Rep. Hinojosa drops support of bank overdraft legislation

A senior lawmaker last week dropped his support for legislation limiting bank overdraft fees, saying the Federal Reserve has taken a better approach to the issue.

Rep. Rubén Hinojosa (D-Texas) took his name off the co-sponsors list for the bank overdraft bill backed by Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.), chairman of the House Financial Services Committee. The legislation is seen as a key part of the Democrats’ effort to reform the financial sector in the wake of Wall Street’s meltdown last year.

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A spokeswoman for Hinojosa said he dropped his support for the bill because of the Fed’s recent action on overdraft fees.

The Fed issued a rule on Nov. 12 that would require banks to ask consumers permission before subscribing them into overdraft fee programs.

“When the Congressman saw the Federal Reserve approach, he started leaning more towards the Federal Reserve's idea. He does believe there is a problem that needs to be fixed,” said Patricia Guillermo, a spokeswoman for Hinojosa.

Rep. David Loebsack (D-Iowa) also dropped his support for the bill this week. But it was a clerical error that he was counted in the first place, according to one of his aides.

A spokeswoman for Loebsack said the Iowa Democrat was included among the bill’s supporters because of “a staff-related error with the bill numbers and we never meant to co-sponsor.”

Maloney and Frank’s bill goes farther than the Fed. It would restrict the number of overdraft fees that banks may charge to one per month or six per year and also limits the total fees that banks may charge. Under the bill, banks would have to charge fees proportional to the overdraft.

Banks will collect a record $38.5 billion in overdraft fees in 2009, according to Moebs Services, an economic research firm. That revenue is almost twice as much as the $19.9 billion they earned from overdraft fees in 2000.

Consumer groups have attacked banks for subscribing their customers into overdraft protection programs without permission. Banks generally charge $35 fees for each overdraft, and have also been criticized for manipulating the order of transactions to impose fees on each overdraft.

The overdraft fee bill has been met with heavy resistance from lobbyists for the banking industry who believe customers would be bothered if they found their ATM and debit card transactions rejected after they overcharged their accounts. But public interest groups have argued legislation is needed to protect consumers, considering a $5 cup of coffee could end up costing $40 due to bank overdraft fees.

After the Fed’s announcement, Maloney indicated legislation was still needed.

In a statement, she said she was glad the Fed recognized the need to police fees, but criticized the bank for not going far enough. The Fed’s rule would still allow an unlimited amount of fees and not make them proportional to the size of the overdraft.

Banking and credit union trade associations criticized the bill at an Oct. 30 House Financial Services Committee hearing.

“Consumers value depository institutions paying their overdrafts —have come to expect it — as it helps to avoid the embarrassment, inconvenience, fees imposed by merchants and others, and other adverse consequences of having a check bounce or a transaction denied,” said Nessa Fadis, vice president and senior counsel for the American Bankers Association’s Center for Regulatory Compliance, in prepared testimony at the hearing.

But public interest groups say that customers do not ask for the protections that often come with expensive fees.

“Consumers do not apply for this form of credit, do not receive information on the cost to borrow bank funds via overdrafts, are not warned when a transaction is about to initiate an overdraft, and are not given the choice of whether to borrow the funds at an exorbitant price or simply cancel the transaction,” said Jean Ann Fox, director of financial services at the Consumer Federation of America, at the same hearing.

The bill enjoys a base of support in the house. Fifty-nine members in the House are co-sponsoring the bill, including senior members like Frank and Maloney as Republican Walter Jones (N.C.). Similar legislation has also been introduced in the Senate by Sen. Christopher Dodd (D-Conn.), the Senate Banking Committee chairman, and has earned 7 co-sponsors so far.