How Many Rules Does it Take to Regulate Overdraft Fees?

When the Federal Reserve introduced new rules last week which would ban banks and credit unions from charging overdraft fees to consumers at ATMs or debit cards unless they’re giving option of accepting or declining the service, it seemed it was taken care of and next July 1, when the new rules will take effect.

No, that’s not the case though. Lawmakers, evidently in bids to build up even more political capital, are now pushing two bills through Congress in order to deal with the same issue.

Christopher Dodd, Senate Banking Committee Chairman, has been getting clobbered in the polls leading up to the next race for his Senate seat, and seems to be using the only tool he knows how to – the public discontent over the banking industry – to try to gain some traction for the coming election.

With that as a background, Dodd has introduced legislation that goes beyond the mandate from the Federal Reserve, adding to the gaining of consumer permission before being enrolled in their overdraft program the additional rule of only being able to charge fees six times a year or only once a month.

Making it even more complex, Dodd’s bill would also force the fees to line up in proportion to what the processing costs would be. Not only that, but customers would also have to be contacted in some way to let them know that they had overdrawn their account. The practice of changing the order of transactions, which in some cases increased the number of overdrafts assessed, would also be forced to stop.

If all of this isn’t enough, House Financial Services Committee Chairman Barney Frank and Joint Economic Committee Chairman Carolyn Maloney have also offered a bill that is similar to the one proposed by Dodd, but which has yet to be marked up in committee.

Executives from banks and credit unions oppose all the new legislation, stating it should be postponed until the effects of the new rules from the Federal Reserve are implemented to see what type of impact they make before adding more rules to them.

The new rules could inadvertently end overdraft protection programs they contend, as introducing a cap of six overdraft protections a year would make them a cost liability which the financial institutions may not be able or willing to bear.

Thinking on that, how does someone continually overdraft their account with that type of regularity? I’ve had overdraft protection for years and have never had a fee from overdrawing the account.

Representing the credit unions at the meeting with the Senate Banking Committee will be Pentagon Federal Credit Union President/CEO Frank Pollack, along with a representative from Citibank (NYSE:C). From the other side of the issue will be two consumer groups and and individual from the home state of Dodd.