and it is not that far away 

because it can be done and it already is—it is in the ATMs, as we 

have heard—is you can make the decision about whether or not 

you want to incur the fee. Do I want this or do I not want this? 

No, I don’t want the fee. I am willing to go someplace else to do 

that. And that is where the real choice is. 

Chairman DODD. Right. 

Mr. CAREY. My concern is that if we give a choice in a static environment, where I opened an account 2 years ago and I opted into 

this thing and I had no idea that I would be incurring this fee, that 

is the problem now. 

You asked about the reasonableness of fees—— 

Chairman DODD. Yes. 

Mr. CAREY. ——and it is a slippery slope. My concern about it 

is, certainly in the debit and the ATM space, establishing limits 

and establishing those, what is reasonable or not, I think that is 

worth discussing. But I think when we start talking about people 

writing checks and bouncing checks and the banks offering the 
18 

service for overdrafts rather than having the check bounce, that is 

a good thing. 

Chairman DODD. But my point, I guess, I want to make to you, 

that in the absence of these other matters being adopted, I wanted 

to determine whether or not you felt it was reasonable, our bill. I 

am not asking every dotted ‘‘i’’ and crossed ‘‘t’’—— 

Mr. CAREY. No. In essence, what I would say, what I would suggest is that the transaction should just simply be denied. 

Chairman DODD. Yes. Let me ask other members of the panel. 

Ms. Fox. 

Ms. FOX. Senator Dodd, when banks talk about overdraft fees 

being set high to serve as a deterrent, that is a bit disingenuous. 

If they wanted to deter overdrafting, they would deny the transactions on debit cards at the ATM—— 

Chairman DODD. You anticipated my next question, because the 

GAO found that the average noninterest fees, including overdraft 

fees, increased by 10 percent or more since the year 2000. So how 

has the imposition of these fees as a deterrent fared if, indeed, recent data has shown increasing revenue coming to banks from 

these fees? It seems to me it is—— 

Ms. FOX. Right. We have been surveying the largest banks’ overdraft fees for the last several years, and every time we go back and 

look, the fees have gone up. More banks are charging tiered fees, 

so the second and third and fourth overdraft is even more expensive. And now they are starting to add sustained overdraft fees, so 

you can get charged $35 immediately. If you don’t pay the bank 

back in a few days, it is another $35. Some banks charge an $8 per 

day sustained overdraft fee. 

I heard a young fellow in Indiana this summer, just out of high 

school, working a minimum wage job, and made a $10 math error 

on his bank account. He had four debit transactions that overdrew 

his account by $6.58. His bank charged $35 for each of them. He 

rushed down and deposited $100. That was sucked out to pay the 

overdraft fees, so he was still overdrawn, and they charged him $8 

a day. By the time this young kid’s family got in touch with me, 

he was $500 in the hole. That is not a deterrent. That is not a service. That is a debt trap. 

Chairman DODD. Yes. Does anyone else want to comment on this 

before I turn to Senator Reed, or Senator Brown, excuse me? Does 

anybody else want to comment on this particular point? 

Mr. CALHOUN. If I may add, that is what the practice was not 

many years ago, and that was a big selling point, in fact, of debit 

cards, was that they had a limit. They were different from credit 

cards. And again, what these overdraft programs have done, particularly with debit cards, is they have turned debit cards into extraordinarily high-cost credit cards—— 

Chairman DODD. That is a very good point. 

Mr. CALHOUN. ——with none of the substantive protections. The 

CARD Act limits the number of fees and is patterned similar to 

what you have in S. 1799 and requires that those fees be reasonable, proportional, and they be consented to. If you are going to require that for a credit card, it seems like you need at least those 

protections when something is marketed as a noncredit product. 

Chairman DODD. Thank you very much. 
19 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman, and thank you, Senator Reed. 

A question for Mr. Calhoun and a question for Mr. Pollack. The 

American Bankers Association say that consumers appreciate having overdraft protection, that it is a service that their members’ 

customers want. Why are your survey findings so different, Mr. 

Calhoun, from what the American Bankers Association tells us? 

Mr. CALHOUN. Well, as many surveys, it depends what you ask 

and to whom you ask it. Our survey was done by an independent 

group, a larger sample nationwide, more than 2,000 respondents, 

and people want to know what it will cost them. When they are 

told $35, it is a whole different kettle of fish. 

The other main thing is that for people who want it covered, 

there is an alternative, both a line of credit, which the typical 

charge if you use overdraft protection from a line of credit is less 

than $1 for an overdraft versus $35, or they used to regularly offer 

linking, as some still do, linking your debit card to your savings, 

and then some charge imposed, like a $1 fee each time you access 

it. Banks are discontinuing those programs because the regulators 

have allowed these abusive products to drive out the good ones. 

So you can have—it is not an either/or. If somebody truly wants 

coverage for overdraft, they can have it and on a fair basis that is 

profitable to banks. 

Senator BROWN. So 5 or 10 years ago, it would be much more 

likely for a bank to set up a situation that the account, the overdraft, if you will, would simply be money taken out of my savings 

account. There would be a link there. The bank would just do that 

automatically. I would get the statement that they had done that. 

Mr. CALHOUN. Yes. 

Senator BROWN. And that is much less common today than it 

was 5 years ago? 

Mr. CALHOUN. Yes. If you go in, many banks no longer offer it 

and those that do often actively discourage it and point people toward the high-fee overdraft program instead. 

Senator BROWN. Mr. Pollack, at the Pentagon Credit Union 

where you work, do your customers complain that you decline these 

debt transactions? Do you hear discussions from customers about 

this after they see how your system works? 

Mr. POLLACK. Actually, we do not. We share the view, and we 

think that our members do, as well, that Citicorp has, that when 

they do not have money in the account, they prefer to know they 

don’t have money in the account and not be charged a fee to get 

$20 or $5 for a cup of coffee. And so we have had no complaints. 

Senator BROWN. You don’t have the technology Mr. Carey talked 

about that someone is notified that they would be overdrawn but 

still has the option to be overdrawn and get the fee, pay the fee, 

in case of emergency? You don’t have that technology, I assume, 

yet? 

Mr. POLLACK. That is correct, and we reject if you do not have 

available funds. 

Senator BROWN. As Citi, you said. 

Mr. POLLACK. Right. 
20 

Senator BROWN. Would you know if most credit unions around 

the country have the policy that you have? Are other credit unions 

more likely to mimic the Pentagon Credit Union or are they more 

likely to mimic some banks that do this? 

Mr. POLLACK. It is probably 50-50, roughly. 

Senator BROWN. Can you—is it the larger credit unions that are 

more likely to do it? The smaller ones? Can you give me—— 

Mr. POLLACK. I think the larger ones are less likely to charge a 

fee. In the House meeting, the second-largest credit union showed 

up, which is North Carolina State Employees. They do not charge 

fees, either. So I think the larger credit unions are more apt to 

have programs similar to ours or similar to Citi’s. 

Senator BROWN. OK. Thank you. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman, and 

thank you, witnesses, for your wonderful testimony. 

Let me ask, Mr. Carey, you have initiated these steps with respect to your policies as a result of any type of regulatory suggestion, or is this just something that you think is good business? 

Mr. CAREY. This is something—this has been our practice really 

since we invented the ATM and that we have never done anything, 

literally—— 

Senator REED. Be careful, because somebody invented the Internet and got in a lot of trouble. 

[Laughter.] 

Mr. CAREY. I don’t think there is much—not as much dispute 

around this one as, I think, the other one. But it has basically essentially been our practice, if the funds aren’t there, the transaction doesn’t go forward. 

Senator REED. Well, the majority of banks, though, both large 

and medium and all sizes, charge these fees, and I guess my point 

is that do regulators ever look at you and say, that is great, or do 

they in any way sort of try to suggest what a good fee structure 

would be with respect to consumers, or do they just remain aloof? 

Mr. CAREY. Well, I think to your first point, I have yet to be in 

a meeting with a regulator where they have said everything that 

I have ever done is really good and pat me on the head. I think 

that is not their job. 

But, you know, they both through their compliance oversight as 

well as the safety and soundness oversight, they challenge us on 

all sorts of issues about how we are approaching specific things. I 

have not had specific conversations around our practices with respect to debit and ATM, but—nor would I expect to have them because, I think, it is not a driver of consumer complaints. They are 

not surprised that the coffee that they bought, in fact, cost them 

$40. And with respect to ACH and checks, our customers like the 

fact that we can cover off a transaction that is important to them 

rather than bouncing their check and having them face a returned, 

bounced check fee from a vendor and all the flow-down problems 

that come from it. 

Senator REED. Thank you. 

There is some evidence, though, I think, Mr. Calhoun, that consumers would rather be denied in some cases, and particularly 
21 

debit cards, than to have automatic fees. Is that your findings at 

your agency? 

Mr. CALHOUN. We polled and 80 percent of consumers prefer to 

be denied rather than impose the $35 fee on a debit. They want 

choice on all of these. 

And going back to your question about the regulators, I think one 

of the really striking things is I mentioned the joint Federal guidance that was issued 5 years ago. That was February—almost 5 

years ago, February 2005. But even going back further than that, 

the OCC, going back as far as 2001, was approached by a bank 

that wanted to offer one of these overdraft programs, kind of a new 

thing then, on debit cards, and it was very similar to the programs 

that have been described here today. In August 2001, the OCC responded in very harsh criticism noting all the lack of consumer protections and the program was never instituted at that time. Why 

the change of heart by the regulators? Consumers suddenly have 

more money that they want to pay in fees? Not only have they 

failed to address this problem, they have actively condoned the development of these overdraft programs, as your questioning was 

suggesting. 

Ms. FOX. Senator, could I add to that? 

Senator REED. Ms. Fox, please. 

Ms. FOX. Also, the Comptroller of the Currency has had a set of 

guidelines for the order in which banks process payments, and 

none of those criteria add any consumer protection. It talks about 

deterring misuse of the account, or that the bank lets you overdraw. You haven’t misused anything. You have been invited to do 

that. None of the OCC’s guidelines about the ordering of payments 

says that consumers shouldn’t be charged extra fees just because 

it has been manipulated. So the regulators have really failed to 

curb this practice. As the fees went up, overdrafts became more 

pervasive. More transactions became covered by it, and more 

money went out of people’s pockets. 

Senator REED. And that is, from your perspective, consistent 

across the board, not just OCC, but OTS and other—— 

Ms. FOX. Well, it is the Federal Reserve that writes the rules 

that implement the Federal banking and credit laws, and we have 

been urging them for years to require banks to comply with Truth 

in Lending when they extend credit through letting you borrow 

from the bank with an overdraft. And in docket after docket, the 

Federal Reserve has failed to do that. They have written Truth in 

Savings Act rules. They have now added rules to Reg E. But they 

have failed to provide a basic set of comparable protections to overdraft lending that every other creditor has to comply with. 

Senator REED. And Mr. Pollack, you point out in your testimony 

that essentially that is what you do voluntarily, that because you 

treat, because of your practices, if someone has overdraft protection, you are consistent with all the lending laws and consumer 

protection laws, is that correct? 

Mr. POLLACK. Yes, sir, that is correct. 

Senator REED. And you have not seen that as an impediment to 

business or to profitability? 

Mr. POLLACK. To the contrary. We are doing quite well. 
22 

Senator REED. Good. And Mr. Carey, just in my mind to clarify, 

your policy about debit cards is that you don’t charge these fees, 

et cetera. With respect to checks, you do charge those, and unlike 

Mr. Pollack’s organization, you don’t do it through an overdraft, 

you do it automatically? 

Mr. CAREY. Oh, no. We have, as I said in my testimony, we have 

programs similar to what Pen Fed has, which, again, at account 

opening and throughout the relationship, there is an opportunity to 

link a savings account or link a line of credit and then customers 

can move those funds back and forth and make sure that they have 

the appropriate coverage. So we do have all of those things. And 

so at those points of sale, money can literally move over and cover 

those particular transactions and people aren’t denied of them. So 

we essentially have the same capability. 

What I was essentially focusing on was if someone just simply 

didn’t opt-into those programs, in the current environment, we simply wouldn’t authorize the transaction if there weren’t funds there. 

Senator REED. Well—yes, sir, Mr. Livieri. Thank you. 

Mr. LIVIERI. A lot of times, and it has been my policy, and it has 

been quite a while, but I remember having a credit card or a debit 

card or whatever and you put it in the machine and you say you 

want $200 or whatever it is, and then it says the fee will be $18. 

Do you want to continue? And if you say no, the transaction is null 

and void. That is OK. As long as you know what it is going to cost 

you, if you want it, you do it. If you don’t want it, you just put ‘‘no’’ 

and forget about it. 

Senator REED. And I think you are right. 

Mr. LIVIERI. Doing it without you knowing what they are going 

to charge, that is a horse of a different garage. 

Senator REED. I could not say it any better. I better remember 

that, a horse of a different garage. 

Chairman DODD. A different garage. That is a new one for me, 

Mr. Livieri. And a garage of a different color. 

[Laughter.] 

Senator REED. Mr. Chairman, thank you. 

Chairman DODD. Thank you very much, Senator Reed. Good 

questions. 

Let me pick up on the points that Senator Reed was making. It 

may be duplicative. I hope it is not. But, you know, for many, many 

years, the Federal Reserve—because it is the Federal Reserve, Ms. 

Fox, you are correct, that actually has the primary responsibility 

or has had the primary responsibility in this area of consumer protection. And they have been aware of the abusive overdraft fees for 

a long time. In fact, an interagency guidance in 2005 called overdraft coverage programs ‘‘abusive and misleading.’’ That is 4 years 

ago. That is their words to describe this going back in 2005. 

Over the past several years, of course, the Federal Reserve has 

issued modest rule after modest rule to address the programs. And 

I am pleased to see what they have done. I do not want to have 

anyone leave the room here thinking we are not grateful, but I understand in a sense. I would love to be convinced that it would 

have happened in the absence of introducing legislation in this regard and also absence of the consideration of the financial regulatory reform proposals that are out there. And as I say, I have a 
23 

lot of respect for Ben Bernanke, and I do not say that lightly. I 

think he has done a very good job, and I do welcome these changes 

here, it seems to me. But are these sufficient rule changes going 

to be adequate enough? And let me just take advantage of the 

panel here, and, again, I say this not because it should be punitive 

or adversarial, but merely sort of to complete the entire picture if 

we are looking at creating stability and safety and soundness in financial institution, which we all want. At the same time, it is very, 

very important that people like Mr. Livieri, a hard-working guy 

who ran his own business for 50 years, goes in and does a simple 

transaction and ends up paying $140 for a $2.17 overdraft, you 

know, again, if this were the bizarre exception, I would not have 

him here. He would not come here. Mistakes happen. Unfortunately, this happens with great regularity. 

And the idea that in this reorganization of the regulatory process 

here, instead of me going through the process—and, look, all of you 

understand and know the Senate pretty well. The likelihood I can 

take a bill like this and get it out of Committee, get it on the floor 

of the U.S. Senate, go through a week or two, maybe, if I am lucky 

here, without a whole lot of other things being added to it, to complete it in the other body of 435 people, to have the President of 

the United States sign it into law, in order to get some changes 

that the Federal Reserve 4 years ago called abusive and misleading, it seems to me it cries out for a different process here that 

would allow an agency with responsibility of confirmation by the 

Senate, appointment by the President, to watch out for what happens to the Mr. Livieris of this world. 

I should not have to go through this process on every matter like 

this. This ought to be delegated to a responsible regulatory body to 

provide the kind of protections. 

In the Great Depression, we came up with the Federal Deposit 

Insurance Corporation. We did not require a piece of legislation 

every time a bank failed to make sure that the depositors in those 

banks were going to have their money protected. With the Securities and Exchange Commission, we guaranteed that if you bought 

a share of stock, you were not going to be deceived and defrauded. 

Now, obviously, that still goes on, the Bernie Madoff case. But, 

nonetheless, there was an agency of protection rather than a bill 

in Congress every time some action occurred out there. 

Shouldn’t we today in the 21st century, given all the wonderful 

technologies that exist today that can inform consumers of what is 

going on—I apologize for the length of this question, but it just 

seems to me it cries out. This is a further example of instead of 

waiting around and hoping and praying, despite years of acknowledgment of this problem existing and waiting for a bill to get 

passed by Congress, we would have responsible people at a responsible regulatory body making these kinds of decisions. Doesn’t it 

cry out for an independent consumer—if your lawn mower breaks 

today, you can call somebody and say, you know, ‘‘The warranties 

are not there. Who can help me out to get my money back from 

a faulty product that I got sold, a consumer product?’’ Who do you 

call when all of a sudden you are Mr. Livieri and you have been 

taken to the cleaners for 140 bucks for a $2.17 transaction? Who 
24 

does he call? He called his Senator. You should not have to call 

your Senator. 

Ms. FOX. Right. And if he calls the bank regulatory agency, they 

will tell him, ‘‘This did not violate any rule. This did not violate 

any law.’’ 

Chairman DODD. He was told that. It was legal. 

Ms. FOX. They can charge you any amount. They can charge you 

any number of fees. They can charge you over and over for the 

same overdraft, that there are no limits on what the banks can do 

in this area. And you are correct that a Consumer Financial Protection Agency would be very important to keep this kind of abusive 

practice from getting out of hand. 

Chairman DODD. Mr. Pollack, I do not mean to draw you into 

this, but, you know, you are in the business of financial services. 

Do you have a reaction to this? I do not even know what your answer would be, so I am just curious what your thoughts are. 

Mr. POLLACK. Well, at PFCU we believe that the CFPA is a good 

idea. We think that the ability of an agency to focus solely on consumer protection will make that agency more effective. The fact of 

the matter is today that regulators have a very difficult job and 

have to cover a lot of ground, and I do not think that anybody at 

any of the regulatory agencies was trying to do a bad job. I do not 

think that at all. I simply think that when you are trying to cover 

a lot of ground, you cannot do as well as when you are focused on 

one sole area. 

So we believe strongly that the CFPA is a beneficial event for the 

American consumer. 

Chairman DODD. Yes. Mr. Carey, I will invite any comments you 

want to make. I will let you even speak as a private individual 

here rather than representing the bank. 

Mr. CAREY. I think the best thing I could say is that clearly there 

is an opportunity to improve consumer protection, and whether it 

is through the CFPA or whether it is through enhancing the authorities, Senator, you probably know that better than I do. But, 

clearly, the stories that you are describing here deserve attention, 

and if it is not being done by the regulatory agencies, then the 

questions have to be asked as to why not. 

Chairman DODD. Yes. And, of course, Mr. Calhoun, we know 

where you stand on this. You have already spoken about it. But do 

you want to make additional comments—Senator Merkley returned. I apologize. I did not see you walk in the room, Jeff, so why 

don’t you just jump in here. I do not know much longer we will 

have before a vote starts. Go ahead. 

