By Ian Swanson - 11/11/09 11:00 AM EST
Banks may suffer their second major defeat since the financial crisis began as lawmakers move legislation that drastically curbs fees charged to consumers who overdraw their account balance.
Bills in the House and Senate would overhaul a service that earned $38.5 billion for banks in the last year, according to industry sources who are pessimistic they can stop it. This comes after Congress passed new credit card reforms earlier this year.
“It’s going to be hard to stop,” said another industry representative, who asked to speak on background to talk more candidly about the issue.
Hitting banks on overdraft fees is a perfect election-year issue in that it allows Congress to stand up for consumers while hitting the big banks many see as responsible for the financial crisis that sparked the worst recession in decades, industry sources said.
In addition, they believe Senate Banking Committee Chairman Chris Dodd’s (D-Conn.) tough reelection fight bolsters the hopes of legislation. Dodd’s electoral problems follow controversies hinging on his ties to the financial industry, and he’s looking for issues that show off his bona fides for consumers and working people.
All of those factors expedited Congress’s work on restricting credit card fees and interest rates earlier this year.
Overdraft fee legislation will likely move on its own and will not need another vehicle. One industry source joked about how lawmakers will tout it to the rooftops and hold a parade.
The bills drafted by Dodd and House Financial Services Committee Chairman Barney Frank (D-Mass.) would require banks to get the consent of their customers before enrolling them in overdraft protection programs.
The programs allow consumers to spend more than what is in their accounts. The catch is that each bad check or debit card swipe will generally bring a $35 fee, and banks are accused of manipulating the order in which they post transactions to rack up additional fees.
The service has drawn complaints from consumer groups and lawmakers who say customers don’t realize they’re going to get hit with the fees for using the protection. Some consumers don’t realize they have the protection at all.
The banking industry warned of unwanted consequences from the credit card bill, and is making a similar argument on overdraft fees.
After President Barack ObamaBarack ObamaObama lauds abortion decision from Supreme Court Dems celebrate anniversary of gay marriage ruling Cannabis conversation urged at North American Leaders Summit MORE signed legislation clamping down on the ability of issuers to raise interest rates and fees on existing credit card balances, several banks began raising rates on new cards.
Industry officials predict the legislation on overdraft fees will kill the service and that banks will look for other ways to make up for the lost profits. One possibility would be ending free checking accounts.
“The bill will kill overdraft protections for those who need it the most,” said Scott Talbott of the Financial Services Roundtable. He said consumers and merchants who benefit from the service will both feel the pain.
Obama to China
Obama has pledged to make currency and trade imbalances a focal point of his first trip to China as president.
In an interview with Reuters, Obama said cheap imports from China have been a benefit to consumers but were made possible by “huge debt” that is unsustainable.
He also said manufacturers in the U.S. “have legitimate concerns” about their ability to sell products into China, and suggested the current imbalance with China cannot be allowed to stand.
The U.S. trade deficit with China stands at $143 billion through August, and $20.2 billion in that month alone. China also holds about $2.2 trillion in foreign currency reserves, mostly in U.S. dollars.
China pegs its currency to the dollar, so even as the dollar hit its lowest point in 15 months on Monday, it did not lose ground to the yuan.
That’s led to renewed calls for Congress and the administration to do something, since the lower Chinese currency makes it easier for China to sell products in the U.S.
“I think it is significant he brought this up in an interview and it’s more than a passing comment,” said Pat Mears, who works on China issues for the National Association of Manufacturers.
Mears noted that China started to allow the yuan to appreciate only after pressure from Congress, the George W. Bush administration and other trading partners.
A bipartisan group of lawmakers led by Rep. Tim Ryan (D-Ohio) wrote to Obama last week criticizing him for not labeling China a currency manipulator. They’ve offered legislation that would impose tariffs on imports from China if it is found to manipulate its currency, but the legislation has stalled this year as Democrats give the administration time to work with China’s government.