By James Limbach
ConsumerAffairs.com
November 12, 2009
Under a new rule proposed by the Federal Reserve Board, financial institutions will no longer be able to charge consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless the consumer consents, or opts in, to the overdraft service for those types of transactions.
Before opting in, the consumer must be provided a notice that explains the financial institution's overdraft services, including the fees associated with the service, and the consumer's choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act.
"The final overdraft rules represent an important step forward in consumer protection," said Federal Reserve Chairman Ben S. Bernanke. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."
The Board's consumer testing shows that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions unless they affirmatively consent, or opt in. At the same time, testing shows that most consumers want overdraft services to cover important bills, such as checks they use to pay rent, utilities, and telephone bills.
To ensure that consumers have a meaningful choice, the final rules prohibit financial institutions from discriminating against consumers who do not opt in. Institutions would be required to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.
"Overdraft fees can be costly," said Governor Elizabeth A. Duke, the chair of the Board's Committee on Consumer and Community Affairs. "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."
The Center for Responsible Lending, which has long pushed for regulation of overdraft fees, calls the Fed proposal inadequate.
"The Federal Reserve Board's action today on debit card overdraft fees legitimizes an abusive product without providing any substantive protections for bank customers," said CRL Director Eric Halperin. "We appreciate that the Fed chose to implement the strongest overdraft reform rule it was considering, namely requiring banks and credit unions to ask new and existing customers before charging overdraft fees on debit card transactions. But this improvement is undermined by the Fed's failure to propose or enact necessary safeguards against a host of unfair practices.
Halperin says the rule does not prohibit institutions from charging an unlimited number of overdraft fees in a single day, even if the transactions are for small amounts, which most are.
"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. "Bills in the House and Senate, introduced in recent weeks by Rep. Carolyn Maloney and Sen. Christopher Dodd, would limit overdrafts to no more than one a month and six a year. The legislation also would require that fees be reasonable and reflect an institution's cost of covering an overdraft."
