Deceptive Overdraft Fees: There Ought to Be a Law!

If you ask around, it's pretty easy to find someone who has a bank account overdraft horror story to tell.

Nine out of ten adult Americans have a checking account. It's the most widely used financial services product in the United States. And according to a survey by Pew's Safe Checking in the Electronic Age project, about 18 percent of those with checking accounts have been hit in the past year by an overdraft fee.

In a country of more than 310 million people, that's a lot of people, a lot of fees, and a lot of money -- in fact, overdraft fees paid to financial institutions amounted to about $31.5 billion in 2012, up for the first time in three years, according to Moebs Services.

Those overdraft charges often come as a rude surprise. The Pew survey found that more than half of those charged overdraft fees didn't even know that they had somehow opted in to overdraft "protection."

And when there are electronic terminals ready to take a swipe of a debit card everywhere from dry cleaners to gas stations to McDonald's, it's easier than ever to throw your checking account into deficit and incur an overdraft penalty fee.

So if you use a debit card to pay for a fancy cappuccino when your account is in deficit, it quickly becomes a $35 dose of caffeine -- discoverable only when the bank statement comes through.

It gets worse. If you keep rough track of charges to your account as you go through the month, you could assume you were safe until the last week of your statement cycle. But get this: many banks don't post those transactions chronologically; they actually re-order the transactions in a way that benefits them -- from highest amounts to lowest, driving the account into the red faster so that each of the small transactions generates an overdraft fee!

And it's all completely legal.

A recent federal court case involving debit card practices noted how one customer incurred $506 in overdraft fees for exceeding her account balance by $120. Courts have called these overdraft practices "unfair," "deceptive" and based on "fraudulent or misleading representations."

To their credit, some banks have started to change their overdraft practices by denying transactions when an account doesn't have funds available. But many institutions still don't do that -- claiming it would take a massive software overhaul.

That's why there ought to be a law. And hopefully, soon, there will be.

The Overdraft Protection Act of 2013, which I introduced last week with 42 cosponsors, would rein in abusive banking practices that hit the unwary hard.

My bill would prohibit institutions from manipulating the order of transactions and require that overdraft fees to be reasonable and proportional to the amount of the overdraft. It also limits overdrafts to one per month and six per year, and requires a consumer's affirmative opt-in to any overdraft plan.

It is going to be a tough fight to get this bill passed.

But fraud, deception and misrepresentation are the sorts of things that government should try to stop.