Senator MERKLEY. Well, I wanted to ask a question, and I apologize that I had to leave and come back, so if this has been answered, you can just indicate to me to check the record, if you 

would. But I use a debit card, a Visa debit card, for just about everything that I am purchasing. And I try to keep enough balance 

to not worry about this issue of overdraft. But how difficult would 

it be to have a system in which I could be given a real-time choice 

of whether or not, if I have, in fact, depleted my funds with a 

transaction and I am buying a newspaper in the airport, how difficult would it be to give a real-time warning and allow me to 
25 

choose do I wish to have an overdraft and pay a fee for that or simply not do the transaction? 

Mr. CALHOUN. Why don’t you start, John. 

Mr. CAREY. Right now the technology is there, but it is not capable of being done now. In other words, it is not like we have to invent a new idea. We do not have to invent the transporter room 

in order to make this happen. The technologies are there. The processes are not. And that requires the cooperation of merchants, it 

requires the cooperation of banks, and it requires the cooperation 

of the networks to get that done. 

So it is not there today, but, for example, it is your own ATM, 

and it should be for your—you are on us or your home ATM about 

having that capability, if you do this, you are going to be overdrawn, would you like to go forward with the fee? So it is not that 

far away, but there has to be the incentive to be able to basically 

go out and build it. And part of that is—and that is the point that 

I have been trying to make—until that is there, then perhaps the 

transaction should not be approved, just simply flat out not approved. So if there is a market for that, if there is the need for 

that, then let us build it and let us give consumers the choice at 

the moment in time they need it most. 

Senator MERKLEY. And it does not seem that long ago that that 

was the response. You have hit your limit, ad your transaction will 

not go through. 

Mr. CAREY. Right. 

Senator MERKLEY. That is just a few years ago, isn’t it? 

Mr. CAREY. According to the testimony today, again, at Citi we 

do not do it, and so if you do not have the dough in the account 

or it is not linked to another account, there just simply are not 

funds available for you to draw, the transaction is not authorized. 

And I suspect that that was a much more typical practice earlier 

on, and it has migrated over time. But I am sure Mr. Calhoun has 

a point of view on this. 

Mr. CALHOUN. I would echo his comments that it is not going to 

immediately be available to have point-of-sale real-time warning. 

And it is critical that reform not be dependent upon that, because 

particularly if you set the standard as universal two-way communication, there is going to be a gas station out in some small county 

that it may be 10 years before it would have two-way communication. And I think as this bill properly does, it ought to set the goal 

and the incentive to move in that direction. But in the absence of 

that warning, the practice should be and the law should be that no 

fee should be charged on those debit transactions. 

If the bank for convenience or for a particular customer wants 

to cover it, this bill, 1799, does not prohibit it. It prohibits, though, 

these abusive fees, which also—I think a point that has not been 

covered—these fees actually beget more defaults. The majority of 

these fees are from accounts where people have fallen into a hole 

where they cannot make up the money, and most of these fees, programs, overdraft fees have, for example, $500 limits. Once you hit 

that limit, you are getting checks turned down even or overdrafts 

turned down. You have just been triggered into all these defaults, 

because, as we heard about, the defaults put you behind and a lot 
26 

of people’s paychecks cannot catch up that hole and cover their deficiency, so next month they are facing more of these overdrafts. 

Senator MERKLEY. Well, and I would think that regardless of the 

technology for the two-way communication in the future, right now 

we have the old style that would work, which is a bank could say, 

‘‘Well, Jeff Merkley, you have a choice. You can either sign up for 

a line of credit and have your overdraft covered by a line of credit. 

Or you can choose for us to turn down your transaction if you have 

hit your limit.’’ Or you can choose to do some third option. But 

there are a range of options that could address this that we do 

have the technology for right now. 

Mr. CALHOUN. Yes. 

Senator MERKLEY. OK. 

Mr. CAREY. That is correct. We do. 

Senator MERKLEY. Thank you, Mr. Chair. 

Chairman DODD. Well, it is a great line of questioning and an 

important point. I feel each of our colleagues raises certainly—it 

may have been you, Senator, and maybe some of you know the answer to this. As I heard it, it was something like 17 or 20 percent 

of consumers are paying about 90 percent of the fees. Am I close 

to accurate on that, something like that? 

Mr. CALHOUN. Yes, Mr. Chairman. 

Chairman DODD. It is a relatively small number of people, and 

they are people, obviously—I will not say ‘‘obviously,’’ but primarily 

people who are in difficulty, lost their jobs, are in difficult straits, 

going through a medical crisis of one kind or another. They are in 

a tough spot. Is that correct? Do I have the numbers? 

Ms. FOX. Yes, Senator, the FDIC did a very extensive study that 

was issued late last year, and they reported that 9 percent of customers had 10 or more overdrafts in a year. You know, 25 percent 

of banking account customers overdraw in a given year. So it is a 

very small fraction of customers who are keeping the banks afloat 

with $24 billion—— 

Chairman DODD. So it is that constituency that has paid the $24 

billion last year and the estimated $38.5 billion this year. 

Ms. FOX. Yes. I think the $38.5 billion includes both bounced 

check and overdraft fees. 

Chairman DODD. Yes. 

Ms. FOX. But that is the cost to consumers of not having sufficient money in the bank accounts and the banks going ahead and 

loaning money and charging a fee. 

Chairman DODD. Well, here I have got it. Let me give it to you 

exactly from the FDIC. 

Ms. FOX. Yes, that is great. 

Chairman DODD. The FDIC reported that 93 percent of all overdraft fees are paid by 14 percent of account holders. 

Ms. FOX. Yes, that is about right. 

Chairman DODD. So 14 percent of account holders pay 93 percent 

of that number. 

Ms. FOX. And a lot of those fees—— 

Chairman DODD. And so it is the worst off, people who are struggling the most, are paying the lion’s share of these billions of dollars in fees. That is ridiculous. 
27 

Mr. CALHOUN. And, Mr. Chairman, if I could add, there are really sort of two subgroups, again, over—there are two separate problems. Over 27 million families that will pay five or more overdrafts 

in this year based on the last data, so that is a pretty good hit. And 

then there is this group that just gets hammered because that 

same study found that the average household in that high-use 

group paid $1,600 a year in overdraft fees—$1,600. So you really 

have—but the abuse is not just that very high use. It does spread 

across a much larger swatch of account holders—27 million, to be 

exact. 

Mr. CAREY. Senator, if I may. 

Chairman DODD. Yes, Mr. Carey. 

Mr. CAREY. A couple points worth making. What I asked, because I anticipated this question, is that I wanted to see whether 

there was a disproportionate impact of the people who receive an 

overdraft fee or an NSF fee across our checking account business. 

Again, since we do not do the debit and we do not do the ATM, 

so this is limited really to a group that would otherwise be bouncing checks. And it actually does not spread out to—it does not load 

up on the LMI. It spreads out across the entire spectrum. 

So, again, I want to make sure that we are focusing on the problem, and the problem to me is around the velocity of electronic 

debit and ATM transactions where people are just simply caught 

unaware. 

Chairman DODD. And we again appreciate what Citi has done in 

this area. 

Mr. CAREY. Thank you. 

Chairman DODD. Have I said that enough times? 

Mr. CAREY. You have, and I appreciate it very much. You can 

never say it enough. 

[Laughter.] 

Chairman DODD. We appreciate the step in the right direction. 

Well, that is an interesting statistic as well. Tell me again how 

that works. Among your check cashers—— 

Mr. CAREY. In essence, because it is primarily made up of people 

who are writing checks or are overdrawn through ACH transactions, and the question that I ask is: You know, it is disproportionately impacting LMI? And it is not. It is spread out across that 

spectrum. And I think the reason why is because we do not charge 

that fee, people are not caught with—they are not using debit cards 

the way—— 

Chairman DODD. I suspect another factor is that an awful lot of 

low-income people do not have checking accounts. There are 10 million people in this country that never access a traditional financial 

institution other than through credit cards and debit cards the way 

they do things. So there is that element, Yes, Ms. Fox? 

Ms. FOX. Senator, a few years ago Congress enacted EFT 99 to 

require that Federal benefit recipients get direct deposit of their income—Social Security, SSI, veterans benefits. So we have pushed 

a lot of unbanked consumers into mainstream banking without 

making it safe for them to have bank accounts. And all the Social 

Security and SSI are supposed to be exempt from attachment. 

Banks take that money to pay overdraft fees for overdrafts they 
28 

permitted to take place. So that is a drain on older consumers and 

low-income consumers. 

The FDIC study looked at a cross-section of large and small 

banks that they supervise. They do not have the big money center, 

big national banks in their field of supervision. But if you look at 

banking across the board, it is low- to moderate-income consumers 

who have a bank account; they do not have enough money to make 

ends meet, and the banks are not helping them avoid fees. 

Chairman DODD. And they have problems. Thank you. 

One of the things I wanted to point out, I think the idea of letting someone know they could opt-into an overdraft coverage, but 

we need to make sure that, one, these fees are not going to be excessive, which is a point we made earlier, and also that there are 

alternatives such as lines of credit or linked accounts that, again, 

Citi does but not everyone else does—in fact, they have moved 

away from that—are important as well, but consumer awareness 

about what is available to them, rather than just do you want to 

have a fee charged or not have a fee charges, but what else is 

available to me, ought to be critically important. 

Senator Merkley. 

Senator MERKLEY. Thank you. 

Mr. Carey, I wanted to ask you about the type of conversation 

your financial institution went through, because I picture a board 

meeting in which someone comes forward and says, ‘‘Now, our competitors are charging these fees for overdrafts, and it is X billion 

dollars a year, and to be competitive, we want to make sure we do 

not give up this source of revenue.’’ And someone Citibank came to 

the conclusion not to do that, and I am just—could you walk us 

through the thinking that transpired? 

Mr. CAREY. Well, I am not sure if you were here earlier, but 

what I said is we just simply—— 

Senator MERKLEY. No, I missed it. I apologize. 

Mr. CAREY. We have just never done it, and it has not been part 

of the sort of fabric of the company in this space. You know, people 

are very unhappy about fees in general, and I think you have to 

basically try and drive better transparency. You know, I am responsible for business practices within the consumer businesses, 

and a lot of it is centered around all sorts of revenue opportunities. 

And we spend a great deal of time in those discussions trying to 

weigh all of the risks and rewards that come from that, such as the 

damage to reputation risk, what is the potential revenue opportunity, where are we in the competitive space. And there is vigorous debate and discussion, and it is a very good and, I think, useful process that we do to try and come up with really what the 

right answer is. But it is through those kinds of things that we 

come up with the decisions that we do come up with about what 

makes the most sense. And I think what we would like to believe 

is that, you know, at the end we have got to be entirely transparent to our customers. We have got to make sure that they understand exactly what is going on and that they have informed 

choices and that they can make those choices over a reasonable period, you know, in a reasonable time so that they are not trapped, 

and that that is basically a bedrock in how we look at these things. 

Senator MERKLEY. Thank you. 
29 

Mr. CALHOUN. Senator, if I may add, I think Citi’s testimony addresses an important point that was raised earlier today. There 

was concern that perhaps this reform effort would disadvantage 

other consumers, and particularly one argument that has been 

thrown out is somehow that if you regulate overdraft fees, it would 

mean the end of free checking, which lots of consumers like. And 

I think two points are: first of all, Citi finds a way to both turn 

down and not charge overdraft fees on debit cards but still offer 

free checking; and free checking predated these aggressive, abusive 

overdraft programs. They are not interdependent, and that if you 

take away the abusive overdraft, you are no longer going to have 

free checking. 

Chairman DODD. No, and that is a good point, and you have provoked me to say, as someone who obviously negotiated and tried for 

many, many years to get some reform of the credit card industry 

and this year, thanks to Senator Merkley and other Members of 

this Committee, we were able to get out of the Committee by a onevote margin the credit card bill, and yet it passed the Senate overwhelmingly, but one of the reasons we negotiated that process was 

a delay before implementing the provisions of that bill in order to 

provide at the request of the industry time for them to be able to 

adjust to the changes. What, of course, they have done in that interim period is not just adjust to the changes, but charge outrageous fees, and interest has just been skyrocketing in this window, to get as much out of this window as you could get, completely 

defying, in effect, the very request they made, and that was to basically allow for an adjustment period, which I thought was a reasonable request. I am angry now in a sense that they took advantage 

of that request in here, and we, of course, got legislation to put a 

freeze on here if we can get it done. I do not know if we can or 

not. And they have been arguing then, ‘‘You see, this is what happens, because you have changed the rules now, we are going to end 

up doing all of these things, and we are only doing them because 

you passed the credit card bill.’’ And, frankly, that is baloney, that 

argument, and, frankly, the argument now that we are going to do 

away with free checking and other things. Citi is a living example 

of what you can do. You can do exactly what they have done with 

the debit and the credit cards, also provide free checking, and have 

a very reasonable response in these areas. So I hope that those who 

are involved in the lending institutions are not going to try these 

tricks, again, further evidencing why you need a Consumer Financial Product Safety Agency. You do not have to have a bill in every 

time. Here I have got to introduce a bill again to put a freeze on 

these rates instead of having an agency that could put an end to 

it immediately without having to go through all of this. 

Well, I thank all of you. You have been very gracious. Mr. 

Livieri, we thank you particularly. You have come down, and we 

know it is not easy for anyone to stand up and talk about something. And, again, I think all of us agree. I think we all bear responsibility at the outset to conduct our affairs and be knowledgeable about where we are in these matters. And so to stand up and 

to talk about a situation that involved $2.17 for a guy who has 

been in business for many, many years obviously is an uncomfortable moment, but we appreciate your doing it because you become 
30 

the face of an awful lot of people. These are not just numbers and 

statistics, so we are very grateful to you. 

Mr. LIVIERI. Thank you for the opportunity. 

Chairman DODD. I appreciate it. Again, Ms. Fox, Mr. Pollack, 

Mr. Carey, Mr. Calhoun, we thank you as well. 

The Committee will leave the record open for additional questions that Members may have, but, again, I am pleased that all of 

you were here. The Committee will stand adjourned. 

[Whereupon, at 4:37 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 
31 

PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Thank you all for being here this afternoon. 

Our job on the Banking Committee is to make sure that regular folks get a fair 

deal from their banks. 

For too long, credit card companies made profits by charging consumers outrageous fees, or raising rates whenever they felt like it. 

Our Committee approved legislation to stop those abusive practices, legislation 

that passed the Senate with overwhelming bipartisan support and was signed into 

law by President Obama earlier this year. 

Today, we meet to discuss another abusive practice—misleading overdraft programs that encourage consumers to overdraw their accounts then slam them with 

a high fee. 

Now, let’s be clear. People have a responsibility to spend within their means. And 

banks have a right to charge a fair fee for legitimate services. 

But banks often add overdraft coverage to consumer accounts without informing 

them or giving them a choice. 

The overdraft charge is usually a high fee—a consumer can pay a $35 fee for overdrawing on a $2 transaction. 

In some cases, a consumer can rack up multiple overdraft fees in a single day 

without being notified until days later. Many institutions also charge additional fees 

for each day an account is overdrawn—the longer it takes for you to realize there’s 

a problem, the more fees they can charge you. 

Sometimes, banks will even rearrange the order in which they process your purchases, charging you for a later, larger purchase first so that they can charge you 

repeated overdraft fees for earlier, smaller purchases. 

So the truth is that the ‘‘service’’ of overdraft protection often serves as nothing 

more than a way for banks to profit by taking advantage of customers. 

Last year, American consumers paid $24 billion in overdraft fees, and the Financial Times recently reported that banks stand to collect a record $38.5 billion in 

overdraft fees this year. 

According to the Center for Responsible Lending, nearly $1 billion of those fees 

will come from young adults. Another $4.5 billion will come from senior citizens like 

Mario Livieri, one of our witnesses today and a resident of Branford, Connecticut. 

I’ll let Mario tell his own story about how an initial $2 overdraft ended up in $140 

in overdraft coverage fees. The methods his bank used will sound familiar to many 

Americans. 

Families in my State of Connecticut and across the country are already struggling 

to make ends meet—and these unfair and excessive charges are making it even 

harder. 

Last week, the Federal Reserve announced that they will require banks to get a 

customer’s consent before enrolling them in an overdraft coverage program. It was 

a welcome but long-overdue announcement for American consumers. 

And, we need to do far more to protect them from these abusive bank products. 

That’s why I introduced—The Fairness and Accountability in Receiving Overdraft 

Coverage Act. Senators Schumer, Reed, Brown, Merkley, Menendez, Levin, Reid, 

and Franken have joined me as cosponsors. 

Like the Federal Reserve’s rule, my bill would establish an opt-in rule for overdraft coverage for ATM and debit transactions. Customers would now have to consent before overdraft coverage is applied to their account. 

My legislation would go further and limit the number of overdraft fees banks can 

charge to one per month, and no more than six per year. And that fee would have 

to be reasonable and proportional to the cost of processing the overdraft. 

My legislation would also put a stop to the practice of manipulating the order in 

which transactions are posted, and require banks to warn customers if they are 

about to overdraw their account, giving them a chance to cancel the transaction. 

Finally, it would require banks to notify customers promptly when they’ve overdrawn an account—through whatever means the customer chooses, from e-mail to 

text message—so that they can quickly restore their balances and avoid unnecessary 

fees. 

Abusive overdraft policies are blatantly unfair. And the banks know it. After it 

came out in the press that I was working on this legislation, a few of the big ones 

took steps towards responsible reform—I assume out of the kindness of their hearts. 

We will see whether they are truly committed to reform. But folks like Mario deserve better. 

Last week, the Federal Reserve released a new rule that will require banks to get 

a customer’s consent before enrolling them in an overdraft coverage program. That’s 
32 

a good start. But my legislation goes further, and I remain committed to ensuring 

that American consumers are protected. 

And let’s remember, regulators did little while consumers were taken advantage 

of by these misleading and unfair overdraft programs. This is exactly why we need 

an independent consumer financial protection agency that would be focused on preventing these abuses and addressing them quickly. 

Folks like Mario deserve better. I remain committed to ensuring that American 

consumers are protected—and I look forward to our discussion today. 

PREPARED STATEMENT OF SENATOR JIM BUNNING 

We now live in a time where no one is responsible for his or her own actions. We 

have witnessed billion dollar bailouts of irresponsible banks, and automakers who 

operated on flawed business models. We have also witnessed people who used their 

homes as a line of credit and took on too much debt receive a bailout from those 

who acted responsibly. The Federal Government continuously rewards irresponsibility at the expense of responsibility. So why should Americans be responsible for 

overdrawing funds from their checking accounts? While I understand the significant 

impact unreasonable fees can have on consumers, I also recognize that it is the responsibility of individuals to have a better knowledge of their own financial situation. 

Again, the Federal Reserve has dragged its feet in implementing consumer protections. We saw this with mortgage regulation and now with overdraft fees. While the 

Fed is late in doing so, I believe their recent rules outline some key issues in this 

debate. 

