Democratic Lawmakers Call for Regulations To Limit Bank Overdraft Charges

In a move that would affect commercial banks like Bank of America (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), and JP Morgan Chase (NYSE: JPM), Democratic lawmakers on Friday publicly called for regulatory changes to banks ability to charge overdraft fees.  Rep. Barney Frank, chairman of the House Financial Services Committee, and Chris Dodd,  Chairman of the Senate Banking Committee called for legislation that would allow bank customers to opt out of overdraft protection.

Banks typically allow customers to overdraft their accounts, temporarily withdraw more money than they have, and then charge them a fee of between $25 and $40 for the convenience.  Banks have long argued that their customers want overdraft protection, and would prefer not to have their transaction rejected at the sales counter.  But public backlash at the size of overdraft fees charged, and the perception by bank account holders that the timing of credits and debits were being manipulated in order to generate additional fees has led to the cry for legislation to regulate and modify this bank practice.

Over the past few weeks, in a gesture of political goodwill and to gain some positive public relations capital, Bank of America (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), and JP Morgan Chase (NYSE: JPM), announced that they would allow their customers to decide  for themselves whether they wanted overdraft protection. This would allow account holders to opt out of any overdraft protection program, rather than making it mandatory for all account holders.  These new changes to internal bank policy were generally hailed as “too little, too late” by lawmakers in the House and Senate, and the fear is that once public focus is removed from this area, banks will quietly shift back to their previous methods and fee structures.

It is widely expected that the Federal Reserve will announce new regulations on bank overdrafts by the end of 2009, but Democratic lawmakers would like to see any new regulations codified into law.  Representative Carolyn Maloney (D-NY) decided not to wait, and recently introduced a bill in the House that would require banks to ask customers whether or not they wanted overdraft protection.

Congress already has a full plate with health care reform taking up most of their time as well as the headlines, but both Congress and the Administration have made it clear that reform of banks and the financial markets are also very high on their list.  We will see what becomes of this bill, though it is fairly small in scope, it does promise consumers some protection and could be the catalyst for additional regulations of the financial markets and banking industry.