Thank you, Mr. Chairman, and thank you for holding this critical hearing on H.R. 3904, the Overdraft Protection Act of 2009.

The “Overdraft Problem” is significant-- and getting worse, because the quantity of debit card transactions has now exceeded the quantity of credit card transactions.  Just yesterday, a headline in The American Banker newspaper read, “Dependence on Debit is the New Norm.”

The Center for Responsible Lending (CRL) has found that overdraft fees have increased 35% in the last two years, and they estimate that twenty-seven million Americans overdrew their checking account more than 5 times in a 12-month period. 

From start to finish, the consumer is too often kept in the dark, and not allowed to choose how he or she spends their own money. This bill brings sunshine and permission into the process, restricting deceptive practices and empowering consumers to manage their own lives and their own financial accounts.

Let me briefly explain the “Overdraft Cycle”…

As a consumer opens an account, according to a study by the FDIC, most banks—75.1% of banks—automatically enroll them in an automated overdraft program, which charges a fee ranging from $10 to $38 for each overdraft, and sometimes another fee if an account stays in negative balance for a period of time. 

Then consumers begin to use their debit card just as they’re advertised-- for groceries and gas, for cups of coffee and movie tickets. Run a Saturday’s worth of errands, and many people will use their debit card at a point-of-sale a half-dozen times or more.

And because they were enrolled automatically in overdraft “protection,” and are using ATMs or point- of-sale terminals that don’t – or can’t – tell them if a transaction is about to drive them into a negative balance and incur a fee, consumers often don’t know they might have incurred overdraft fees.

What the consumer doesn’t know, unless they keep fastidious track of their balance after each and every transaction, is that they could have racked up a half-dozen or more overdraft fees in that one day!

So that a fancy $5 “frappucino” on a Saturday morning becomes a $40 frappucino when the overdraft fee is added on!

What’s more, the consumer doesn’t find out about the fee that was automatically charged until later, because the overwhelming majority of banks—81%, according to the FDIC-- will allow an overdraft to occur at an ATM or a point of sale, but only notify the consumer after the transaction has been completed and the overdraft fee incurred.

Finally, the “Overdraft Problem” culminates when the transactions are posted to accounts back at the bank. You might think that the transactions would be posted in chronological order. But you would be wrong.  They are usually posted by size, from large to small.

Which means the larger transaction has the effect of driving an account to a negative balance faster, and each smaller transaction that occurs while the account is in negative balance incurs a new, separate overdraft fee!  The FDIC study reports that 53.7% of large banks process overdrafts in large-to-small fashion.

The bill that Chairman Frank, Chairwoman Waters and I have introduced meets the overdraft problem head-on, from start to finish:

• It brings automated overdraft plans under the Truth in Lending Act, requiring financial institutions to obtain permission of consumers before enrolling them in an overdraft program.
• It requires that ATMs notify the consumer if a cash withdrawal would incur an overdraft fee and allow the consumer to reject the withdrawal before a fee is incurred.
• It limits overdrafts at the source—the financial institution—to no more than 1 per month or 6 per year.
• It prohibits the manipulation of posting order of transactions by the banks.
• Finally, it requires that overdraft fees be “proportional to actual harm”—so that $5 cup of coffee isn’t charged what amounts to a 700% interest rate in the form of a $35 fee.

I want applaud the efforts of some of the large banks to address the issue of excessive overdraft fees.  But I believe that overdraft protections must extend to all customers of all financial institutions—even some of the banks which have dialed back overdrafts still permit up to four overdrafts per day!

As the FDIC study has shown, the problem is so wide and so deep—encompassing the majority of banks and affecting tens of millions of consumers—Congress must address the “Overdraft Problem” across the board, systemically--- allow consumers to control their own financial lives, and allow the competitive market to function.

This bill is the latest iteration of my legislation on this issue. When the bill I introduced earlier this year, HR 1456, had its own hearing last March, we learned from the retail sector that the cost of installing smarter point-of-sale terminals that would notify a consumer if they were about to incur an overdraft fee was prohibitive—especially in the midst of this “Great Recession.”  So what we’ve done in this bill is cap overdraft fees at the source, and require a study from the GAO about the feasibility of installing such terminals at every retail point of sale.

I thank the Chairman for sponsoring this legislation with me and I look forward to hearing from the witnesses here today.