It used to be considered ‘‘illegal’’ to overdraw from your checking account. In today’s technological age, consumers have many different methods of confirming their 

checking account balance and there is no excuse for not knowing how much money 

is in their individual accounts. If a person wants overdraft protection on his or her 

checking account and agrees to pay a fee in the case of an overdraft, that person 

should have the option to do so if his or her bank wants to offer that service. On 

the other hand, if a person realizes that he or she could possibly act irresponsibly 

and would rather pass on overdraft protection in exchange of having his or her debit 

card rejected at the time of purchase, then that person should have the ability to 

make that decision. Capitalism thrives on choice and it only makes sense to give 

consumers a choice on what kind of financial product caters to their financial needs. 

But with that choice comes responsibility and consumers must be expected to face 

the consequences of their actions. I look forward to debating this important issue. 

PREPARED STATEMENT OF MARIO LIVIERI 

CONSUMER, STATE OF CONNECTICUT

NOVEMBER 17, 2009 

Good afternoon Senator Dodd and esteemed Members of the Committee. 

My name is Mario Livieri. I am a senior citizen, and I live in Branford, Connecticut. I’m honor to be invited here today to share my story with you. I hope that 

it will help you do right by consumers like me, who have been treated unfairly and 

misled by their bank about overdraft fees. 

Until a few months ago, I was a customer at a prominent bank in my town. I 

am no longer a customer there, because I don’t think they treated me fairly. 

Over the summer, I wrote a check for $200. When the check was cashed, it 

overdrew my checking account by $2.17. My bank charged me a $35 fee for my $2.17 

mistake. 

I had no idea I’d overdrawn my account. If I had known, I would have immediately deposited money in the account to cover the overdraft. 

But instead, it took the bank over a week to notify me of the overdraft. By the 

time they finally got around to telling me my account was overdrawn, I had made 

a few other small purchases using my debit card totaling about $100—and the bank 

charged me $140 in fees. 

Now, I owned a small business—a building and lumber company—for 50 years. 

And I know that it’s important to stick to a budget. But I also know that you don’t 

get anywhere in the world of business by treating your customers unfairly. 

So, I called the bank. After a whole bunch of arguing, they agreed to refund one 

$35 charge, but insisted that I pay all of the other fees. I told them I didn’t think 

that was fair. They told me it was legal. 
33 

1The Consumer Federation of America is a nonprofit association of over 280 pro-consumer 

groups, founded in 1968 to advance consumers’ interest through advocacy and education. 2 Consumer Action (www.consumer-action.org) is a national nonprofit education and advocacy 

organization serving more than 9,000 community based organizations with training, educational 

modules, and multilingual consumer publications since 1971. Consumer Action’s advocacy work 

centers on credit, banking, and housing issues. 3 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws 

of the State of New York to provide consumers with information, education and counsel about 

goods, services, health and person finance, and to initiate and cooperate with individual and 

group efforts to maintain and enhance the quality of life for consumers. 4The U.S. Public Interest Research Group (USPIRG) serves as the federation of and Federal 

advocacy office for the State PIRGs, which are nonprofit, nonpartisan public interest advocacy 

groups that take on powerful interests on behalf of their members. 5The National Association of Consumer Advocates, Inc. is a nonprofit 501(c) (3) organization 

founded in 1994. NACA’s mission is to provide legal assistance and education to victims of consumer abuse. NACA, through educational programs and outreach initiatives protects consumers, 

particularly low income consumers, from fraudulent, abusive and predatory business practices. 

NACA also trains and mentors a national network of over 1,400 attorneys in representing consumers’ rights. 6The National Consumer Law Center, Inc. (NCLC) is a nonprofit corporation, founded in 

1969, specializing in low-income consumer issues, with an emphasis on consumer credit. On a 

daily basis, NCLC provides legal and technical consulting and assistance on consumer law 

issues to legal services, Government, and private attorneys representing low-income consumers 

across the country. 

I’ve been in business too long for that to be an acceptable answer. If that sort 

of practice—running up ridiculous charges for an overdraft ‘‘protection’’ program I 

didn’t even sign up for—is legal, it shouldn’t be. And it certainly isn’t fair. 

I’m glad my Senator, Chris Dodd, is doing something about it. And I’m grateful 

to the entire Committee for the opportunity to discuss my story with you today. 

There are a lot of folks like me in your States who are in the exact same situation— 

they made a little mistake and got slammed for it by their bank. 

I hope that we can stop abusive overdraft coverage practices so that nobody else, 

no matter what bank they use, has to go through what I went through. 

Thank you for inviting me here today and thank you for fighting the good fight 

on behalf of us consumers. 

PREPARED STATEMENT OF JEAN ANN FOX 

DIRECTOR OF FINANCIAL SERVICES, CONSUMER FEDERATION OF AMERICA

NOVEMBER 17, 2009 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, I appreciate the opportunity to testify in support of the FAIR Overdraft Coverage Act, 

S. 1799, on behalf of the Consumer Federation of America, 1 as well as Consumer 

Action, 2 Consumers Union, 3 USPIRG, 4 National Association of Consumer Advocates, 5 and the National Consumer Law Center (on behalf of its low income clients). 6 We also commend Chairman Dodd for the financial reform discussion draft 

he released last week, and in particular, his proposal for the creation of a Consumer 

Financial Protection Agency. This agency would not only implement the FAIR Overdraft Coverage Act, but also enforce the law and clamp down on other high cost loan 

abuses. The agency will monitor the marketplace both for evasions in current law 

and watch out for new products and services designed to trip and trap consumers. 

We appreciate your interest in protecting consumers from unauthorized and extremely expensive overdraft loans, the banking equivalent of payday lending. Marketed as ‘‘overdraft protection’’ or ‘‘courtesy overdraft,’’ fee-based overdraft programs 

protect the banks’ ability to maximize fees while jeopardizing the financial stability 

of many of its customers. Rather than competing by offering lower cost and truly 

beneficial overdraft products and services, many financial institutions are hiding behind a smokescreen of misleading terms and opaque practices that promote costly 

overdrafts. 

Without asking for their consent, banks and credit unions unilaterally permit 

most customers to borrow money from the bank by writing a check, withdrawing 

funds at an ATM, using a debit card at the point of sale, or preauthorizing an electronic payment that exceeds the funds available in a checking account. Instead of 

rejecting the debit card purchase or ATM withdrawal at no cost to the consumer, 

or returning the check unpaid with a bounced check fee, most institutions will now 

cover the overdraft and impose an expensive fee for each transaction. 

Consumers do not apply for this form of credit, do not receive information on the 

cost to borrow bank funds via overdrafts, are not warned when a transaction is 
34 

about to initiate an overdraft, and are not given the choice of whether to borrow 

the funds at an exorbitant price or simply cancel the transaction. Banks are permitted by the Federal Reserve to make cash advances through overdraft loans without complying with Truth in Lending cost disclosure rules, denying consumers the 

ability to make informed decisions about whether to access credit, as well as comparison shop for the lowest cost overdraft program. 

Overdraft loans are the bank equivalent of payday lending. Just as payday lenders use the borrower’s personal check or debit authorization to insure priority payment, banks use their contractual right of set-off to collect the amount of the overdraft loan and the fee by taking money out of the next deposit into the borrower’s 

checking account, even when the funds are Social Security or other exempt funds. 

Overdrafts are typically repaid within days, and the flat overdraft fees for very 

short-term extensions of credit result in outrageous interest rates. 

Common banking practices, as confirmed by the FDIC’s 2008 study of overdraft 

programs, now increase the number of overdrafts rather than minimize them—and 

can cost the account holder hundreds of dollars in a matter of hours, when they otherwise may have been overdrawn by just a few dollars for a few days or less. 

Debit card overdrafts are now the single largest source of overdraft fees and are 

especially costly for account holders because they carry the same high flat fee but 

for much smaller loans. As recently as 2004, about 80 percent of banks rejected unfunded debit transactions without charging a fee. As consumers have switched to 

payment by debit instead of paper checks, banks have expanded overdraft programs 

that cover debits to make up for disappearing bounced check fees. 

Abusive overdraft loans are costly for everyone, but are most destructive to people 

who are struggling to meet their financial obligations. The FDIC’s study found that 

consumers most likely to be charged repeated overdraft fees are younger consumers 

and lower-income consumers. In a system hugely out of balance, our big financial 

institutions are collecting enormous fees from people who have nothing to spare, 

making them even less able to meet their obligations. 

Banks continue to increase the dollar amount of fees, even as the recession makes 

consumers less able to pay ever higher fees for inadvertently overdrawing their accounts. Banks that received TARP funds from the public have not returned the 

favor. Indeed, the most recent CFA survey of the Nation’s 16 largest banks found 

that overdraft fees continue their upward spiral, with the largest fee charged by big 

banks ranging from $34 at Citibank (up from $30 in the last year) to a maximum 

$39 charged by Citizens Bank. The median maximum overdraft fee for the largest 

banks is now $35. While major banks have announced changes to their overdraft 

programs in recent weeks, none of the largest banks have lowered the price for an 

overdraft. 

We strongly support S. 1799 as a strong solution to the problem of overdraft lending. This legislation will help stop the abuse, without limiting the ability of financial 

institutions to provide genuine protection for their customers. While the Federal Reserve Board’s new rule under the Electronic Fund Transfer Act is a good first step, 

the comprehensive protections in this legislation are essential to protecting consumers and making it safer for consumers of modest means to use mainstream 

banking. 

In this testimony: 

• We will describe the dysfunctional overdraft lending system that now dominates 

the market, the failure of bank regulatory agencies to protect consumers, and 

the vulnerable consumers most likely to use overdrafts. Our testimony also documents that consumers want to opt-in and have warning before triggering debit 

overdrafts and oppose manipulation of payment processing that drives up total 

fees. 

• We will explain that abusive overdraft lending costs $24 billion per year and 

that nearly half of these fees come from overdrafts triggered by debit cards at 

the checkout counter or ATMs—overdrafts that could be prevented with a warning or if the transaction were simply declined. We will review overdraft fees and 

practices at the Nation’s largest banks, including recently announced voluntary 

‘‘reforms.’’ 

• We will recommend that Congress enact S. 1799, a solution that will put real 

protection back into overdraft policy, and enact the Consumer Financial Protection Agency to enforce this law. 

Abusive Overdraft Lending Systematically Strips Funds From Checking Accounts 

Fee-based overdraft loans should not be confused with cheaper sources of backup funds for checking accounts. Under traditional programs that link checking ac-
35 

7The FDIC Study found that 75 percent of banks surveyed automatically enrolled customers 

in automated overdraft programs. FDIC Study of Bank Overdraft Programs at iii (Nov. 2008) 

[hereinafter ‘‘FDIC Study’’]. 8 Eric Halperin, Lisa James, and Peter Smith, ‘‘Debit Card Danger: Banks Offer Little Warning and Few Choices as Customers Pay a High Price for Debit Card Overdrafts’’, Center for Responsible Lending, at 8 (Jan. 25, 2007), available at http://www.responsiblelending.org/pdfs/ 

Debit-Card-Danger-report.pdf [hereinafter Debit Card Danger]. The FDIC study found that the 

median fee charged by surveyed institutions was $27. CRL’s research reflects the average paid 

by account holders. It is not surprising that it is larger since larger institutions with more customers generally charge higher fees. Government Accountability Office report on bank fees, 

‘‘Bank Fees: Federal Banking Regulators Could Better Insure That Consumers Have Required 

Disclosure Documents Prior To Opening Checking or Savings Accounts’’, GAO Report 08-291 at 

16 (Jan. 2008) (noting larger institutions’ average NSF and overdraft fees were higher than 

smaller institutions’). 9FDIC Study. Id. 10ORCI Poll for CFA, July 2009. 11 CRL Research Brief. 

counts to a savings account or line of credit, which are legitimate money management tools, funds are transferred in increments when the checking account is temporarily overdrawn. Financial institutions have offered such programs for decades. 

The largest banks charge a median $10 fee to transfer consumers’ funds from savings accounts to cover overdrafts in their checking accounts. Banks with overdraft 

lines of credit generally charge around 18 percent per year and provide installment 

repayment arrangements. 

Today, banks commonly automatically enroll their checking account holders in a 

high-cost fee-based system at the time they open a checking account or add this feature for existing customers without their consent. The FDIC reports that over threefourths of the banks it surveyed automatically pay overdrafts for a fee and seventyfive percent of those banks automatically enroll their customers in overdraft programs without their permission. 7 If an account dips into a negative balance, the 

bank routinely covers the overdraft—a change from past practices—paying the 

shortfall with a loan from the banks’ funds. When the account holder makes the 

next deposit, the bank debits the account in the amount of the loan plus a fee, which 

now averages $34. 8 At the largest banks, the median overdraft fee is $35. 

Overdraft Loans Give Banks First Claim on Consumers’ Pay or Benefits 

The method in which overdraft loans are collected contributes to the harm they 

cause consumers. Banks, with the Federal Reserve’s permission, currently treat 

overdraft loan ‘‘fees’’ as checking account fees under the Truth in Savings Act. As 

a result, banks can and do use set-off to pay themselves first out of the consumer’s 

next deposit of pay or benefits. Consumers caught by overdraft loans do not get affordable installment repayment schedules. The full amount of the overdraft and the 

fees are due and payable immediately and the bank reserves the right to deduct full 

payment out of the next deposit of funds into the account, giving banks the first 

claim on a consumers’ income. 

For low-income account holders who have no cushion of cash in their bank account, repayment of the overdraft and the average $34 charge is difficult to make 

up before another debit hits their account, sending them further into the red, triggering another $34 fee, and accelerating a downward spiral of debt. As discussed 

below, a small percentage of customers end up paying enormous amounts for overdraft loans, and these consumers tend to be lower-income and minorities. 

Consumers Trapped in Overdraft Loans Can Least Afford Astronomical Fees 

Overdraft loans create a debt trap for a significant number of consumers. The 

FDIC examined individual transaction information from 39 banks to provide a snapshot of customers who overdrew their accounts on 22.5 million transactions. Nine 

percent of customers had 10 or more insufficient fund transactions in 1 year. Consumers who overdrew 10 to 19 times in 1 year paid $451 in fees, while consumers 

who overdrew 20 times or more paid $1,610 in fees per year. 9

Unfortunately, abusive overdraft fees have the greatest impact on those who can 

least afford them. In July of this year, 13 percent of a representative sample of 2000 

adult Americans surveyed for CFA by Opinion Research Corporation said they had 

taken out a bank overdraft loan to cover a check or debit purchase or ATM withdrawal in the past year. Eighteen percent of those with incomes under $25,000 said 

they had used such a loan while 26 percent of African-Americans paid for overdrafts 

in the last year. 10 Two Center for Responsible Lending (CRL) surveys, conducted 

in 2006 and 2008, found that account holders who are repeatedly charged abusive 

overdraft loan fees were more likely to be lower income, single, and nonwhite. 11 The 
36 

12FDIC Study at v. It further found that account holders who overdrew their accounts more 

than 4 times per year paid 93.4 percent of all overdraft fees. Id. 13ORCI Poll for Consumer Federation of America, 2004. 14See, Shredded Security. 15 Id. at 4 (citing 2008 Retirement Confidence Survey, Employee Benefit Research Institute 

(April 2008) finding that 28 percent of retirees have no savings). Shredded Security also notes 

that even those who do have savings are increasingly spending it on rising healthcare costs (citing Paul Fronstin, Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement, Employee Benefit Research Institute (July 2006), projecting that retired couples will 

need between $300,000 and $550,000 to cover health expenses such as long-term care). 16Shredded Security at 6, Table 1. ‘‘Heavily dependent’’ was defined as recipients who depended on Social Security for at least 50 percent of their total income. 17 Id. 18See, Leslie Parrish and Peter Smith, ‘‘Billion Dollar Deal: Banks Swipe Fees as Young 

Adults Swipe Debit Cards’’, colleges play along, Center for Responsible Lending, at 1 (Sept. 24, 

2007) [hereinafter Billion Dollar Deal], available at http://www.responsiblelending.org/pdfs/billion-dollar-deal.pdf. 19Seven out of ten young adults would use a debit card for purchases costing less than $2. 

Id. (citing Visa USA Generation P Survey, conducted July 24–27, 2006. Findings and discussion 

at http://corporate.visa.com/md/nr/press638.jsp (last visited Mar. 15, 2009)). 20 Billion Dollar Deal. 21 Id. at 7 (citing ‘‘U.S. Bank Pays Campus for Access to Students’’, Milwaukee Journal Sentinel, June 18, 2007 (noting the agreement between U.S. Bank and the University of Wisconsin 

at Oshkosh prohibits all financial institutions other than U.S. Bank and the college’s own credit 

union from locating ATMs on campus); Amy Milshtein, ‘‘In the Cards, College Planning and 

Management’’ (Dec. 2005) (noting the fee-sharing deal Higher One has with partner universities)). 22 ‘‘Debit Card Danger.’’ See, also, ‘‘FDIC Study of Bank Overdraft Programs’’ (Nov. 2008) 

(finding 41 percent of NSF-related transactions were triggered by point-of-sale/debit and another 

7.8 percent by ATM transactions). 23Mark Fusaro, ‘‘Are ‘Bounced Check Loans’ Really Loans?’’, n. 4, at 6 (Feb. 2007), available 

at http://personal.ecu.edu/fusarom/fusarobpintentional.pdf (last visited Mar. 15, 2009). See, 

also Sujit Chakravorti and Timothy McHugh, ‘‘Why Do We Use So Many Checks?’’ Economic 

FDIC study also found that customers living in low-income areas carry the brunt 

of overdraft fees. 12 This is not a recent development. CFA conducted a national 

opinion poll in 2004 which found that 28 percent of consumers say they overdrew 

their accounts which would trigger either insufficient funds or overdraft fees. Consumers who stated they overdrew their accounts and were most likely to pay overdraft and bounced check fees were moderate-income consumers with household incomes of $25,000 to $50,000 (37 percent). Those 25 to 44 years of age (36 percent) 

and African Americans (45 percent) were most likely to have bounced checks. 13

Overdraft fees strip funds from Americans of all ages, but research indicates they 

hit America’s oldest and youngest checking account holders—often the least financially stable—especially hard. Older Americans aged 55 and over paid $4.5 billion 

of the $17.5 billion total overdraft fees paid annually in 2006, 14 an especially alarming figure given that one in four retirees has no savings of any kind. 15 Those heavily dependent on Social Security pay nearly $1 billion, 16 while those entirely de- pendent on Social Security pay over $500 million. 17

At the other end of the age spectrum, young adults who earn relatively little as students or new members of the workforce pay nearly $1 billion per year in overdraft fees. 18 CFA’s 2009 ORCI poll found that 17 percent of those 18–34 years old 

had used overdraft loans in the last year, compared to 13 percent for the total sample. Because younger consumers are far more likely to use a debit card for small 

transactions than older adults, 19 they pay $3 in fees for every $1 borrowed for debit 

card overdrafts. 20 The situation is exacerbated by deals banks make with universities to provide school ID cards that double as debit cards. Banks pay the partner 

school for exclusive access to the student population and sometimes even split the 

fee revenue they collect on debit card transactions with the university. 21

Banks Turn Debit Cards Into High Cost ‘‘Credit Cards’’ When Overdrafts Are Permitted 

Today, banks swipe a large portion of these fees when their account holders swipe 

debit cards at ATMs and checkout counters. A 2007 CRL report found, and the 

FDIC study confirmed, that debit card purchases are the most common trigger of 

overdraft fees. 22

When debit cards first came into common use, they promised the convenience of 

a credit card without the cost, because debit card users were required to have the 

funds in their account to cover their purchase or withdraw cash. As recently as 

2004, 80 percent of banks still declined ATM and debit card transactions without 

charging a fee when account holders did not have sufficient funds in their account. 23 But banks now routinely authorize payments or cash withdrawals when 
37 

Perspectives, 3rd quarter 2002, Federal Reserve Bank of Chicago, 44, 48 (‘‘When using debit 

cards, consumers cannot overdraw their accounts unless previous credit lines have been established.’’)). 24Leslie Parrish, ‘‘Consumers Want Informed Choice on Overdraft Fees and Banking Options’’, CRL Research Brief (Apr. 16, 2008), available at http://www.responsiblelending.org/ 

pdfs/final-caravan-survey-4-16-08.pdf [hereinafter CRL Research Brief]. 25Debit card transactions are increasing at a rate of 17.5 percent per year, while check payments are decreasing 6.4 percent annually. 2007 Federal Reserve Payments Study, ‘‘Financial 

Services Policy Committee, Federal Reserve Study Shows That More Than Two-Thirds of 

Noncash Payments Are Now Electronic’’ (Dec. 10, 2007), available at http:// 

www.federalreserve.gov/newsevents/press/other/20071210a.htm (last visited Mar. 15, 2009). 26The Indiana Department of Financial Institutions warned banks that ‘‘courtesy’’ overdraft 

programs arguably entice consumers to unwittingly commit a criminal offense. ‘‘Since the Program gives no assurance of coverage in the event of an overdraft, but leaves that to the discretion of the bank, a customer will never be certain that a bad check will be covered. This could 

make both the customer and the bank accountable under the criminal statute.’’ Letter from J. 

