Research and Statistics

Comment period ends on automatic overdraft protection


Almost 2,000 consumers and financial institutions answered the Federal Reserve’s call to voice their opinion on overdraft fees. Consumers want see change; banks want little change if any.

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Almost 2,000 consumers expressed anger and frustration over automatic debit card overdraft protection plans during an open comment period hosted by the Federal Reserve Board, which ended March 30.

Consumers told the Fed they want changes in automatic overdraft protection.

The public comment period gave anyone interested 60 days to voice their opinions about the board’s two proposed alternatives to Regulation E, which governs current overdraft regulations. The alternatives could ban institutions from automatically enrolling customers in overdraft protection programs, require them to give customers notification and a chance to opt out of the program, or require them to ask permission before they enroll customers in an overdraft program.

A total of 1,930 comments scorched the board’s website, and an overwhelming majority of them were from consumers wanting to see a change in how overdraft fees are assessed.

Automatically granting overdraft protection to checking accounts and debit card users has been a practice that has swept the banking industry in the past decade. Instead of bouncing a check or having a debit card declined, automatic overdraft protection covers the amount, up to a limit — for a hefty fee.

Consumers have complained they didn’t know they were enrolled in the programs, didn’t know when they were triggering fees and often would rather just have their debit cards declined if there are insufficient funds. Out of a random sampling of 100 comments to the Fed, 94 agreed that adjustments are needed to the current system. All of comments asking for change were written by consumers. The six that disagreed were all sumbitted by financial institutions.

Bailout a sore spot
The main complaint of those in favor of changing the overdraft regulations was simple: It’s not fair. Consumers argued that banks, credit unions and other financial institutions are bleeding the ordinary citizen dry by charging them money for not having money. Another major sore spot was financial institution bailouts, which consumers cried is giving their tax dollars to banks that are ripping them off.

For a lot of consumers, new overdraft regulation would be a refreshing and long-awaited change.

Lynne Woodside of Old Lyme, Conn., compared the proposed regulations to taking down the Mafia. “We can’t do anything without a bank,” she says. “It’s like legalized extortion or ‘protection money.'” If the alleged Mafia was doing it they’d be wiped out or in prison, not being bailed out by the victims (taxpayers). Please level the playing field.”

This kind of rob Peter and stab Paul practice needs to be outlawed.

— Pamela Buckner
Springfield, Va.

Pamela Buckner of Springfield, Va., went with a similar theme. “This kind of rob Peter and stab Paul practice needs to be outlawed,” she says. “I am sick of big banking bleeding me dry at both ends of the spectrum — bailout and cleanout!”

Other consumers offered solutions instead of complaints, such as more reliance on technology. Theresa Drozda of Scottsdale, Ariz., proposed that financial institutions start sending text messages, e-mails or automated phone messages to people that alert them when their balance nears zero. “Today, they text you for everything under the sun, and it seems it could be done for us,” she says. “Most people who overdraw do not mean to do so, so this process could really cut down on unnecessary paperwork, stress and costs, as well as improve customer relations.”

Financial institutions react
Financial institutions arguing against new regulation claimed overdraft fees protect consumers from themselves. They say the ability to complete a transition without sufficient funds is a must in an emergency situation, and that overdraft protection allows customers to avoid other fees, such as return check fees assessed by merchants.

Dennis Schaefer, president of the SIU Credit Union in Carbondale, Ill., says allowing customers to completely opt out of overdraft fees would confuse them rather than help them. He wants customers to be able to use overdraft services for all transactions or no transactions. “A ‘partial’ opt out is likely to confuse customers and lead to the need for extensive explanations as to the different types of transactions that are or are not covered by the customer’s choice with respect to an opt-out decision,” he says. “A simple ‘on or off’ solution will be much easier for customers to understand.”

Other institutions were more concerned about the logistical side to overdraft changes. Michelle Johnson, representing the American State Bank in Erskine, Minn., says customers who choose to change their overdraft status will require a new ATM card, which “would be confusing and aggravating to customers.” She also states that disclosing new overdraft regulation in a customer’s statement could cause a “substantial financial loss to any financial institution that already has a large supply of statements on hand.”

According to the Federal Reserve, additional consumer testing will be conducted after all comments are evaluated, and a decision as to which route will be taken is expected later this year.

See related: Fed invites comments on automatic overdraft programs, Being declined at checkout trumps paying overdraft fees, Debit cards pushing older adults into overdraft trouble, 5 secrets to smart debit card use

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