Law to require banks to notify you if using your ATM card would cause an overdraft (and overdraft fee). This is particularly important if two people (a husband and a wife, for example) have ATM cards on the same account, which could readily create an unsuspected overdraft.

Should your bank warn you of potential overdrafts when you use an ATM or debit card?

Congress is considering a bill, HR 946, that would require banks to give consumers a chance to back out of transactions that might cause them to overdraw their checking accounts.

The bill is sponsored by Rep. Carolyn Maloney, a New York Democrat. Rep. Emanuel Cleaver, a Kansas City Democrat, is listed as one of several co-sponsors.

Consumer groups support the bill, contending that banks are lulling consumers into a false sense of security and then nailing them with fees of $30 or more for each overdraft, even if for just a pack of gum.

“We think that consumers should be allowed an informed choice,” said Jean Ann Fox, a spokeswoman for Consumer Federation of America, one of the consumer groups supporting the bill.

The groups say consumers are surprised by the growing practice and often aren’t told they can be hit by the fees when they sign up for an ATM or debit card. They also say banks make it too easy for cash-strapped consumers to use their debit cards almost like payday loans.

Banking officials oppose the bill. They say they provide consumers a service by allowing transactions to go through that save them the embarrassment of a bounced payment. Besides, they say, it is up to the customer to keep track of how much money they have in their accounts. [As though the bank doesn't, huh? - LG]

“Only the consumer can know for sure how many outstanding payments they have,” said John Hall, a spokesman for the American Bankers Association.

Banks in the past often refused checks or debit transactions if a customer didn’t have enough money in their accounts. Now, many banks will honor the transactions but charge a discretionary fee.

A study by the Center for Responsible Lending found that the hardest hit by overdraft fees are consumers between ages 18 and 24. This group is more susceptible to overdraft fees, the study said, because they are more likely to use debit cards for small purchases such as books, meals and snacks.

The study contended that banks use “abusive overdraft loans to collect nearly $1 billion per year in fees from young adults who earn relatively little as students or new members of the workforce.”

The study also took universities to task for “contributing to this problem” by selecting a single bank and granting them exclusive marketing privileges on campus.

But Hall said the study findings also underscore “why financial literacy is so important today.” He said overdraft fees can act as a deterrent. “This is a learning experience for young people,” he said.

Consumer groups also criticize banks for clearing withdrawals starting from the biggest to the smallest, rather than in the order in which they come in. Fox said this arbitrarily results in more overdrafts, and more fees, especially at a time when speedier electronic banking makes it harder to keep track of balances.

But Hall disagreed. He said banks that order withdrawals by amount think they are offering customers a service, because many of the largest amounts are for important budget items, such as rent and home loans.

“Again, if you are keeping good records, how the bank processes checks doesn’t matter,” he said.

He said the issue affects a relatively small number of consumers, citing an ABA survey released in August showing 80 percent of consumers have not paid an overdraft fee in the past 12 months.

Still, consumer groups say banks should be required to inform consumers of the practice in the interest of fair play and to comply with federal truth-in-lending laws.

One way to avoid overdraft fees is to tie your checking account to some other account at a bank, such as an equity credit line or a credit card account. This way, if you overdraw on your bank account, the bank automatically charges the excess to the other account, usually for a nominal fee. [Nominal? Maybe. It depends (a) on the bank and (b) what you find nominal. - LG]