Philip Goddard, Indiana Department of Financial Institutions, February 21, 2002. 27Federal Reserve Board, Model Consent Form for Overdraft Services (205.17), Regulation E: 

Docket No. R-1343, Final Rule, November 12, 2009. 

customers do not have enough money in their account to cover the transaction, so 

debit cards end up being very costly for many account holders. Among large banks, 

Citibank stands out for not permitting debit card transactions to overdraw its customers’ bank accounts, protecting those consumers from unexpected high fees. 

Banks and credit unions could prevent every dollar of debit card overdraft fee 

charges by simply notifying account holders when they are about to overdraw their 

accounts or by declining a transaction when there are insufficient funds available, 

as they did in the past. Indeed, consumers would appreciate the warning: 80 percent 

of consumers surveyed would rather have their debit transaction denied than covered for a fee, whether that transaction is $5 or $40. 24

Institutions often claim that denial at the point of sale or ATM is not feasible, 

but it would be surprising if banks couldn’t accomplish now technologically what 

they could in 2004. Furthermore, 7.9 percent of banks in the FDIC survey reported 

that they did inform customers at a debit card point of sale that funds were insufficient before transactions were completed, offering the customers an opportunity to 

cancel and avoid a fee, and 23.5 percent did the same at ATMs. It’s difficult to believe that these banks have some sort of advanced technology unavailable to other 

banks. 

Absent meaningful regulatory reform, banks will only increase their profits from 

overdraft fees as debit card transactions continue to skyrocket. 25 Debit card transactions will not only continue to grow as a percentage of all bank transactions, but 

they will continue to provide banks more transactions overall as more account holders use them in place of cash for small transactions. 

Consumers Cannot Rely on Bank Overdraft Programs 

Based on CFA’s review of the largest banks’ account disclosures and fine print in 

mid-2008, it is clear that consumers are unable to rely on their bank to honor overdrafts, are held responsible for immediately repaying the bank in many cases without notice or demand from the bank, and can have their overdraft ‘‘service’’ terminated at any time for any reason. Banks employ contract language making overdraft 

coverage a discretionary program. As a result, a consumer writing a check or paying 

by debit card never knows for sure whether the bank will honor or reject the overdraft. The consumer has no way of knowing whether any particular transaction will 

trigger merchant NSF fees, penalties for nonpayment, or legal problems from writing an unfunded check. 26 Banks set internal but unannounced limits on the amount 

consumers can overdraw an account. Even if a bank provides fee-based overdraft 

programs, an individual consumer initiating a transaction for more funds than are 

on deposit cannot know with certainty that the transaction will be covered by the 

bank. 

Banks make no promise to pay an overdraft while obligating consumers to immediately repay both the overdraft and the fee in a single balloon payment (often without notice or demand). The new Federal Reserve Reg E rules maintain the discretionary nature of overdraft coverage, even when consumers opt-in to have debit card 

overdrafts paid for a fee. The Model disclosure form includes this statement: ‘‘We 

pay overdrafts at our discretion, which means we do not guarantee that we will always authorize and pay any type of transaction.’’ 27 Banks use set-off to extract pay-
38 

28For examples of one-sided bank account contract terms, See, ‘‘CFA Comments to Federal 

Reserve Board’’, FRB Docket No. R-1314, August 4, 2008. 29See, e.g., U.S. Bank’s 26-page document, Terms and Conditions for Deposit Accounts, effective Feb. 1, 2005, available at https://fastapp.usbank.com/fastapp/enlus/ 

termsAndConditions/TandC/LinkDepositAgreementCurrent.jsp (last visited Mar. 15, 2009): ‘‘If 

we get a batch of such items in a day (checks typically come in batches), and if one, some or 

all of them would overdraw the account if paid, we can pay or refuse to pay them, in any order, 

or no order . . . We have all these options each time you might overdraw an account. What 

we do one time does not make that a rule you can rely on for the future’’; Bank of America’s 

36-page document, Deposit Agreement and Disclosures, available at https:// 

www1.bankofamerica.com/efulfillmentODAO/newlwindowlnp.cfm?appURL=https:// 

www1.bankofamerica.com/efulfillment/&showdaddoc=91-11- 

2000ED&daddoc2use=20081101&type=1&view=htm (last visited Mar. 15, 2009): ‘‘We may process and post items in any order we choose . . . We may change categories and orders within 

categories at any time without notice . . . [S]ome posting orders may result in more insufficient 

funds items and more fees than other orders. We may choose our processing and posting orders 

regardless of whether additional fees may result.’’ Wachovia, Deposit Agreement and Disclosures 

for Personal Accounts, effective Feb. 8, 2008, available at http://www.wachovia.com/personal/ 

onlinelservices/disclosure/view/0,,7,00.html (last visited Mar. 15, 2009): ‘‘Although we generally pay larger items first, we are not obligated to do so and, without prior notice to you, we 

may change the order in which we generally pay items.’’ 30Federal Reserve Board, Final Rule, Regulation DD, Docket No. R-1197, 5-19-2005, p. 4. 31FDIC Study at iii (noting that 53.7 percent of large banks batched processed transactions 

by size, in order from largest to smallest). 32FDIC Study at 62. 

ment out of the next deposited funds, even when those funds are exempt Federal 

benefits. 28

Banks Speed Withdrawals but Not Deposits 

In this age of fast-paced banking and electronic bill pay, anyone can temporarily 

slip into a negative balance. Check 21, passed in 2004, allows banks to debit accounts more quickly, while the rules for how long they can hold deposits before crediting accounts have not been updated in 20 years. In an age of 24/7 online banking 

and branches open six and seven days a week, the expedited funds rules defining 

a ‘‘business’’ day to exclude weekends result in consumers overdrawing when deposits could have covered the transactions. When banks hold deposited local checks 

until the permitted second business day, a paycheck drawn on a local bank and deposited on Friday afternoon can be held until Tuesday before money is available in 

the account to cover transactions. Fifth-day availability for deposited nonlocal 

checks means consumers may have to wait a whole week for deposits to become 

available, even when the check is drawn on the bank where it is deposited. 

Banks Manipulate the Order of Processing Withdrawals and Drive Up Fee Revenue 

Financial institutions can manipulate the order in which withdrawals are posted 

in order to trigger more overdraft fees. Large institutions usually clear the largest 

transaction first, causing more transactions to overdraw the account. This practice 

generates more in overdraft revenues because the institution can charge an overdraft fee for each transaction once the account is below zero. 

Consumers do not know the order in which items drawn on their account will be 

presented to their bank and are not likely to know the order in which their bank 

pays items. Banks bury the disclosures about the order in which they process transactions, and these disclosures provide the banks the widest possible latitude to engage in this behavior. 29 Even the Federal Reserve noted in adopting Truth in Savings regulations in 2005 that consumers who are aware that their account may be 

overdrawn are not likely to know the number of items that will bounce or the total 

fees they will be charged. 30

Banks claim they do customers a favor by paying the largest, and presumably 

most important, items first to ensure those items get paid. But this argument is disingenuous when a bank has an overdraft loan program, because the bank pays all 

of the transactions, regardless of the order in which they are posted. So no matter 

what order the transactions are cleared in, all items get paid up to the bank’s internal guidelines, and the only difference is how much the customer pays in overdraft 

fees. Legislation is necessary because bank regulatory agencies have failed to require banks to fairly treat their customers. (For a review of bank regulatory actions 

on processing order, please see Appendix C.) 

Indeed, the FDIC’s 2008 overdraft study found that over half of the large banks 

they surveyed process overdrafts from largest to smallest. 31 The survey further 

found, not surprisingly, that banks that engage in this abusive practice generate 

more overdraft fees than those that don’t, but they also end up with more 

uncollectible debt related to overdraft loans. 32
39 

33 CFA ORCI Poll, July 24–27, 2009. 34 Consumer Reports National Research Center, Financial Regulation Poll, as filed with the 

Federal Reserve Board in Reg E Docket R-1343, March 12, 2009. 

CFA’s review of the largest banks’ account agreements and customer information 

for comments filed in 2008 at the Federal Reserve found that 15 banks disclose that 

they pay the largest transactions first or reserve the right to pay withdrawals in 

the order the bank chooses. There was insufficient information to determine payment order at one bank surveyed. Bank customer agreements typically reserve the 

bank’s right to change the order of processing withdrawals without notice or consent 

from account holders. 

The public wants banks to pay checks in the order they are received, as opposed 

to the current practice of allowing banks to routinely pay the largest first, which 

drains some accounts more quickly and increases bounced check fees. In a poll of 

1,018 people conducted by Caravan Opinion Research Corporation for CFA this 

summer, 70 percent supported (53 percent strongly supported) this requirement. 33

This confirms the finding of an older poll conducted for CFA which found that only 

13 percent of the public support the bankers’ claim that consumers want the largest 

transaction paid first. 

Consumers Want To Decide Whether To Use Fee-Based Overdrafts 

Most banks do not require customers to apply for and affirmatively choose to use 

fee-based overdraft coverage. Using either consultant-provided overdraft programs 

or internal bank policies, financial institutions decide which customers will be permitted to overdraw, the limit on the amount of overdrafts, and the fee or fees that 

will be charged. Banks do not contract or promise to cover overdrafts but claim this 

is a discretionary service that can be withdrawn at any time. 

Consumers Want Choice and Warning on Overdrafts 

Consumers think they should be provided the opportunity to affirmatively opt-in 

to overdraft provisions of their checking accounts. CFA polled a representative sample of adult Americans in July 2009 and learned that 71 percent support requiring 

banks to gain the permission of customers before routinely providing loans to cover 

overdrafts. In CFA’s 2004 ORCI poll, more than twice as many consumers thought 

it would be unfair for banks to permit overdrafts without obtaining their customers’ 

consent (68 percent) rather than fair (29 percent). 

The Consumer Reports National Research Center 2009 poll of a nationally representative sample of 679 people found that two-thirds of consumers prefer to expressly authorize overdraft coverage, so that there would be no overdraft loan—or 

fee—until they opted into the service. Likewise, two-thirds of consumers said that 

banks should deny a debit card or ATM transaction if the checking account balance 

is too low. 

A 2009 Center for Responsible Lending survey found that 80 percent of consumers 

who wanted a choice about overdraft thought that their debit purchases and ATM 

withdrawals should only be covered for a fee if they affirmatively asked for overdraft coverage for those transactions. But the default arrangement for most institutions continues to be coverage—whether or not the account holder asked for it. 

In addition to wanting to opt-in for overdraft coverage, consumers want to be 

warned when ATM withdrawals will trigger an overdraft. CFA’s 2009 ORCI poll 

found that 85 percent of adult Americans want banks to be required to disclose on 

the ATM screen when a withdrawal will overdraw an account. Seventy-three percent strongly supported that requirement. In a 2004 CFA poll, consumers by a wide 

margin said they are treated unfairly when banks permit them to overdraw at the 

ATM without warning. The 2004 ORCI survey also found that an overwhelming majority (82 percent) of consumers thought permitting overdrafts without any notice 

at the ATM was unfair, while 63 percent said it was ‘‘very unfair.’’ Fewer than one 

in five (17 percent) people thought it was fair. 

The Consumer Reports National Research Center poll also found that many consumers do not expect their bank to pay a debit card or ATM transaction that overdraws an account. Forty-eight percent of those polled thought an ATM card would 

not work if the account balance was too low and another 10 percent thought they 

would not be assessed a fee if the bank allowed the overdraft. Thirty-nine percent 

of people thought their bank would either deny a debit transaction or allow it to 

proceed without charging a fee. 34

A 2006 study by Forrester Research Group documented that consumers are 

‘‘irked’’ by overdraft fees. While 65 percent of consumers with no overdraft fees said 

they were very satisfied with their banks, only 53 percent of consumers charged 
40 

35 CUNA News: ‘‘Consumers Ignore ATM Fees, Get Irked at Overdraft Fees,’’ January 17, 

2006. 36 Note that a ‘‘stickiness’’ of default options was observed with respect to unsolicited credit 

cards, which is the same with unsolicited overdraft loans. When unsolicited credit cards were 

permitted, very few consumers opted out—only 1 percent returned the card. However, when prospective customers were asked whether they wanted to receive a card, only 0.7 percent said they 

would. Jack Metcalfe, ‘‘Who Needs Money’’, New York Sunday News, Nov. 24, 1968, reprinted 

in 115 Cong. Rec. 1947, 1951 (Jan. 23, 1969). 37Pub. L. No. 91-508, 84 Stat. 1126-27 (Oct. 26, 1970). 38S. Rep. No. 91-739, at 2-44 (1970). 

overdraft fees in the last few months reported being very satisfied. 35 By offering 

contractual overdraft protection by linked savings accounts, low cost lines of credit, 

and transfers to credit cards, banks can provide real protection at lower cost to consumers and avoid angering a large number of banking customers. 

Overdraft Loans Are Credit but Don’t Have Credit Protections 

There is no question that overdrafts loans constitute a form of credit. Overdrafts 

are credit under the Truth in Lending Act (TILA), which defines ‘‘credit’’ as the 

right to ‘‘incur debt and defer its payment.’’ See 15 U.S.C. §1602(e). When a bank 

permits a consumer to use the bank’s funds to pay for an overdraft, and then requires the consumer to repay the bank, it is granting the right to incur a debt and 

defer its payment until the consumer’s next deposit. 

Involuntary Overdraft Credit 

Overdraft loans are unique in that they are one of the few forms of involuntary 

credit. Banks impose this form of credit on consumers who have not requested it. 

Furthermore, some consumers may not be aware until they overdraw their account 

that they are accessing a high-cost credit product. This is especially true in the ATM 

or debit card context, where transactions that would overdraw an account were previously declined and did not incur a fee. 

Indeed, we can recall only one time that consumers were sent loan products without their affirmative opt-in—when creditors sent unsolicited credit cards to consumers in the 1960s. 36 As a result of the outcry over this practice, Congress stepped 

in, amending TILA in 1970 to ban unsolicited credit cards. 37 According to the Senate report that accompanied this TILA amendment, unsolicited credit cards encouraged consumers to incur unmanageable debt, and many consumers found them an 

unwarranted intrusion into their personal life. 38 These same problems cited by this 

Senate report nearly 40 years ago hold true today for unsolicited overdraft loans— 

they cause severe financial distress and represent an intrusion on the lives of consumers. 

Note that in the case of unsolicited credit cards, the consumer at least has to affirmatively and knowingly take action to use the credit card, by making a purchase 

or taking a cash advance. In the case of overdraft loans, the consumer not only receives credit without requesting it, the consumer often unknowingly and involuntarily uses that credit when she triggers an overdraft, especially in the debit card 

situation where many consumers don’t realize they can overdraw their accounts. 

Thus, overdraft loans represent an even worse problem than unsolicited credit 

cards did nearly 40 years ago. S. 1799 would prohibit this ‘‘cramming’’ of overdraft 

loans on consumers by requiring banks to obtain specific written consumer consent 

before adding this feature to a bank account for debit purchases and ATM withdrawals. 

The Federal Reserve Board Has Failed To Protect Consumers Under Truth in Lending 

As discussed above, overdrafts are clearly ‘‘credit’’ under the Federal Truth in 

Lending Act (TILA). The reason that overdraft loan programs do not require TILA 

disclosures is an exemption created by the Federal Reserve. Regulation Z, which implements TILA, excludes overdraft fees from the definition of a ‘‘finance charge.’’ 

This exemption, written in 1969, was originally designed to exclude from TILA coverage the traditional banker’s courtesy of occasionally paying overdrafts on an ad 

hoc basis as a customer accommodation. However, banks exploited this exemption 

as a gaping loophole, creating and promoting predatory credit, extended on a routine 

basis without adequate disclosure—contrary to the clear statutory language and intent of TILA. The new Reg E rule maintains the special carve-out from TILA for 

the debit-card based overdrafts covered. As a result, S. 1799 would amend TILA 

itself to define an overdraft fee as a finance charge to ensure that institutions no 

longer benefit from a loophole to exploit account holders and that all short-term consumer lending operates by the same set of rules. 
41 

39 15 U.S.C. §1601(a) 40Keith Ernst, et al., ‘‘Quantifying the Economic Cost of Predatory Payday Lending’’, Center 

for Responsible Lending (December 18, 2003), at 3. 41 Eric Halperin and Peter Smith, ‘‘Out of Balance: Consumers Pay $17.5 Billion per Year in 

Fees for Abusive Overdraft Loans’’, Center for Responsible Lending, at 9 (June 2007), available 

at http://www.responsiblelending.org/issues/overdraft/reports/page.jsp?itemID=33341925’ 

[hereinafter Out of Balance]. CRL analyzed 18 months of bank account transactions from participants in Lightspeed Research’s Ultimate Consumer Panel, from January 2005 to June 2006. 

