The House Financial Services Committee is on the path to reform by preventing banks and credit unions from engaging in the deceptive practice of covering checks in the order that will gain them the most in overdraft fees.  For example, if a consumer has three checks that come in but have only enough to cover either a single check or two smaller checks, the bank with pay the larger check regardless of whether it came in after the two smaller checks because bouncing the two smaller checks will enable it to impose two separate overdraft fees.  Overdraft fees are the largest consumer fee income for the industry primarily because banks make it easy for consumers to spend more than they have and then admittedly penalize them for it.  Several reps from large banks actually admit to doing this.  They give the consumer the money and then they actually say that the same consumer must be penalized in some way for taking it.  Unbelievable. 

The Committee also are initiating a requirement that forces the overdraft fees to be commensurate with the ACTUAL cost of covering the checks or purchase.  One of the panelist during the Committee hearing hit the nail on the head:

Jean Ann Fox, director of financial services for the Consumer Federation of America, said, “When a bank decides to lend money to consumers by letting a debit purchase go through that should have been denied, the fee is not a deterrent, it’s a profit center.”

Here is additional information from USA Today:

The House Financial Services Committee blasted banks and credit unions at a hearing Friday for routinely paying consumers’ overdrawn transactions, then charging them steep fees. These fees have bolstered banks’ balance sheets during the recession while turning debit cards — which the industry often advertises as a product to help you manage your money — into a debt trap for some consumers.

“Why are overdraft services the only ones where banks can take consumers’ money without their permission?” Rep. Carolyn Maloney, D-N.Y., said at the hearing. “How is this different from Burger King charging you for a burger you didn’t want?” 

Maloney has sponsored a bill with Rep. Barney Frank, D-Mass., requiring banks to get consumers’ permission before covering their overdrafts and charging them a fee. Currently, most banks will automatically enroll customers in these programs.

The legislation, which faces stiff opposition from the banking industry, would also cap the number of overdraft fees consumers can be charged and tie the fees to the transactions’ processing costs. Sen. Chris Dodd, D-Conn., has a similar bill pending in the Senate.

Representave Carolyn Maloney hopes to have the legislation on the President’s desk by Christmas.