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Compare PricesBanks under fire for ‘criminal’ overdraft fees
Backlash brews as Dems target bailed-out firms that rely on hidden charges

Alex Wong / Getty Images Senator Christopher Dodd speaks to the media on Capitol Hill on Thursday. Dodd plans to introduce legislation requiring banks to get permission from customers, rather than allowing overdrafts automatically.

Cash cow for banks: Debit overdraft fees
Sept. 14: Overdraft fees on debit cards are estimated to generate about $27 billion in revenue this year. Consumer groups consider the practice predatory. NBC’s Lisa Myers reports.

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By Binyamin Appelbaum and Nancy Trejos

updated 2 hours, 36 minutes ago

A backlash is brewing on Capitol Hill against banks that charge large fees for overdrafts without asking or telling customers, the latest sign that the financial crisis is shifting the balance of power from banks toward borrowers.

Banks struggling to survive have become increasingly reliant on the fees, which could total $38.5 billion this year.

But congressional Democrats, who pushed through new restrictions on credit cards this spring, now are promising a crackdown on overdraft fees, using words like "criminal" and "rip-off" to describe the practice of letting people overspend and then charging them fees without warning. Most overdrafts are now incurred on debit card transactions.

Sen. Christopher J. Dodd (D-Conn.) plans to introduce legislation requiring banks to get permission from customers, rather than allowing overdrafts automatically. If customers decline and then try to overspend, the transaction would be rejected. A similar bill is pending in the House.

Dodd dismissed concerns about the impact on ailing banks.

"People out there are getting whacked," he said. "They should have the right to say, 'Deny me the transaction.' "

Regulation overhaul

The attack on overdraft fees comes as Congress is considering a fundamental overhaul of financial regulation. The Obama administration has proposed the creation of a new agency empowered to write and enforce rules protecting consumers in financial transactions, removing that power from banking regulators. Dodd also favors the creation of a single agency to oversee the health of banks, consolidating a responsibility held by four agencies.

Even as that debate unfolds, however, some members of Congress see a need for more immediate action in specific areas, such as credit cards and overdraft fees. There is outrage that some banks have raised fees, squeezing consumers even as the government is investing vast sums to rescue the industry. Average overdraft fees at large banks have increased 4 percent this year, according to Moebs Services, a financial research firm.

Industry groups argue that customers are responsible for monitoring their account balances, that overdrafts should not happen unintentionally and that overdraft loans -- the money advanced automatically to cover the overdraft -- are a service that banks offer.

The issue has been simmering for years. In the age of handwritten checks, banks rarely made overdraft loans, but as the rise of debit cards vastly increased the volume of transactions, the industry gradually perfected a new strategy. Banks began to honor transactions, up to a preset limit, and then charge a fixed fee on top of the amount of the loan.

Most banks automatically offer the loans to all account holders, according to a study by the Federal Deposit Insurance Corp. released last year. They also do not notify customers when an overdraft is about to occur, nor do they offer them a chance to cancel the transaction. Furthermore, many banks process transactions in ways that increase the number of overdraft charges, for example by debiting large transactions before small ones, exhausting available funds more quickly.

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Unregulated credit card?

Moebs Services projects that the industry will make $38.5 billion off the fees this year, up from $18 billion in 1999, in part because the average fee large banks charge for each overdraft has climbed by $10, to $35.

Because most overdrafts are now prompted by debit card transactions, consumer advocates argue that the industry in effect has created a new kind of unregulated credit card. But the Federal Reserve ruled in 2004 that banks were providing a service rather than a loan, and therefore the customer's decision to spend the money was sufficient to indicate approval. The Fed did require banks to detail the fees on the customer's next statement.

(It has happened to me, where I write a series of small checks on a deposit that should have cleared but somehow didnt. They charge me $39 each for every one. I raise Hell, and they usually remove the charges. My nephew was also whacked by credit card charges, altho he has no money sense and deserved a lot of it. His 12%, 13%, 14%, and 19% credit cards, charged to the max, along with his own stupidity, cost him his house.)