For further discussion of CRL’s database and methodology, See, ‘‘Out of Balance’’ at 13-14. 42 ‘‘Out of Balance’’, at 10. 

Consumers Need ‘‘Truth’’ in Overdrafts To Make Informed Decisions 

A requirement that banks comply with TILA and quote an effective APR for overdraft loans would be an eye-opener for the extreme high cost of these loans. In general, the fees for overdraft loans translate into APRs that are triple-digit or even 

higher. For example, consider a $100 overdraft loan that is repaid in 2 weeks, for 

which the bank charges a $20 fee. A comparable payday loan would have to disclose 

an APR of 520 percent. Instead of requiring TILA disclosures, the Board chose to 

regulate overdraft loans under the less effective Truth in Savings Act (TISA), simply 

requiring disclosure of the fee and a running tally. See Regulation DD, 12 C.F.R. 

Part 230. 

Furthermore, most overdraft loans are paid much more quickly than 2 weeks— 

sometimes in a matter of days or hours—and sometimes the loan is only for a few 

dollars. The FDIC study gave a more realistic example of the extreme cost of feebased overdraft. The typical $20 debit card overdraft with a $27 fee repaid in 2 

weeks costs 3,520 percent APR if calculated as a closed-end loan. Bank overdraft 

loans are parallel to payday lending in that the high interest rates and short repayment time often trap marginally banked consumers in a cycle of debt. Consumers 

should not have to pay triple or quadruple-digit interest rates for either form of 

credit. (See Appendix D). 

The failure of the Federal Reserve to require TILA disclosures and other protections for overdraft loans undermines the statute’s key purpose of strengthening 

‘‘competition among the various financial institutions and other firms engaged in 

the extension of consumer credit.’’ 39 Without the uniform disclosure of the APR required by TILA, consumers have no way to compare overdraft loans to the cost of 

an overdraft line of credit or transfer from savings. Under the Fed’s rules, the disclosed APR for a typical payday loan is 391 percent to 443 percent 40 but for an overdraft loan program the lender may disclose under TISA that the account is actually 

earning interest! Without apples-to-apples comparisons, there is no competition to 

reduce the cost of any of these products. 

Legislation is needed because the Federal Reserve Board has failed to protect 

bank customers from abusive overdraft practices or to require financial institutions 

to comply with credit laws that apply to other forms of small lending or substitute 

products. 

The new rule announced by the Federal Reserve last week amends Reg E and is 

substantially weaker than the provisions of S. 1799. The Board’s rule does not recognize that overdrafts are extensions of credit that should require Truth in Lending 

disclosures, does not prohibit bank manipulation of the clearing of transactions to 

maximize overdraft fees, and places no limits on the number of overdraft fees banks 

can impose. The Federal Reserve’s Reg E rule also does nothing to curb excessive 

fees. Industry calls for Congress to defer to a narrow Federal Reserve rule-making 

should be ignored. Opt-in alone is not sufficient protection. Consumers also get to 

‘‘opt-in’’ to using credit cards, but legislation was needed to curb abusive practices 

as well. 

Overdraft Lending Cost Americans $24 Billion in 2008 

Americans pay more in abusive overdraft loan fees than the amount of the loans themselves, paying almost $24 billion in fees in 2008 for only $21.3 billion in credit 

extended. 41 High fees, coupled with small overdrafts, result in consumers paying 

more to borrow from banks than the banks extend as credit. 

Overdraft loan fees now make up 69 percent of all overdraft-related fees, while 

traditional NSF fees—generated when the paper check transaction is denied—make 

up only 31 percent. 42 The FDIC reports that all banks collected service charges on deposit accounts as of June 30, 2009, that totaled $21,796,013,000. Projected to a 

full year, banks will take in almost $43.6 billion in bank account service charges. 

According to the FDIC report on overdrafts, about 74 percent of that line item on 

call reports is generated solely by insufficient fund fees and overdraft fees. If trends 

continue, consumers will pay banks $32.26 billion due to lack of sufficient funds to 

cover transactions. At 69 percent of that total, American consumers will pay banks 
42 

43FDIC Study at v. 

alone almost $22.3 billion for overdraft loans in 2009. Credit union overdraft fees 

add to that total. 

Small Dollar Overdrafts Trigger Steep Fees 

The FDIC’s report on bank overdraft loan programs, fees and practices, based on 

a detailed study of 462 FDIC-supervised banks and data on overdraft transactions 

from 39 banks, found that the typical debit card purchase overdraft was only $20 

but cost an average $27 fee at FDIC banks. If repaid in 2 weeks, that overdraft 

costs 3,520 percent APR. The typical $60 ATM withdrawal on insufficient funds 

costs 1,173 percent APR. The median size check that overdraws an account is $66, 

an APR of 1,067 percent. 43 If the bank adds a ‘‘sustained overdraft fee’’ or requires 

repayment in less than 2 weeks, the APRs on these loans are even higher. Furthermore, because consumers often use their debit cards several times per day, multiple 

fees will be charged when an account is overdrawn. 

CFA’s 2009 survey of the Nation’s largest banks confirms that not only are multiple overdraft fees becoming more common, but the fee per transaction is getting 

larger. The maximum overdraft fee at this sample of banks is now $39, while the 

median fee is $35. Five of the largest banks use tiered fee schedules, with fees rapidly escalating when consumers incur more than a few overdrafts over a 1-year period. U.S. Bank charges $19 for the first overdraft, $35 for the second through 

fourth, and $37.50 thereafter. Fifth Third Bank switched to tiered fees in the last 

year, now charging from $25 to $37 per overdraft. Bank of America terminated its 

tiered fee structure and now charges $35 for each incidence. 

Majority of Largest Banks Double Up on Overdraft Fees 

Ten of the sixteen largest banks add sustained overdraft fees when consumers are 

unable to pay the overdraft and fee within a few days. On top of already high initial 

overdraft fees, SunTrust adds a $36 additional fee while Bank of America and Citizens Bank add a $35 fee when overdrafts are not repaid in less than a week. Chase 

Bank adds up to $25 per overdraft when an overdraft goes unpaid for 5 days. When 

initial overdraft fees and sustained overdraft fees are combined for overdrafts unpaid after 7 days, consumers can be charged as much as $74 at Citizens Bank for 

a single overdraft. The combined cost at Bank of America is $70, at SunTrust $72, 

and at U.S. Bank $69.50. In recently announced changes to overdraft programs, six 

of the largest banks lowered or set a maximum on the number of overdraft fees 

charged on a single day. For banks with a limit on daily fees, the range is three 

to seven overdraft fees levied. (See Appendix B.) 

Voluntary Bank Overdraft Changes Are Too Little, Too Late 

Recently announced changes in overdraft programs by some large banks are unlikely to significantly reduce costs to customers. Some banks have changed the 

threshold that triggers overdraft fees to a total of $5 to $10 in total overdrafts per 

day before fees are charged and some have lowered the total number of overdraft 

fees a consumer can be charged in one day. But none of the banks are lowering the 

fees charged for initial or sustained overdrafts. 

While a few banks will soon permit consumers to opt-in for some forms of overdraft coverage, the norm is to permit current customers to opt-out and to only permit new customers to make choices about overdraft loans at those banks announcing changes. It has taken some of the largest banks in the country 4 years to get 

around to complying with the Interagency Guidelines for overdrafts, issued in 2005, 

that advised banks to at least provide an opt-out opportunity for consumers. Chase 

Bank plans to permit its existing and new customers to affirmatively sign up to use 

overdraft loans and will process payments as they come in during the day. In some 

cases, banks will permit only new customers to opt-in to some forms of overdrafts 

in the future. In a change initiated in the last year without fanfare, Citibank does 

not permit its customers to incur overdrafts when using debit cards for purchases 

or at ATMs, although Citibank customers can incur four $34 overdraft fees per day 

for checks. Citibank does not charge sustained overdraft or tiered fees. 

Other banks have also announced adjustments to their overdraft practices. For example, Capital One, starting in early 2010, will not charge fees if consumers overdraw their accounts by a total of $5 or less in a single day and will limit the number 

of overdraft fees to four per day. Capital One permits customers to opt-out of having 

overdrafts paid for a fee. Starting mid-2010, Capital One will permit new account 

holders to decide whether to opt-in to overdrafts triggered by debit cards and at 

ATMs. (See Appendix A: Summary of Recent Changes to Bank Overdraft Practices 

and Prices.) 
43 

44FDIC Guidelines for Payday Lending, 2005, Renewals/Rewrites amended the Retail Classification Policy, directing institutions to ‘‘Ensure that payday loans are not provided to customers 

who had payday loans outstanding at any lender for a total of three months during the previous 

12 months . . . What a customer has used payday loans more than three months in the past 

12 months, institutions should offer the customer, or refer the customer to, an alternative 

longer-term credit product that more appropriately suits the customer’s needs. Whether or not 

an institution is able to provide a customer alternative credit products, an extension of a payday 

loan is not appropriate under such circumstances.’’ See: www.fdic.gov/news/news/financial/ 

2005/fill405a.html, viewed 3/2/2005. Since payday loans are typically 2 weeks in duration, a 

three month payday loan limit is equivalent to permitting six monthly overdraft fees per year. 

S. 1799 Protects Bank Account Customers 

S. 1799, the FAIR Overdraft Coverage Act, will prevent abuses created by the relatively new system of unauthorized fee-based overdraft lending that is premised on 

generating fee revenue rather than protecting the funds of account holders. This important legislation places bank overdraft lending on the same legal playing field as 

other forms of small-dollar loans and provides consumers with information necessary to make an informed decision. 

S. 1799 requires financial institutions to obtain account holders’ specific written 

consent in order for financial institutions to enroll them in fee-based overdraft programs triggered by debit cards at point of purchase and ATM withdrawals. We also 

support requiring affirmative consent for overdraft coverage triggered by checks, 

preauthorized debits, and other ways funds are spent from consumers’ accounts. 

This control over bank account credit features is what consumers expect and want 

to have. 

S. 1799 requires banks and credit unions to warn account holders before making 

them a high-cost loan at the ATM or from a teller and permits them to terminate 

the withdrawal to avoid the fee. This warning is what consumers expect and want. 

A GAO study is mandated to explore the feasibility of point-of-sale warning and 

ability to terminate a debit purchase in the future. 

S. 1799 prohibits manipulation of account activity if the result is to increase overdrafts. This should mean no debiting accounts with the highest dollar charge first 

in order to increase the number of overdraft fees an account holder is charged and 

no holding deposits before crediting accounts in order to create a negative balance 

and charge an overdraft fee. Bank manipulation of payment order is strongly opposed by consumers. 

S. 1799 also clarifies that an overdraft fee is a finance charge subject to the Truth 

in Lending Act. This will confer TILA protections to overdraft loans and require 

cost-to-borrow disclosures as determined by the Federal Reserve. The Board will 

need to devise disclosures that provide consumers with comparable cost to borrow 

information. 

S. 1799 requires the Federal Reserve Board to set ‘‘reasonable and proportional’’ 

bank overdraft fees, based on the cost to banks to cover these loans. Competition 

has had no impact on bank overdraft fees that continue to escalate even in a recession. This feature of S. 1799 is comparable to the CARD Act’s requirement that the 

Board set the over-the-limit fee. 

S. 1799 protects consumers from being buried in overdraft fees and requires banks 

to provide information on their less expensive and more appropriate products available to address overdrafts or extend small dollar loans. The bill applies the FDIC’s 

payday loan suitability standard 44 as well as the over-the-limit policy in the CARD 

Act by limiting banks to one overdraft fee per month up to a total of six per year. 

The bill permits banks to cover more overdrafts without charging additional fees. 

Banks can and should reject debit card purchases or ATM withdrawals for which 

funds are not available, which was standard banking practice just a few years ago. 

A cap on the number of overdraft fees that can be charged is not an invitation for 

consumers to initiate numerous unfunded transactions. In fact, limiting banks to 

one fee per month gives banks a financial incentive to limit unfunded purchases and 

withdrawals. 

S. 1799’s one-fee-per-month limit will prevent banks from piling on sustained 

overdraft fees when consumers are unable to repay the overdraft and initial fee in 

just a few days. Not only will this limit protect frequent users of overdrafts, it will 

provide an incentive for financial institutions to market their more affordable and 

appropriate products such as overdraft lines of credit, transfers from savings, and 

small dollar loans. 

We also urge the Senate to enact Senator Dodd’s legislation to create the Consumer Financial Protection Agency to provide a strong consumer protection agency 

for financial services. The CFPA will be assigned the job under Truth in Lending 

to write the rules that implement the FAIR Overdraft Protection Act, to supervise 
44 

compliance with these new protections, and to provide consumer information. The 

Federal Reserve has failed to adequately exercise its authority to protect consumers 

from unfair and abusive overdraft loan practices. 

Conclusion 

Today, as many American families struggle to meet daily obligations in the worst 

economy since the Depression, the last thing they need is to be surprised by highcost credit to which they never expressly consented. S. 1799 would benefit consumers by requiring financial institutions to get consumers’ affirmative and informed consent to select fee-based overdraft programs for debit card purchases and 

ATM withdrawals; defining overdraft fees as a finance charge covered by Truth in 

Lending; capping fees based on Federal Reserve rules using reasonable and proportional costs to cover an overdraft; and limiting overdraft fees to one per month up 

to six per year. Overdraft loans are not a ‘‘convenience,’’ but are dangerous highcost loans that must be reined in, even for people who agree to use them. We urge 

this Committee to reverse the drain on vulnerable consumers’ bank accounts and 

the current trend toward even greater overdraft abuses by supporting S. 1799. 
45 
46 
47 
48 
49 
50 
51 

PREPARED STATEMENT OF FRANK POLLACK 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, PENTAGON FEDERAL CREDIT UNION

NOVEMBER 17, 2009 

Good afternoon, Mr. Chairman and Members of the Committee. On behalf of the 

Board of Directors and Management of the Pentagon Federal Credit Union I would 

like to thank you for the opportunity to testify here today. 

The Pentagon Federal Credit Union is a $14 billion credit union serving nearly 

950,000 members around the globe. Our core field of membership comprises the men 

and women of the Army, Air Force, Coast Guard, and Department of Homeland security. We are a conservative institution that is particularly fee averse. Our total 

fee income represents less than 10 percent of our total income. While our first priority is to always remain safe and sound our strategic objective is to provide products and services that result in high rates on savings, low rates on loans and low 

fees. 

We have been recognized in the military community as a leader with our overdraft protection programs. We have always viewed overdraft protection as a particularly valuable service for the military member. In their line of work maintaining 

good credit is important to their military readiness and ultimately their career. 

Thus, our program dates back more than 20 years preceding most of the overdraft 

programs that have come into question today. 

From the very beginning we have believed that members should either qualify for 

our low cost line of credit or we should not allow over drafting of their accounts. 

We would note that with more than two decades of experience we find that our 

members are appreciative of the responsible approach that we have taken. We offer 

a line of credit attached to a member’s checking account with a minimum of $500 

overdraft protection. This service is offered to every creditworthy member who opens 

a checking account. Forty five percent of our active checking accounts have line of 

credit overdraft protection. As a result our program has always been opt-in. We believe that every consumer must have opt-in rights. At the Pentagon Federal Credit 

Union we charge 14.65 percent annual percentage rate, calculated on a simple interest basis with no other fees or charges when an overdraft occurs. We believe that 

by using a line of credit product which is formally recognized as a loan and thus 

subject to all of the Federal lending disclosure requirements, the cost to the consumer is both fully disclosed and properly proportional to the amount that they 

overdraft their account by. 

At PenFed we post transactions smallest to largest to avoid charging unnecessary 

overdraft and nonsufficient funds fees. We provide separate mail notifications for 

each overdraft event so that our members are kept fully aware of the status of their 

account. We believe rapid notification is important because it enables members to 

pay off the loan immediately if they are able thus further reducing the cost of the 

overdraft. In short, we have attempted to craft a product that is truly consumer 

friendly. We would make note of the fact that we have not received a single complaint from our membership regarding the order in which we process items in more 

than 20 years. 

Nevertheless, there are members who do not choose to opt-in and there are those 

who can not qualify for a line of credit. These members are not allowed to overdraft 

their account with the limited exception of an off line debit transaction where we 

are required, by contract, to process such payments. In those instances we do charge 

a fee of $30. This does not happen with great frequency and we recognize the proposed bill would eliminate this fee. We support that and we recognize that the recent action of the Federal Reserve Bank will prohibit such a fee. However, we do 

believe that merchants and networks should also be required to process all transactions in real time which would eliminate this exception circumstance. 

As an organization we are constantly focused on process improvement. We felt 

that there was more that we could do for our military members in the area of overdrafts. This summer we made a decision to eliminate as many of the nonsufficient 

funds fees that our military members incur as we possibly could. The product we 

created is called, ‘‘Warriors Advantage.’’ It waives the checking account fees associated with instances of insufficient funds for up to two occurrences in any rolling 3 

month period. Importantly, this program is separate and distinct from our overdraft 

line of credit and goes beyond the minimum requirements of the proposed legislation. 

Under this program a military member with overdraft protection can use all of 

the money available in their checking account plus all of their line of credit and 

have two additional instances of returned items every 90 days with no fees or 

charges beyond the interest on their loan. Our research indicated that this program 
52 

would result in just over 98 percent of our military membership with checking accounts never experiencing a fee! 

The Warriors Advantage program represents only a beginning for us. We intend 

to extend this program to our entire membership and we are already at work on 

our next version which we hope to roll out in the summer of 2010. 

Thank you very much for this opportunity to testify and we are indebted to you 

for your work on behalf of the American consumer. 

PREPARED STATEMENT OF JOHN P. CAREY 

CHIEF ADMINISTRATIVE OFFICER, CITIBANK NA 

NOVEMBER 17, 2009 

Good afternoon Chairman Dodd, Ranking Member Shelby, and Members of the 

Committee. My name is John Carey, and I am the Chief Administrative Officer of 

the Citigroup North America Consumer Banking business and am responsible for, 

among other things, the business practices of Citibank, North America. I appreciate 

the opportunity to appear before you today to discuss our views on the Fairness and 

Accountability in Receiving (FAIR) Overdraft Coverage Act (S. 1977) and to offer 

recommendations for improving customer choice in and protection by overdraft coverage. 

Citibank serves more than 4 million customers in our retail banking business and 

has a network of more than 1,000 branches, 3,200 Citibank proprietary ATMs, and 

an additional 23,000 surcharge free ATM’s available to our customers through various partnerships. 

As we will discuss today, the policies that most banks employ when applying overdraft protection policies, most particularly for ATM transactions or debit purchases, 

can be very confusing, frustrating, and too expensive for consumers, particularly for 

those people who don’t closely manage their daily finances. We have all heard stories about consumers being caught unaware and incurring unexpected fees for 

transactions they could have easily avoided with greater transparency at the point 

of sale. 

So let me be clear—at Citibank, we help customers avoid overdraft fees. We decline ATM transactions or debit purchases when sufficient funds are not available 

to cover the transactions. Therefore we do not charge overdraft fees when a customer attempts such a transaction. 

