Banking on Trust

A friend called recently, and as soon as I answered he began unloading a fusillade of obscenities on me about his bank. It was one of those wall-of-apoplexy monologues where you're going “Mm-hmm. Yeah, mm-hmm,” during the occasional forced pause. I'd suffered through these financial rants before, but this one definitely took the prize. It seemed humanly impossible, but the bank whacked him for a big handful of $35 overdraft fees, netting almost $700.

We can all recount a personal anecdote or two when it comes to outrageous bank service charges. But this? This was the Iliad of overdraft scenarios. The direct deposit of his paycheck was four days late, so when his electronic bill payments started closing, the funds were unavailable. Car payment, insurance, phone, cable, credit cards, some other odds and ends, plus a few checks he wrote prematurely, counting on the funds being there.

After he finished tenderizing my brain with his angry tale, I still had enough energy left to launch into my own tirade about the time I made an $.86 cent oversight in my account balances and ended up buying a $38 cup of coffee.

“This must be happening to everyone,” he sighed, exasperated by the whole affair. “I'd like to know how much these banks are making on overdrafts. It's gotta be in the tens of millions. Probably one of their main sources of income.”

Tens of millions? Try again. According to a 2007 Center for Responsible Lending study, consumers pay an incredulous $17.8 billion annually in overdraft and non-sufficient fund penalties. Moreover, a 2006 FDIC study found that overdraft and NSF fees represent 74 percent of all service charges for individual account holders.

President Obama's ongoing financial system overhaul includes formation of the long-overdue Consumer Financial Protection Agency (CFPA). Among its responsibilities, the five-member board would regulate bank overdraft fees, eliminate arbitrary interest rate increases, monitor and enlarge the small print on credit card agreements, clamp down on high-interest payday loans and in general enforce fair lending rules.

One of the new agency's principal weapons will be the Credit Card Accountability, Responsibility and Disclosure Act of 2009. When it comes to credit card issuers, “contracts are written not to inform, but to confuse,” Obama acknowledged in May when signing the bill, stating that credit payments often cripple a family's finances. “Mysterious fees appear on statements. Payment deadlines shift. Terms change. Interest rates rise.”

Now bracing for decades of increased taxation to repay the $700 billion bailout of America's financial system, distrusting consumers should be thrilled at receiving a little federal protection. Yet conservatives and their banking constituents (whose humiliated hands were outstretched mere weeks ago) are now vehemently opposed to the proposed consumer protection agency.

The banking lobby, together with the U.S. Chamber of Commerce and the SEC insist that adding another regulatory agency is not the answer — the solution is to get the existing agencies to do their jobs. Which agencies are we talking about? The SEC itself, under whose watchful eye the economy just melted down. Sen. Chris Dodd (D-CT), who spearheaded much of the consumer protection legislation remarked yesterday, “It is unbelievable that some of the same irresponsible actors that helped create the current financial mess would argue that we are doing too much for consumers.”