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Fed: Consumers must opt in to debit card overdraft fees

New overdraft rule is mandatory by July 1, 2010

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Consumers will be able to avoid getting hit with costly overdraft fees on their debit cards under new rules released Thursday by the Federal Reserve. 

HIGHLIGHTS OF NEW
FEDERAL OVERDRAFT FEE RULES

What: The Federal Reserve issued rules Thursday requiring banks to get consumers' permission to charge overdraft fees when there are insufficient funds in an account to cover purchases.

Who is affected: Anyone with an ATM or debit card. The rules apply to existing as well as future cardholders.  

How soon does it take affect: Banks must implement the rules no later than July 1, 2010. They cannot charge overdraft fees to existing customers without prior consent after Aug. 15, 2010.  

What's not covered: Banks can still charge whatever they want for overdraft fees. They can also assess multiple fees during a single month. Members of Congress are vowing to push for legislation to address these practices. 

Lawmakers and consumer advocates, however, said the new Fed rules  don't go far enough in protecting consumers from abusive overdraft practices and vowed to continue efforts to pass more stringent legislation. 

Starting July 1, 2010, banks will be required to allow debit card customers to opt-in to overdraft fees rather than automatically enrolling card users in programs that charge $20 to $30 whenever there are insufficent funds to cover purchases. That means consumers who do not opt in and who attempt to make transactions without sufficient money in their accounts to cover the purchase could have their debit cards denied at the cash register. (See 6 ways to avoid debit card overdraft fees.)   

Under the Fed rules, banks would have to explain what overdraft protection is, the details of how it works and the fees associated with it before asking consumers to opt in to the program. (See model opt-in disclosure.) 

"The final overdraft rules represent an important step forward in consumer protection," Federal Reserve Chairman Ben S. Bernanke, said in a press release on the rules. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Another blow to banks
The new rules are the latest setback for the nation's banks and credit unions already reeling from the effects of the economy and new consumer credit card rules coming online. Thursday's overdraft regulations are sure to trim back what had become a growing income source, estimated at $23.7 billion in 2008 and projected to hit $38.5 billion in 2009.

In third quarter financial statements filed this month, Wells Fargo indicated it expects to take in $300 million less in fee revenues in 2010 because of policies the bank has implemented to help consumers limit overdraft and returned item fees. Facing a rising tide of consumer complaints, Bank of America and Chase have also revised their policies to give customers the choice of using overdraft services.

VIDEO: Should you enroll in overdraft protection?

New federal rules require banks to get your permission before they enroll you in overdraft protection. Should you opt in? Before you decide, watch this video.

Edward L. Yingling, president and CEO of the American Bankers Association trade group, said the bankers have created an overdraft task force to look at consumer concerns as well as how technology can be improved and the role of retailers and merchants processing transactions.

"This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs. Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently," Yingling said in a statement.

The Fed rules also come as lawmakers in both houses of Congress are considering bills (H.R. 3904 and S. 1799) to curb overdraft abuses. The proposed bills are more far reaching than the Fed rules and include bans on multiple overdraft fees during a single month. Those bills also seek to regulate how debit card transactions are processed by banks. Consumer advocates have complained that transactions are processed to maximize fees for banks rather than chronologically as they occur. A hearing on the Senate bill is scheduled for Nov. 17 before the Senate Banking Committee. 

Lawmaker: Fed rules don't go far enough
Rep. Carolyn Maloney, co-sponsor of the House bill, applauded the Fed for recognizing that the overdraft fee problem needs review, but said the Fed rules don't go far enough to address all of the practices harmful to consumers.

While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue.

-- U.S. Rep. Carolyn Maloney    

"While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue," Maloney said in a statement. "The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed's new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!"

She added: "My bill does all that -- it caps the quantity of fees at one per month or six per year, requires that fees be reasonable, and prohibits posting-order manipulation, and includes all transactions, not just debit cards. Those are provisions I believe make for the strongest consumer protections, that's why Chairman [Barney] Frank and I have proposed this legislation, and that's what I believe the House will be passing."

Consumer groups have called overdraft fees "high-cost loans" and note that banks can decline debit transactions when there aren't enough funds but don't because of the profits they can make from the fees consumers pay. Advocates say banks often don't explain to consumers that they can avoid overdraft fees by linking their debit cards to other savings accounts or opening a line of credit -- less expensive alternatives to overdraft fees.

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Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending, criticized the Fed's "failure to propose or enact necessary safeguards against a host of unfair practices."

"Congress needs to step in to stop the abusive practices the Fed has known about for nearly a decade, but once again has failed to address," Halperin said in a statement.  

Fed research: Consumers want choice
According to the Fed, which conducted consumer research on overdraft practices, most consumers would prefer to have a choice in enrolling -- or "opt in" for -- overdraft programs for ATM and debit card transactions. The research also showed that most people do want overdraft coverage for important bills such as rent, telephone and other utilities. Thus, the new rule applies to ATM and one-time debit card transactions but not checks. A 2009 study by the Center for Responsible Lending found most overdraft fees were generated at the point of sale, when consumers are using their cards at checkout. 

The Fed rule also took steps to prevent banks from discriminating against customers who do not opt in by requiring that they have the same account terms, conditions and features as account holders who opt in to the fees. Anyone with ATM or debit cards prior to July 1, 2010, cannot be charged overdraft fees after Aug. 15, 2010, unless the bank or credit union has first gotten the consumer's consent to participate in an overdraft program.  

"Overdraft fees can be costly," Fed Gov. Elizabeth A. Duke, who heads the agency's Committee on Consumer and Community Affairs, said in a press release. "Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs."

Said Maloney at an Oct. 30 congressional hearing on her overdraft bill: "The overdraft problem is significant and getting worse. The quantity of debit card transactions now exceeds the quantity of credit card transactions." 

See related: 6 ways to avoid debit card overdraft fees, Banks' checking, debit card overdraft policies draw scrutiny 

Updated: September 13, 2010


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