At Citibank, we believe that we have an obligation to our customers to be fair 

and fully transparent and to use practices and disclosures that are clear and easy 

to understand. In many cases, overdraft fees can be avoided. To that end, I will 

highlight some important observations about consumer behavior and preferences describe our position and practices relative to overdraft protection, address some of the 

key aspects of the current bill that will adversely affect our customers and the industry at large, and offer some solutions for how consumer concerns around overdraft services could best be addressed. 

When banks enter a relationship with a consumer, they take on a significant responsibility: to provide tools and services that make fundamental day-to-day financial activities easier, more convenient, and beneficial to consumers, while providing 

value to customers for the value they bring to banks with their business. Most 

banks provide their customers with instant access to their funds through branches, 

ATMs and online banking services. Moreover, most banks provide their customers 

with financial expertise and assistance through their representatives and a wide 

range of tools that support better money management. 

At the same time, it is impossible to provide a wide variety of banking services 

to the public without assuming some risk. Therefore, it is the responsibility of both 

the customer and the bank to work together to mitigate those risks. The services 

that banks provide regarding overdrafts are an important component of the basic 

banking relationship and in mitigating risk. Responsible money management ultimately must lie in the hands of the consumer, because it is the individual consumer 

who has immediate control and knowledge of his finances and accounts. We recognize, however, that it may not always be practical for customers to keep track of 

every purchase. There are ways to make purchases that operate in different time 

frames (for example, instant PIN debit purchases versus check processing or scheduled payments), and merchants have a wide range of processing options that add 

complexity, so banks have widely instituted the service of occasionally covering 

transactions through overdraft payments. 

In thinking about overdraft services, it is important to distinguish ATM transactions or debit purchases from other transactions such as checks and Automated 
53 

Clearing House (ACH) transactions. The frustration that consumers express is centered on those ATM or debit transactions where the overdraft fee could have been 

avoided, if the customer had only known at the ATM or point of sale that the transaction would result in the assessment of an overdraft fee. 

Conversely, customers find overdraft services for checks and ACH transactions to 

be a valuable service. They prefer to have their bank cover the occasional overdraft 

payment of a check for a fee, rather than having the check returned, receiving an 

insufficient funds fee, an additional bounced check fee imposed by a merchant for 

the returned item, and the possibility of negative impact to their credit report. 

Overview of Citibank Overdraft Policies and Practices 

For Citi, our guiding principle to overdraft payment services is simple: we help 

our customers effectively manage their finances and avoid spending money they 

don’t have in their accounts. That’s why for ATM transactions or debit purchases 

(both PIN-based and signature-based), where balances can be instantly checked 

electronically, we will not authorize a transaction when the customer does not have 

the funds to spend in his account. 

Separately, we do allow overdrafts for checks and ACH transactions. We do this 

because the situation is very different. With checks and ACH transactions, the customer has the sole control over those transaction requests; we cannot know what 

amount they are writing on a check or exactly when they have written the check. 

In those cases, we mitigate risk for our customers and ourselves by allowing customers a cushion that covers a small overdraft. In order to avoid large overdraft situations, Citi will not authorize payment beyond a reasonable amount. 

Moreover, we encourage customers to link other accounts or lines of credit to 

cover potential overdrafts and avoid either an overdraft fee or a bounced check fee. 

Overdraft/NSF fees help cover the cost of processing the transaction, cover the risk 

of possible loss, cover the cost of an interest-free advance of funds, as well as provide an incentive to customers to not spend more than they have in their account, 

or to use the other, lower-cost services we have that can cover potential overdraft 

transactions. 

We have also made other important policy decisions to ensure our overdraft protection is fair. We instituted a cap of four fees per day (which also includes insufficient funds fees) in early 2008; fees that for Citibank generally would arise only if 

a customer drew multiple checks where funds were unavailable. We do not do ‘‘continuous overdraft,’’ where a bank will impose an additional fee on an overdraft if 

the overdraft remains on an account after a certain period of time. Finally, because 

we track electronic debits instantly, we have established a processing order that is 

beneficial for our customers. 

Customer Needs and the Importance of Choice 

As technology has improved and customers expect more choice in their banking, 

Citibank has gone to great lengths to provide tools to help customers manage their 

finances. In addition to providing alerts and instant access to balances online and 

through mobile services, we make sure that our customers’ transactions are updated 

in real time so that customers can move money as needed to cover payments. Our 

customers are able to see credits or the electronic purchase they made at the grocery 

store reflected immediately in their available balance. And, we know they avail 

themselves of this service as a significant number of customers make transfers at 

branches, online, or at ATMs every day to cover potential overdrafts they are able 

to see happening during the day. 

In addition, a third of our customers have signed up to link a line of credit or 

savings account to their checking accounts, which can be used to cover overdrafts 

in addition to simply being used for savings or as additional credit to draw upon. 

We encourage the establishment of these services at account opening and throughout our relationship with our customers. Our personal bankers are in fact incented 

to encourage customers to open additional savings accounts and lines of credit to 

cover overdrafts. When a customer uses these services to cover overdrafts 

proactively, there are no additional fees charged; when Citi covers the overdraft for 

them using these accounts or lines, a nominal fee is charged. Finally, many of our 

customers have signed up for low-balance alerts, which help them avoid unnecessary bank fees. 

Today fewer than 20 percent of Citibank customers are charged even one overdraft fee in a year. Of those, only a few are charged more than once annually. We 

believe a reason for this is due to our practice of NOT authorizing ATM and Debit 

transactions when funds aren’t available. Fortunately, our customers continue to do 

a good job of managing their accounts, and, with tools such as the ones we offer 

to protect them from overdrafts, we believe that behavior will continue. Still, it is 
54 

our fundamental belief that choice and control around overdraft fees should lie 

squarely in the hands of informed customers. 

Views on Pending Legislation 

In general, we fully support the bill’s goals of protecting consumers from unnecessary overdraft fees. We believe that consumers need transparency, especially at the 

transaction point in order to make informed choices about incurring such fees. That 

is why we support additional efforts to improve consumer awareness regarding overdraft protection and alternative payment options to help people be smart and responsible about money management. 

Moreover, we agree that banks should provide more transparent and easy-to-understand disclosures so that consumers can better manage their own money. For us, 

meaningful customer choice and control are paramount, and customers should be 

able to choose if they need to overdraft or not. 

We also believe, however, in the importance of giving customers the ability to 

make choices based upon their individual circumstances as they manage their finances from one day to the next. That is why we support a requirement for interactivity of ATM screens that allow customers to choose whether to continue with 

a transaction and pay a fee for insufficient funds or terminate the transaction. We 

also see enormous value in finding a similar solution for debit transactions. We believe that the recent changes to Regulation DD that will go into effect in January 

of next year, requiring statements to tally overdraft and insufficient funds fees for 

customers annually, will go a long way towards raising further awareness about the 

costs to consumers for spending funds they don’t have. 

Our concerns regarding the bill are as follows: 

Opt-in and Notification Requirements 

Most customers do not overdraft and never will. However, customers may not 

fully understand the effect that opting into or out of overdraft coverage will have 

on them when they open an account and choose not to ‘‘opt-in’’ to overdraft coverage. 

In the future they may find themselves in a circumstance where they wish they 

could proceed with a specific transaction even if they know they would be charged 

a fee. So for example, it isn’t that $5 cup of coffee that ends up costing $40, but 

rather that being stranded without cash in a foreign country and being able to access $100 from an ATM that will cost them $135. Having previously ‘‘opted-out’’ 

would eliminate that flexibility. 

So it is our position that customers should be given the choice of ‘‘opting-in’’ at 

the point of transaction instead. Customers should be alerted when an ATM or debit 

transaction will overdraft an account, and they should be able to choose at that moment whether they need to continue with that transaction and incur the associated 

fee or not. 

Understandably, updating the technology to provide such transparency will take 

time and it will be incumbent upon the merchants, the networks, and the banks to 

help create the functionality allowing for this practice at the transaction point. 

Until then, perhaps all banks should be required to deny ATM and debit transactions that will trigger an overdraft fee, a practice that Citi follows today. Giving 

the customer the choice to overdraw and incur the fee at the time of the transaction—the moment of truth—we believe, provides the best possible notice. In the 

absence of the technology to provide this notice, the transactions should simply be 

denied. 

Separately, we have concerns about the same-day notification requirements contained in the bill, especially given the amount of detailed information that would 

be required. This kind of notification would be nearly impossible to achieve technologically, and additionally may not be relevant, above and beyond communication 

tools that already exist. By way of example, many customers overdraft their account 

early in the day, but through the course of the day have either made transfers or 

deposits to cover the overdrafts. This tells us that these customers are managing 

their financial circumstances appropriately, making the communication potentially 

unnecessary or even inaccurate. Because many transactions such as checks are received after hours and most ACH transactions are processed overnight through posting reconciliation, a notification would not be timely enough for the customer to respond. In the final analysis though, we believe that customers should manage their 

finances effectively and use the many tools we already provide to achieve those 

goals. 

Limitation of Fees Assessed to One Per Month and Six Per Year 

The bill’s provision that would limit the number of fees assessed is complicated 

by network merchants’ rules that govern how banks process certain transactions. 

Many times a bank cannot control and therefore must allow overdrafts. The most 
55 

prevalent example of this is for settlements of signature-based debit transactions. 

If this limitation is meant to impose restrictions on practices such as ‘‘continuous 

overdrafts,’’ it also has the consequence of preventing banks from collecting appropriate compensation for transactions they are required to honor with merchants, but 

bear the entire risk of potential losses. It is impossible for banks to predict which 

customers will be responsible for those losses, so a very real result may be that 

banks eliminate payment of overdrafts, including checks and ACH transactions, so 

that some of the settlement risk is covered. Again, the result will be harm to customers through additional merchant fees and the consequences of unpaid bills. For 

customers who intentionally and fraudulently create overdrafts, they would soon 

learn that they can ‘‘get away’’ with doing so at a fixed cost to them, which eliminates the effectiveness of overdraft fees as a deterrent. 

We suggest that if the bill is attempting to limit ‘‘continuous overdraft’’ fees for 

a single overdraft, the legislation be focused to specifically address that practice. 

Moreover, we believe that by requiring customer choice at the ATM or point of sale 

whether or not to incur an overdraft fee before authorizing a transaction, customers 

are in complete control. Absent that choice, the transaction should not be authorized. Finally, for ATM transactions or debit purchases, we believe that the limitation on fees should apply only to those fees incurred through ATM transactions and 

debit purchases and not apply to ACH and check transactions. 

Limitation on Fees Created by Holds and Settlements 

Since authorization amounts, or holds, are entirely controlled by merchants, 

banks have no way of anticipating the actual intentions of customers when they are 

performing a transaction. Two common examples of this are gas station purchases 

and hotel stay purchases. Although a gas station may only authorize $1 to allow 

a customer to pump gas, the settlement amount will almost always be larger. In 

this case, we believe that merchants should request authorizations that are greater 

than $1 and indeed ought to consider an amount closer to the average transaction 

purchase at the pump. This should be an easy change for gas stations to make, and 

it would go a long ways towards reducing customer inconvenience. Moreover, at 

some level, the customer must also accept responsibility for knowing whether or not 

they have sufficient funds in their account to buy the gas. Banks can only authorize 

what is presented to them by the merchant, and have no way of knowing for what 

amount the ultimate transaction will settle. 

In the case of a hotel stay transaction, the merchant may seek authorization for 

an amount that exceeds the cost of the customer’s actual stay, and only the merchant is in a position to know or communicate to the customer what the amount 

of the hold will be and ultimately the amount of the settlement. Regardless, banks 

must in the meantime continue to process other intervening transactions based 

upon the authorization request that was submitted by the hotel. This challenge was 

recognized by the Federal Reserve Board in its recent amendment to Regulation E. 

These issues could be minimized through changing the way merchants process these 

transactions, by either seeking authorizations that more closely reflect the cost of 

the ultimate transaction or changing the way they process the transaction. We believe that some effort should be put into developing better controls and rules regarding merchant hold processing, and providing guidelines that could be much more effective in terms of protecting consumers. 

‘‘Reasonable and Proportional Costs’’ 

The bill recommends that a study be performed to understand what the reasonable and proportional costs are of overdraft protection to overdraft fees. Our request 

is that the study address all costs associated with overdraft procedures, certainly 

including risks and losses, but also including additional costs born today. For example, on a daily basis we review accounts and intervene on behalf of good customers 

before overdraft fees are assessed, and if the report were not to factor such overhead 

costs, we may have to stop providing that type of customer service. Moreover, we 

believe that if the bill actually prohibited overdraft ATM transactions or debit purchases (both PIN-based and signature-based) unless the customer has the opportunity to opt-in at the point of sale, the debate around the reasonable and proportional costs gets clearly placed in the consumer marketplace rather than through 

Government imposed price controls. 

Posting Order 

We strongly believe that our posting order presents a fair and simple means of 

processing customer transactions, which they can easily understand. The problems 

that consumers report are when all transactions are bundled and then processed 

from high to low. We believe that by processing credits first, electronic payments 

as they come in, and then processing ACH transactions and checks from high to low, 
56 

1SHCU merged with Wilson Community Credit Union and Scotland Community Credit Union 

in 2004 and with Cape Fear Community Credit Union in 2006. 2These include traditional savings accounts, money market accounts, certificates of deposits, 

and individual retirement accounts. 3Leslie Parrish, ‘‘Overdraft Explosion: Bank Fees for Overdrafts Increase 35 Percent in 2 

Years’’, Center for Responsible Lending (Oct. 6, 2009), available at http:// 

www.responsiblelending.org/overdraft-loans/research-analysis/crloverdraft-explosion.pdf [hereinafter Overdraft Explosion]. 4 In 2004, CRL first estimated the annual cost consumers paid in overdraft fees at $10.3 billion. Jacqueline Duby, Eric Halperin, Lisa James, ‘‘High Cost and Hidden From View: The $10 

Billion Overdraft Loan Market’’, Center for Responsible Lending (May 26, 2005). 

overdraft fees are minimized and the important transactions such as mortgages and 

car payments are covered. This practice is in our customers’ best interests. Attempting to process all transactions chronologically, particularly with checks, would be 

very difficult, as checks are processed in batch, and we do not know what the customer’s particular intentions were regarding order of payment. 

Conclusion 

As I have noted, we find merit to the overriding goals of this bill and we believe 

that customers should have informed choices before incurring debit overdraft fees. 

Obviously, the ultimate goal is for customers to manage their finances carefully and 

never overdraw their accounts. Nevertheless, for the reasons noted above, we believe 

that the legislation may not fully address the concerns that consumers have with 

debit card overdraft fees. 

Thank you for the opportunity to share our ideas with you. 

PREPARED STATEMENT OF MICHAEL CALHOUN 

PRESIDENT, CENTER FOR RESPONSIBLE LENDING

NOVEMBER 17, 2009 

Good afternoon Chairman Dodd, Ranking Member Shelby, and Members of the 

Committee. Thank you for inviting me to testify on S. 1799, the ‘‘Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act of 2009.’’ The Center for 

Responsible Lending enthusiastically supports this bill as a crucial measure for protecting consumers from abusive bank overdraft fees. 

I am president of the Center for Responsible Lending (CRL), a not-for-profit, nonpartisan research and policy organization dedicated to protecting home ownership 

and family wealth by working to eliminate abusive financial practices. CRL is an 

affiliate of Self-Help, which consists of a credit union and a nonprofit loan fund. For 

the past 28 years, Self-Help has focused on creating ownership opportunities for 

low-wealth families, primarily through financing home loans to low-income and minority families who otherwise might not have been able to purchase homes. SelfHelp has provided over $5.6 billion in financing to more than 62,000 low-wealth 

families, small businesses and nonprofit organizations in North Carolina and across 

the United States. 

Self-Help has operated a North Carolina-chartered credit union since the early 

1980s. In 2004, Self-Help Credit Union (SHCU) merged with three community credit 

unions offering a full range of retail products, 1 and it now services over 3,500 checking accounts and approximately 20,000 other deposit accounts. 2 In 2008, Self-Help 

founded Self-Help Federal Credit Union (SHCU) to expand Self-Help’s scope of 

work. SHCU does not offer a fee-based overdraft program, and it routinely denies 

debit and ATM transactions when the customer does not have sufficient funds. If 

a debit card overdraft is inadvertently paid, SHCU does not charge the customer 

a fee for covering the payment. SHCU customers can apply for an overdraft line of 

credit of up to $500, carrying an interest rate of 16 percent, with no transfer fees. 

In my testimony, I will describe the explosion of overdraft fees in recent years and 

the lack of meaningful action by bank regulators to curb these abuses. I will also 

summarize the reforms needed to stop unfair overdraft practices and explain how 

S. 1799 would implement these reforms. 

I. Overdraft Fees Have Exploded in Recent Years 

Overdraft fees are the fees charged when an institution chooses to pay a customer’s debit card, check, ATM or other electronic transaction, even though the customer’s account lacks sufficient funds to cover the charges. In 2008, overdraft fees 

cost consumers $23.7 billion, and we project that in 2009, fees will reach $26.6 billion. 3 In 2004, these fees were $10.3 billion—which means they are now a whopping 

two-and-a-half times the size they were just 5 years ago. 4 Overdraft fees paid now 
57 

5Overdraft Explosion at 7 (estimating $23.7 billion in fees charged in exchange for $21.3 billion in credit extended). 6 Comments of the Center for Responsible Lending to the Board of Governors of the Federal 

Reserve System, Office of Thrift Supervision, and National Credit Union Administration on Proposed Rule Regarding Unfair and Deceptive Practices—Overdraft Practices (Aug. 4, 2008), notes 

62-63, and accompanying text, available at http://www.responsiblelending.org/overdraft-loans/ 

policy-legislation/regulators/overdraft-comments-udap-final-as-submitted-w-appendices-080408- 

2-1.pdf [hereinafter CRL 2008 UDAP Comments]. 7 Eric Halperin, Lisa James, and Peter Smith, ‘‘Debit Card Danger: Banks Offer Little Warning and Few Choices as Customers Pay a High Price for Debit Card Overdrafts’’, Center for Responsible Lending, at 25 (Jan. 25, 2007), available at http://www.responsiblelending.org/overdraft-loans/research-analysis/Debit-Card-Danger-report.pdf [hereinafter Debit Card Danger]. 8 Consumer Federation of America, ‘‘CFA Survey: Sixteen Largest Banks Overdraft Fees and 

Terms’’ (updated July 31, 2009), available at http://www.consumerfed.org/pdfs/overdraftlfeelreportl09.pdf [hereinafter 2009 CFA Survey]. 9FDIC Study of Bank Overdraft Programs, p. iii of the Executive Summary, available at 

http://www.fdic.gov/bank/analytical/overdraft/FDIC138lExecutiveSummarylv508.pdf 

(2008) [hereinafter FDIC 2008 Overdraft Study]. 10Mark Fusaro, ‘‘Are ‘Bounced Check Loans’ Really Loans?’’, n. 4, at 6 (noting 20 percent of 

institutions in June 2004 were applying ‘‘bounce protection’’ to debit cards or ATM) (Feb. 2007), 

available at http://personal.ecu.edu/fusarom/fusarobpintentional.pdf. 11Of the Nation’s 10 largest institutions (per the FDIC’s June 30, 2009, listing according to 

total domestic deposits), only Citibank routinely denies debit card transactions rather than approving them for a fee. Moreover, while as recently as 2004 overdraft loans accounted for 60 

percent of institutions’ total overdraft/insufficient funds revenue, today they account for approximately 70 percent of that revenue—indicating covering overdrafts, rather than denying them, 

is increasingly the norm. Eric Halperin and Peter Smith, Out of Balance: Consumers pay $17.5 

billion per year in fees for abusive overdraft loans, Center for Responsible Lending (June 2007), 

available at http://www.responsiblelending.org/overdraft-loans/research-analysis/out-of-balance-report-7-10-final.pdf [hereinafter ‘‘Out of Balance’’]. 12 In 2007, the Federal Reserve reported that debit card transactions were increasing at a rate 

of 17.5 percent per year. 2007 Federal Reserve Payments Study, Financial Services Policy Committee, ‘‘Federal Reserve Study Shows That More Than Two-Thirds of Noncash Payments Are 

Now Electronic’’ (Dec. 10, 2007), available at http://www.federalreserve.gov/newsevents/press/ 

other/20071210a.htm. 13Overdraft Explosion at 3. 14FDIC 2008 Overdraft Study, Executive Summary at IV. 

exceed the amount of credit extended in overdraft loans themselves. 5 By far, the 

most common triggers of overdraft fees are small debit card transactions—transactions that could easily be denied at the point of sale at no cost to the consumer. 

