Overdraft Fee Limits Are Now Inevitable

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by: Sean Ryan

The Washington Post had an article on bank overdraft fees yesterday that I think shows some limits to be inevitable at this point.

In addition to Rep. Maloney's longstanding support in the House for action on overdraft fees (supported by Financial Services Committee Chairman Barney Frank), the article highlights that in the Senate, Chris Dodd will be introducing a companion bill with the support of Chuck Schumer.

Notably, Barney Frank stated that while new rules would be up to the proposed Consumer Protection Agency if the legislation creating it passes, he will push through overdraft-specific legislation if the larger effort fails.

Banks have been their own worst enemies on his issue.

Many of them automatically enroll customers in overdraft programs. Many also batch each days debits for a customer and pay them in descending order of size; the claim is that this is a service to insure that larger payments, which may be more important ones such as a customer's mortgage, are paid first, and that it is only coincidence that this process serves to maximize the incidence of overdraft fees.

However, the claims that automatic actions are for the benefit of customers are undermined by the failure to automatically link checking and savings accounts, which would have the effect of reducing incidence of overdraft fees.

If you're going to be acting automatically for the purported benefit of your customers, then do so consistently. Doing it just on processes that maximize fees, then playing stupid on processes that would reduce them ("Oh, did you want me to link your savings account to your checking account so you wouldn't be overdrawn?"), fools nobody save perhaps the bankers themselves.

Let me go on record saying I'm not a fan of the proposed consumer protection agency. It has every appearance of becoming playground for statist busybodies of the worst sort. Here's a good rule of thumb in evaluating proposed financial reforms: if Elizabeth Warren likes it, it is a terrible idea.

In the discrete case of overdraft fees, however, banks have done almost everything in their power to alienate political allies (and customers of every persuasion). Having sown the wind, they genuinely deserve to reap the whirlwind.