Total overdraft fees have increased due to both an increase in cost and an increase in frequency: 

• Cost. From 1997 to 2007, the average overdraft fee charged by financial institutions increased from $16.50 to $29. 6 CRL estimates that the average fee paid 

by consumers is $34, 7 which is unsurprising since the sixteen largest banks 

charge an average fee of $35. 8 The FDIC’s 2008 survey, which included many 

smaller financial institutions, found an average among its institutions of $27 

per overdraft. 9

• Frequency. As recently as 2004, 80 percent of institutions denied debit card 

transactions that would have overdrawn the account. 10 Today, 90 percent of the 

Nation’s largest institutions routinely approve these transactions and charge a 

fee for each overdraft. 11 This shift has increased the frequency of overdrafts significantly, particularly given the overall increase in debit card use. 12

Overdraft fees affect a very large number of consumers each year. CRL recently 

estimated that over 50 million Americans overdraw their accounts annually, with 

27 million paying five or more overdraft or NSF fees. 13 Most of these fees are paid 

by a relatively small number of consumers: The FDIC found that 93 percent of all 

overdraft fees are paid by only 14 percent of account holders. These consumers are 

more likely to be lower-income, nonwhite or young account holders, who are the account holders least able to afford such fees. 14 In the midst of a recession, abusive 

overdraft practices are making the dire financial situations faced by many families 

even worse. 

II. Regulators Have Failed To Stop the Abuses 

The Federal Reserve Board (FRB) first requested comment on overdraft programs 

in 2002. Three years later, the FRB, along with the Office of the Comptroller of the 

Currency, the FDIC and the National Credit Union Administration, issued final 

Joint Guidance addressing overdraft programs. This guidance clearly recognized the 

problematic features of overdraft programs, but it failed to prohibit any of them. In-
58 

15 Id. 16Federal Reserve’s press release available at http://www.federalreserve.gov/newsevents/ 

press/bcreg/20091112a.htm. Final rule available at http://www.federalreserve.gov/newsevents/ 

press/bcreg/bcreg20091112a1.pdf. 17Department of the Treasury-Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127 (Feb. 24, 2005) [hereinafter 2005 

Joint Guidance]. 

stead, it described a number of ‘‘best practices,’’ which merely encouraged institutions to avoid those problematic features. 

These best practices included that institutions (1) consider limiting overdraft coverage to checks (i.e., consider not extending overdraft coverage to debit card transactions) and that they (2) monitor excessive usage, which regulators stated may indicate a need for an alternative credit product. 

When asked whether this guidance would be treated as law, regulators responded: 

‘‘The best practices, or principles within them, are enforceable to the extent they are 

required by law.’’ 15 But the regulators required none of them by law, and the guidance has largely been ignored in the years since. 

Just last week, the FRB issued new overdraft rules that address whether and how 

intuitions are required to obtain consumers’ consent to a product their Best Practices suggest shouldn’t be provided at all—overdraft coverage of debit card transactions. 16 The rule will require institutions to obtain consumers’ affirmative consent, or ‘‘opt-in,’’ before charging them overdraft fees on debit card purchases and 

ATM withdrawals. We strongly encouraged the FRB to issue this version of its proposal, as no consumer should be automatically enrolled in any credit product, much 

less an abusive one. 

But this measure alone is largely inadequate, as it fails to address other fundamental problems with today’s fee-based overdraft programs. The FRB’s rule condones charging fees for debit card overdrafts, which could easily be denied for no 

fee; it does not address checks and electronic payments at all; it does nothing to address the dramatic disparity between the amount of the overdraft and the amount 

of the fee institutions charge for covering it; and it fails to address the problem of 

an excessive number of overdraft fees being borne by a relatively small and vulnerable group of consumers. 

In short, neither the FRB nor any other banking regulator has meaningfully addressed the full range of harm to consumers caused by abusive overdraft programs. 

Since regulators first recognized high-cost overdraft programs as a problem in the 

early 2000s, practices have only grown worse, and consumers have paid more than 

$100 billion in overdraft fees. This failure on the part existing regulators is a striking illustration of the need for a Consumer Financial Protection Agency. 

See Appendix A for further discussion of how the regulatory agencies have failed 

to stem abusive overdraft practices. 

III. S. 1799 Will Provide Much-Needed Reform of Overdraft Practices 

Given that the Federal regulators have not prohibited abusive overdraft practices, 

we are very encouraged to see the Senate considering S. 1799. The bill contains provisions essential to addressing the fundamental problems with today’s overdraft programs: 

• A requirement that overdraft fees be reasonable and proportional to the actual 

cost to the institution of covering the overdraft. 

• A limit of six overdraft fees per year. Once a customer has incurred six fees in 

a 12 month period, the institution would be required to provide a longer-term, 

lower cost alternative, such as a line of credit, in order to continue covering the 

customer’s overdrafts for a charge. 

• Codification of a prohibition of overdraft fees on debit card and ATM transactions unless institutions have obtained the customer’s affirmative consent, or 

‘‘opt-in.’’ 

These provisions correspond well with the best practices provided in the 2005 

Joint Guidance addressing overdraft programs. The Guidance suggested that institutions consider making overdraft coverage unavailable for transactions other than 

checks; monitor excessive overdraft program usage, which may indicate a need for 

an alternative credit arrangement or other services; and obtain customers’ affirmative consent to receiving overdraft coverage. 17
59 

18Overdraft Explosion at 7. 19The avg. overdraft amount for debit card transactions is $16.46. Debit Card Danger at 25. 20 In its Regulation E Proposal, the FRB states: ‘‘the consequence of not having overdraft services for ATM and one-time debit card transactions is to have a transaction denied with no fees 

assessed.’’ 74 Fed. Reg. 5218. Currently, charging NSF fees for denied debit or ATM transactions 

is not a common practice. See Center for Responsible Lending’s CRL 2008 UDAP Comments at 

18-19 for discussion of why this practice should be prohibited by the FRB. 21 74 Fed. Reg. 5542. 22FDIC 2008 Overdraft Study at iv. 23 Id. at v. Two CRL surveys, conducted in 2006 and 2008, found that 71 percent of overdraft 

fees were shouldered by only 16 percent of respondents who overdrafted, and those account holders were more likely than the general population to be lower income, nonwhite, single, and renters. Respondents reporting the most overdraft incidents were those earning below $50,000/year. 

Leslie Parrish, Consumers Want Informed Choice on Overdraft Fees and Banking Options, CRL 

Research Brief (Apr. 16, 2008) (http://www.responsiblelending.org/overdraft-loans/researchContinued 

IV. The Problems With Today’s Fee-Based Overdraft Programs 

Financial institutions often justify overdraft fees and the lack of relationship 

these fees have to cost by asserting that they are penalty fees, intended to deter 

future overdrafts. But in the debit card context, the institution can stop the behavior altogether by denying the transaction at the point-of-sale, at no cost to the consumer. In reality, approving debit card overdrafts facilitates rather discourages 

overdrafts. Since the most effective way to prevent debit card overdrafts is within 

the institution’s control, a penalty fee is not appropriate for a debit card overdraft. 

Overdraft fees on checks and electronic transactions should only be allowed with 

baseline substantive protections. 

Today’s fee-based overdraft programs cause substantial injury to account holders. 

The cost of overdraft fees far exceeds any benefit they may provide. Moreover, the 

large majority of fees are paid by a relatively small number of account holders who 

incur numerous fees and are least able to quickly recover from them. For these account holders, one overdraft fee causes subsequent overdraft fees, driving them further into debt and ultimately making them less likely to be able to meet essential 

expenses. As our real-life case study detailed below demonstrates, fee-based overdraft leaves these account holders worse off than cheaper overdraft alternatives or 

even than no overdraft coverage at all. 

An overdraft line of credit is an appropriate credit product for customers who 

qualify for it. If a customer does not qualify for a line of credit, however, it is certainly not appropriate to extend that customer far higher cost credit on repayment 

terms far more difficult to meet. Indeed, those least likely to qualify for a line of 

credit are those least likely to be able to shoulder high-cost overdraft fees. This 

high-cost credit is predatory, and it is driving responsible overdraft products out of 

the market. 

A. The cost of overdraft fees far exceeds any benefit provided. 

In the aggregate, fee-based overdraft programs cost consumers nearly $24 billion 

each year, which is even more than the $21.3 billion in loans extended in exchange 

for those fees. 18 The most common triggers of overdraft fees, which are debit card 

transactions, cause an average overdraft of under $17 yet trigger an average fee of 

$34. 19 This fee—twice the size of the loan itself—does not even provide the account 

holder the benefit of avoiding a denied transaction fee because the cost of a denied 

debit card transaction is zero. 20 Charging any overdraft fee at all on a debit card 

transaction is simply not justifiable because the institution typically has the ability 

to prevent the transaction at the point-of-sale. 

In other contexts, Federal regulators have taken steps to address high fees imposed for low levels of credit. In the credit card context, for example, the FRB determined that the excessive fees associated with ‘‘fee harvester’’ credit cards ‘‘diminish 

the value of the account’’; as a result, the FRB limited up front fees on these cards 

to 50 percent of the total credit provided and required any fees exceeding 25 percent 

of the credit line to be charged over a 6-month period. 21

B. The majority of overdraft fees are paid by a small group of account holders least 

able to recover from them. 

The large majority of fees are paid by overdrafters who pay large numbers of fees 

and are least able to recover from them. The FDIC’s recent study of overdraft programs, consistent with CRL’s previous research, found that account holders who 

overdrew their accounts five or more times per year paid 93 percent of all overdraft 

fees. 22 It also found that consumers living in lower-income areas bear the brunt of 

these fees. 23 Seniors, young adults, military families, and the unemployed are also 
60 

analysis/consumers-want-informed-choice-on-overdraft-fees-and-banking-options.html. See CRL 

2008 UDAP Comments at 19-21 for further discussion. 24For further discussion, see Comments of the Center for Responsible Lending to Board of 

Governors of the Federal Reserve System on Proposed Rule to Amend Regulation E—Overdraft 

Practices (Mar. 30, 2009), Part II.B.1(b), pp. 10–12, available at http:// 

www.responsiblelending.org/overdraft-loans/policy-legislation/regulators/comments-on-regulation-e-overdraft-practices.html [hereinafter CRL 2009 Regulation E Comments]. 25Leslie Parrish and Peter Smith, ‘‘Shredded Security: Overdraft Practices Drain Fees From 

Older Americans’’, Center for Responsible Lending (June 18, 2008), available at http:// 

www.responsiblelending.org/overdraft-loans/research-analysis/shredded-security.html. The report found that debit card POS and ATM transactions account for 37.4 percent and 2.5 percent 

respectively (p. 7), which, when calculated, together equal $2.5 billion. 26 Id. at 6, Table 1. ‘‘Heavily dependent’’ was defined as recipients who depended on Social 

Security for at least 50 percent of their total income. 27 CRL analyzed 18 months of bank account transactions, from January 2005 to June 2006, 

from participants in Lightspeed Research’s Ultimate Consumer Panel. For further discussion of 

our database and methodology, see ‘‘Out of Balance’’ at 13-14. 

hit hard. 24 Americans aged 55 and over pay $6.2 billion in total overdraft fees an- nually—at least $2.5 billion for debit card/ATM transactions alone 25—and those 

heavily dependent on Social Security pay $1.4 billion annually. 26

C. Overdraft fees leave account holders worse off than lower cost coverage or even 

no coverage at all. 

Fee-based overdrafts not only leave account holders worse off than cheaper overdraft alternatives; they even leave account holders worse than no overdraft coverage 

at all. For a recent report on the impact of overdraft fees on older Americans, we 

tracked 2 months of actual checking account activity of one panelist, whom we call 

Mary, from our database. 27 Mary is entirely dependent on Social Security for her 

income. We compared the actual activity with what her account activity would have 

been with an overdraft line of credit. We then added a third scenario: no fee-based 

coverage at all. The results are graphically demonstrated below. 

During January and February of 2006, Mary overdrew her account several times and was charged $448 in overdraft fees. At the end of February, she had $18.48 in 

her account. She was trapped in a destructive cycle of debt, using the bulk of her 

monthly income to repay costly overdraft fees. Notably, even with fee-based coverage, Mary’s utility bills were denied in both January and February because overdraft fees had driven her so far into the red that the bank eventually stopped approving her transactions. 

With an overdraft line of credit at 18 percent, after 2 months, Mary would have 

paid about $1 in total fees for her overdrafts and would have had $420 in the bank. 

Even if Mary had had no overdraft coverage at all, she would have been better 

off than she was with fee-based overdraft. Five of her transactions, totaling $242, 

would have been denied—two point-of-sale transactions and three electronic transactions. She would have been charged no fee for the two point-of-sale transactions. 
61 

28 73 Fed. Reg. 28929. 29See, 2008 Proposed Rule to amend Regulation DD, 73 Fed. Reg. 28743-44. While the FRB’s 

final Regulation DD rule will require that the first balance displayed exclude overdraft funds 

available, it will allow a second balance to be displayed that includes overdraft funds available, 

even with no disclosure that accessing such funds will or may incur a fee. 74 Fed. Reg. 5593. 30 74 Fed. Reg. 5523. The FRB cites the FTC Credit Practices Rule, which found ‘‘the majority 

[of defaults] are not reasonably avoidable by consumers’’ because of factors such as loss of income or illness; Bank of America testimony noting that falling behind on an account is likely 

due to circumstances outside the customer’s control; and an economic journal finding conclusive 

evidence that unemployment is critical in determining delinquency. 31 73 Fed. Reg. 44542. 32Some may posit that the injury caused by overdraft fees must be avoidable because only 

a relatively small portion of consumers frequently overdraw their accounts. But the FRB has 

already concluded that, although injury may be avoidable by some consumers under some circumstances, it may not be reasonably avoidable as a general matter. In its analysis of payment 

allocation methods in the credit card context, the FRB noted that ‘‘[a]lthough a consumer could 

avoid the injury by paying the balance in full every month, this may not be a reasonable expectation as many consumers are unable to do so.’’ It applied a similar analysis to increasing interest rates on existing balances. The FRB acknowledged that the injury resulting from increases 

in the annual percentage rate ‘‘may be avoidable by some consumers under certain circumstances,’’ but it nonetheless concluded that, ‘‘as a general matter,’’ consumers cannot reasonably avoid interest rate increases on existing balances.’’ 74 Fed. Reg. 5522. In both circumstances, the FRB concluded that the injury caused by these practices was not reasonably 

avoidable. 

She might or might not have been charged an NSF fee for each of the three denied 

electronic transactions. She also might have been charged late fees if any of the 

electronic transactions were bills. Assuming, conservatively, that she was charged 

an NSF fee and a late fee for each of the three transactions, her ending balance 

still would have been $489—more than enough to cover the value of the denied 

transactions. 

Mary’s situation illustrates a problem common among the chronic overdrafters 

who pay the vast majority of the fees: Overdraft fees simply beget more overdraft 

fees. Ultimately, fee-based overdraft coverage prevents account holders from being 

able to meet obligations they otherwise would have been able to meet. 

Said another way, fee-based coverage can lead to denial of transactions that would 

not have been denied but for the debt created by high-cost overdraft fees. 

D. Overdraft fees are not reasonably avoidable by many consumers. 

1. Account holders often lack sufficient information about their accounts. The FRB 

has acknowledged the difficulty of knowing one’s own checking account balance, noting that ‘‘consumers often lack information about key aspects of their account’’ and 

‘‘cannot know with any degree of certainty when funds from a deposit or a credit 

from a returned purchase will be made available.’’ 28 Debit holds (occurring when 

institutions make a portion of a customer’s account balance unavailable pending settlement of the final amount of a purchase) and deposit holds (occurring when institutions delay a customer’s access to deposited funds) and the lack of transparency 

about the order in which transactions are cleared contribute to account holders’ confusion about their balances. Making matters worse, account balance disclosures 

sometimes include funds available for overdraft, without including warning that accessing those funds could trigger fees, potentially leading customers to unwittingly 

spend more money than they have. 29

2. Economic hardship prevents those who pay the large majority of fees from reasonably avoiding them. The FRB has acknowledged in multiple contexts that broader economic hardship could prevent consumers from reasonably avoiding injury. In 

the context of raising interest rates on existing credit card balances, for example, 

the FRB cited several sources indicating that loss of income, illness, or other factors 

outside the consumer’s control lead to delinquency. 30

Likewise, in its discussion of ability to repay in the final HOEPA rule, the FRB 

identified several reasons why borrowers, especially in the subprime market, cannot 

necessarily avoid unsustainable loans, including that ‘‘they may . . . urgently need 

the cash that the loan will provide for a household emergency.’’ 31

In the overdraft context, there is no question that economic hardship contributes 

to many account holders’ inability to avoid fees. 32

3. Financial institutions engage in many practices designed to maximize overdraft 

revenue. The increase in overdraft fees—both the cost and the frequency—over the 

past several years is the result of a concerted effort on the part of many financial 

institutions to maximize overdraft revenue. These institutions: 

• have purchased specialized software that helps them maximize fee revenue and 

paid consultants to help them do so; 
62 

33See, CRL 2008 UDAP Comments at 37, Part III.B. 34See, CRL 2008 UDAP Comments at 38, Part IV. Recently, an advisor on overdraft and card 

strategies at Profit Technologies acknowledged that fees are a key driver of institutions’ transaction clearing practices: ‘‘ ‘Banks will say (high-to-low clearing) is for the consumer,’ he says. 

‘Bottom line is, when it was pitched, we’d say . . . a side effect is that it results in more fee 

income to you because it bounces more checks.’ [The advisor] says that after leaving Profit Technologies, he joined a credit-counseling firm and saw the damage fees did to consumers.’’ Kathy 

Chu, ‘‘Banks’ ‘Courtesy’ Loans at Soaring Rates Irk Consumers’’, USA Today, July 13, 2009. 35Statement by an unidentified client of IMPACT Financial Services, available until recently 

at https://impactfinancial.com/portal/Endorsements/ClientTestimonials/tabid/70/Default.aspx (last viewed on-line Mar. 8, 2009). 36Debit Card Danger at 25. CRL’s research found that checks accounted for 27 percent of all 

overdrafts, which is likely decreasing as paper checks are decreasing generally. 

• have expanded their overdraft programs to debit card purchases and ATM 

transactions; 

• often post debits as quickly as possible, while delaying for as long as possible 

making those deposits available for use; 33

• manipulate the order in which they clear transactions. 34 (Institutions often 

clear purchases in order from highest to lowest, rather than the order in which 

they occurred, in order to deplete the account to below zero more quickly. Once 

the account balance is negative, the institution is able to charge an overdraft 

fee on each subsequently posted transaction, often resulting in significantly 

more overdraft fees.) 

E. Overdraft fees harm not only consumers, but also the banking sector and the economy as whole. 

Today’s exploitative fee-based overdraft programs harm the banking industry and, 

ultimately, the economy as a whole. 

Without baseline protections, institutions are engaged in a race to the bottom that 

provides tremendous disincentives to operating fair overdraft programs. Given the 

high fees that institutions generate through fee-based overdraft, institutions choosing to operate fair overdraft programs risk placing themselves at a substantial disadvantage. It’s unsurprising, then, that most of the largest institutions—and many 

smaller institutions—have substantially similar abusive programs. (Of the largest 

institutions, only one—Citi—routinely denies debit card overdrafts.) 

Moreover, institutions are generating a substantial portion of their revenues 

through overdraft practices that both regulators and legislators have deemed questionable. In the interest of safety and soundness, all would be better served if institutions generated greater portions of their revenue through practices that have not 

drawn such scrutiny and criticism. Instead, today’s overdraft programs award banks 

for counterproductive programs while distracting them from core banking activities. 

A representative of one financial institution that implemented software designed to 

increase overdraft fees stated: ‘‘If I had two more products like the IMPACT Automated Overdraft Privilege, I could quit making loans altogether.’’ 35

Finally, taxpayers spent hundreds of billions of dollars to bail out banks while 

being told they would provide critical credit to the economy—not with the expectation that institutions would continue to extract revenues from those with relatively 

little resources. Redirecting these individuals’ incomes toward productive goods and 

services would do far more for economic recovery than allowing practices that drive 

them deeper into debt. 

F. Concern about denied checks does not justify maintaining the status quo. 

Some have posited that limiting today’s fee-based overdraft programs will create 

problems for consumers by leading to an increase in bounced checks. It is important 

to note that, as Mary’s story above illustrates, plenty of checks bounce even under 

today’s overdraft programs. In fact, checks often bounce due to the debt created by 

high overdraft fees themselves. 

Moreover, checks account for only about a quarter of all overdraft fees. 36 The far 

more common triggers of overdraft fees are debit cards—transactions that carry no 

penalty at all when denied. 

V. S. 1799 Addresses the Fundamental Problems With Today’s Overdraft 

Programs 

S. 1799 addresses three key unfair features of fee-based overdraft programs: (1) 

charging fees that are not reasonable or proportional to the cost to the institution 

of covering the overdraft; (2) charging excessive numbers of fees that create a debt 

trap for those paying the majority of overdraft fees; and (3) charging overdraft fees 
63 

37Debit Card Danger at 25. 38There are two primary penalty fees charged in the credit card context today—late fees and 

over-the-limit fees. A reasonable late fee is not as likely as an overdraft fee to simply perpetuate 

the scenario it purports to deter. In the credit card context, avoiding an additional late fee requires that the customer pay only a minimum payment on time—not the entire outstanding balance, including fees. In the overdraft context, the entire loan, plus all fees, are repaid upon the 

customer’s next deposit, typically 3 to 5 days later. Therefore, customers have more time to recover from a late fee than they do from an overdraft fee, and late fees are not as likely to beget 

late fees as overdraft fees are to beget overdraft fees. 

Overdraft fees in the debit card context are very similar to over-the-limit fees in the credit 

card context in that they result from transactions the institution approves that it could easily 

deny for no fee. The clear way to deter the behavior in both contexts is to deny the transaction. 39 2005 Joint Guidance; OTS Guidance, 70 Fed. Reg. 8428 (2005). 40See, e.g., OCC Advisory Letter on Abusive Lending Practices, AL 2000-7, July 25, 2000; 

FDIC Financial Institution Letters, Guidelines for Payday Lending, FIL 14-2005, February 

2005; FDIC Financial Institution Letters, Affordable Small-Dollar Loan Products, Final Guidelines, FIL-50-2007, June 19, 2007. 

on debit card and ATM transactions without obtaining a customer’s affirmative consent to having overdrafts covered. 

A. Addressing High Cost: Reasonable and Proportional Requirement. 

S. 1799 would require that overdraft fees be reasonable and proportional to the 

actual cost to the institution of covering the overdraft, with the FRB providing additional guidelines for what constitutes ‘‘reasonable and proportional,’’ potentially including a safe harbor. 

As noted earlier, the average overdraft fee exceeds the amount of the overdraft 

covered. This disparity is particularly outrageous given the short period of time for 

which the typical overdraft is outstanding—three to five days 37—and the low default risk overdrafts carry. Indeed, the only two circumstances under which an overdraft loan is not repaid are when another deposit is never made into the account 

or when the customer walks away from the account. Operational cost is also low 

because most programs are highly automated. 

The recently passed CARD Act requires the FRB to promulgate standards for reasonable penalty fees and specifies that penalty fees be proportional not only to cost 

but also to the violation or omission. We support S. 1799’s slightly different approach, which does not authorize consideration of the ‘‘violation or omission’’ because it is overwhelmingly clear that overdraft fees as currently administered do not 

deter overdrafting. 38 In fact, institutions’ overdraft practices have evolved from approving the occasional overdraft as a customer courtesy to routinely approving 

transactions, even those they could easily deny at the point of sale for no fee. These 

practices encourage rather than discourage overdrafts. 

In addition, the primary effect of the increase in the average overdraft fee charged 

over the last decade has not been deterrence; rather, it has been to increase the 

number of overdraft occurrences by chronic overdrafters, due in large part to the 

debt trap created by high fees. 

The obvious way to deter overdrafts is to deny transactions that would overdraw 

the account—not to approve them for an exorbitant fee that only drives consumers 

deeper into debt and makes them more likely to overdraw their account again. 

We note that while S. 1799 would exclude overdraft fees from the interest rate 

cap applicable to Federal credit unions, we do not support such exclusion and believe all credit extended by Federal credit unions should be subject to the interest 

rate cap. 

B. Addressing Frequency: Annual Limit on the Number of Fees. 

S. 1799 would limit the number of overdraft fees an institution may charge a customer to six per year. After six fees have been incurred, the institution could only 

continue covering overdrafts for a charge if the customer enrolls in a lower-cost alternative. The banking agencies have long advised institutions to discourage excessive use of overdraft programs, but this guidance has largely not been followed. 39

This proposed limit recognizes that if a customer qualifies for a lower cost form 

of overdraft coverage, the institution should provide that coverage to the customer. 

If the customer doesn’t qualify for lower cost coverage, that customer certainly is 

not in a position to shoulder more than six overdraft fees a year. 

Banking regulators have also long discouraged practices analogous to excessive 

overdraft loans. 40 The repeat borrowing illustrated in our case study above is analogous both to loan flipping of other high-cost short-term loans, such as payday loans, 

loan flipping in the mortgage context, and pyramiding late fees: 

• Other high-cost, short-term loan flipping. Excessive overdraft loans create a debt 

trap similar to that caused by other high-cost, short-term lending. CRL’s recent 
64 

41Leslie Parrish and Uriah King, ‘‘Phantom Demand: Short-Term Due Date Generates Need 

for Repeat Payday Loans, Accounting for 76 Percent of Total Volume’’, Center for Responsible 

Lending (July 9, 2009), available at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf. 42The typical payday borrower pays an additional $45 in interest every 2 weeks, with effectively no reduction in principal—i.e., no benefit—and ultimately pays $450 in interest on a $300 

loan. 43 12 CFR 227.15 (Regulation AA). 44 16 CFR 444. 45FDIC Financial Institution Letters, Guidelines for Payday Lending, FIL 14-2005, February 

2005. 46 Id. 47 Id. The OCC, in its payday guidance, has noted that its guidance addressing abusive lending practices more generally should also be applied in the context of payday lending. That guidance identifies the following indicators of abusive lending: pricing and terms that far exceed the 

cost of making the loan; loan terms designed to make it difficult for borrowers to reduce indebtedness; and frequent and multiple refinancings. OCC Advisory Letter on Abusive Lending Practices, AL 2000-7, July 25, 2000. 48 12 CFR 227.15(a). 49The FRB noted that pyramiding late fees ‘‘give rise to charging excessive or unwarranted 

fees to consumers, who may not even be aware of the default or fees . . . Once consumers are 

in default, these practices can make it difficult for consumers to catch up.’’ 73 Fed. Reg. 44569. 

research finds that over three-fourths of payday loan volume is generated within 2 weeks of a customer’s previous payday loan. 41 While technically a borrower 

typically closes an old payday loan and opens a new one, effectively the borrower is being flipped from one loan into another—unable to repay one loan and 

meet essential expenses without taking out another loan. 42 Payday loans beget 

payday loans, much like overdraft loans beget overdraft loans. 

• Mortgage loan flipping, which has already been identified as abusive. The repeated extension of overdraft loans is also analogous to flipping borrowers from 

one mortgage loan to the next. In the mortgage context, an originator sells the 

borrower an unaffordable loan only to later refinance the borrower into another 

unsustainable loan, extracting fees and stripping home equity from the borrower in the process. Earlier this session, the House of Representatives passed 

H.R. 1728, which would ban this practice for mortgage loans. In the overdraft 

context, cash is similarly stripped from customers who are flipped. 

• Pyramiding late fees, which the FRB has prohibited as an unfair practice. 

Pyramiding late fees occur when lenders apply future payments to the late fee 

first, making it appear future payments are delinquent even though they are, 

in fact, paid in full within the required time period. As a result, lenders charge 

additional late fees. 43 These fees provide no benefit to the consumer while driving them further into debt. 44 For customers who incur the majority of overdraft 

fees, they often would have had sufficient funds in their account to meet future 

expenses but for the excessive overdraft fees they have incurred in previous periods. 

How regulators have addressed these analogous abuses informs what is appropriate in the overdraft context. In 2005, the FDIC limited excessive refinancings of 

payday loans by prohibiting the entities it regulates from making payday loans to 

anyone who has had payday loans outstanding for 3 months in any 12-month period. 45 The FDIC guidance encourages lenders to offer borrowers an alternative 

longer term product at that point but notes that even if such alternative is not 

available, ‘‘an extension of a payday loan is not appropriate under such circumstances.’’ 46 Assuming a 14-day pay period, this standard limits the number of 

loans any borrower can have to six per year, alleviating the debt trap while continuing to allow loans to the occasional users. The FDIC further urges institutions 

to require ‘‘cooling off’’ or waiting periods between payday loans. 47 The limit on fees 

in S. 1799 is closely analogous to the FDIC’s approach to limiting payday loans and 

would address the debt trap caused by overdraft loans in much the same way. 

Similarly, the FRB has long prohibited pyramiding late fees as an unfair practice 

through its Credit Practices Rule, 48 and it recently reinforced its stance by prohibiting the same under TILA through its recent HOEPA final rule. 49

C. Permitting Customers To Opt-In Is Crucial. 

Consumers should be provided a meaningful choice about whether to participate 

in fee-based overdraft programs. Automatically enrolling a customer in the program, 

even if an institution allows the customer to opt-out later (often after the damage 

has been done), does not provide a meaningful choice. 
65 

50 74 Fed. Reg. 5225. 51 CRL 2008 UDAP Comments at 25-27; CRL 2009 Regulation E Comments at 8-18. 52Determined as follows: 

2009 $20.0B (per CRL’s projection for 2009, Overdraft Explosion, through September) 

2008 $23.7 (per CRL 2009 report, Overdraft Explosion) 

2007 $20.6 (assumes midpoint between 2006 and 2008 figure) 

2006 $17.5 (per CRL 2007 report, Out of Balance) 

2005 $14.0 (assumes midpoint between 2004 and 2006 figure) 

2004 $10.3 (per CRL 2005 report, High Cost and Hidden From View) 

Total $106.3 B (Conservative estimate as it does not include any fees paid in 2001, 2002, 

or 2003) 53OCC Interpretive Letter #914 (August 3, 2001), available at http://www.occ.treas.gov/ 

interp/sep01/int914.pdf. The OCC raised compliance issues with respect to TILA, TISA, EFTA, 

ECOA, and Regulation O (extensions of credit to bank insiders). 54 67 Fed. Reg. 72620 (2002). 55 70 Fed. Reg. 29582 (May 2005). 

An opt-in arrangement provides the customer a moment during which he or she 

may evaluate the options available and affirmatively choose the one most suitable. 

In its proposed rulemaking, the FRB recognized the productive incentives an optin arrangement would offer: ‘‘[Opt-in would] provide an incentive for institutions to 

persuade consumers of the benefits of the overdraft service and enable the consumer 

to make an informed choice about the merits of the service before he or she incurs 

any overdraft fees.’’ 50

While an opt-in requirement must be coupled with other substantive protections, 

greater transparency will foster competition in the marketplace, resulting in better 

choices for consumers. Allowing no choice at all, or allowing automatic enrollment 

with only an opportunity to opt-out, are anticonsumer, nontransparent practices 

that have facilitated the race to the bottom in this area over the past several years. 

While the Federal Reserve’s recent action will require ‘‘opt-in’’ on debit card and 

ATM transactions, codification of the protections increases the likelihood they will 

endure over time. S. 1799 requires institutions to obtain consumers’ opt-in to overdraft fees on debit card and ATM transactions. We support this requirement; we 

also support an opt-in requirement for overdraft fees on checks and electronic transfers. For a complete discussion of this issue, see our 2008 and 2009 regulatory comment letters. 51

VI. Conclusion 

We support S. 1799 for comprehensively addressing the most abusive features of 

today’s overdraft programs. The bill would limit the high costs of these fees, would 

cut down on the frequency which fees are charged to those least able to shoulder 

them, and would require the customer’s express consent to overdraft fees on debit 

card and ATM transactions. 

Thank you again for the opportunity to testify today. I look forward to your questions. 

APPENDIX A: REGULATORS FAIL TO CURB ABUSES

Regulators first identified overdraft practices as a problem as early as 2001, when 

the OCC noted the ‘‘complete lack of consumer protections’’ associated with these 

programs. Since then, overdraft practices have grown exponentially worse. While 

regulators have taken no meaningful steps to rein in abuses, Americans have paid 

well over $100 billion in overdraft fees. 52

2001—OCC Interpretive Letter discusses numerous concerns about automated overdraft programs, noting ‘‘the complete lack of consumer safeguards built into the 

program,’’ including a lack of limits on the number of fees charged per month; 

similarities between overdraft fees and other ‘‘high interest rate credit’’; and the 

failure of banks to meet the needs of repeat overdrafters in a more economical 

way. 53

2002—The FRB issues a preliminary request for comment on overdraft programs. 54

2005—The FRB affirmatively exempts overdraft loans from the protections of the 

Truth in Lending Act when it chooses to address overdraft programs under the 

Truth in Savings Act instead. 55 Overdrafts continue to be made without consumers’ explicit consent and with no cost-of-credit disclosures to allow comparisons of overdraft fees to less costly options. 

2005—Regulators issue joint guidance, which reflects several of the OCC’s 2001 concerns. But rather than explicitly prohibiting any of these practices as unfair and 

deceptive, the guidance only provides ‘‘Best Practices.’’ When asked whether this 

guidance would be treated as law, regulators responded: ‘‘The best practices, or 
66 

56 Id. 57There is little evidence to suggest that the OCC has instructed its examiners to even evaluate overdraft practices—much less attempted to encourage best practices. A search of the OCC’s 

Compliance Handbook for depository services finds no reference to the guidance and a search 

of the OCC’s ‘‘Other Consumer Protections’’ Compliance Handbook finds no reference to overdraft protection, or, indeed, to the FTC Act’s UDAP provisions at all. Moreover, the OCC’s message to its banks’ customers has essentially been that the banks can do as they please. For example, the OCC’s online consumer reference ‘‘HelpWithMyBank’’ has a FAQ on its overdraft section concerning transaction posting order (generally manipulated by banks to maximize overdraft fees) that validates the banks’ own claim that they can post transactions in whatever order 

they please. http://www.helpwithmybank.gov/faqs/bankingloverdraft.html#drop08. Additionally, Consumer Federation of America’s 2009 survey of overdraft fees at the 16 largest banks 

finds that their average fee is $35, compared to $27 at FDIC-regulated institutions. 2009 CFA 

Survey. Eleven of the sixteen largest banks are OCC-supervised. 

principles within them, are enforceable to the extent they are required by law.’’ 56

But the regulators required none of them by law, and the guidance has largely 

been ignored in the years since. 

2007—Despite its joint guidance acknowledging that overdrafts are an extension of 

credit, the OCC asserts in Miller v. Bank of America that its regulations allow 

banks to seize exempt benefits such as Social Security to pay overdraft loans and 

fees, claiming that they are not ‘‘collect[ing] a debt.’’ 

2008—Regulators issue a proposal under their authority to address unfair and deceptive practices (UDAP). The proposal covers all transaction types (checks, electronic 

payments, debit card and ATM) but proposes only that consumers have the right 

to ‘‘opt-out’’ of high-cost overdraft programs—not that institutions must obtain 

consumers’ explicit consent before enrolling them. Regulators later withdraw the 

proposal. 2009—The FRB issues a rule addressing consent to overdraft fees on debit card and 

ATM transactions. Its provides no additional substantive protections, such as a 

limit on excessive fees or a requirement that fees be reasonable and proportional 

to the cost to the institution of covering the overdraft. 

ONGOING—Best Practices Guidance continue to be largely ignored by institutions 

and the regulators alike. The OCC’s Compliance Handbooks make no reference to 

overdraft programs at all, 57 much less to Best Practices.