Now that banks aren't allowed to automatically enroll all customers in overdraft protection programs, the Federal Deposit Insurance Corp. has proposed new rules on how banks run those automated overdraft payment programs for consumers who chose to remain in them.
The proposal primarily focuses on finding effective ways for banks to monitor their overdraft programs for excessive or chronic use by customers as a form of short-term, high-cost credit instead of its intended use: protection against inadvertent overdrafts. It also provides an overview of how banks can avoid compliance and safety-and-soundness risks.
"This guidance proposes common-sense ways to mitigate risks to both consumers and banks. Ensuring that their customers are educated on the appropriate use of overdraft payment programs is just one more example of how community banks understand their customers and play a role in helping individuals find suitable financial products," FDIC Chairman Sheila C. Bair said.
Consumers who chose to remain in an overdraft program will continue to pay a fee whenever the bank covers a debit purchase for which there are insufficient funds.
Under new rules that recently took effect, banking institutions already must give customers an opportunity to opt-in to programs that charge a fee to cover ATM and point-of-sale overdrafts.
It's anticipated that most customers will not opt in for this service. Consumer advocates are concerned about those who do.
Less costly options
American families, especially those most vulnerable financially, could save millions of dollars a year in costly overdraft fees if guidelines the FDIC proposed are adopted, said Michael Calhoun, President of the Center for Responsible Lending.
The guidelines would encourage the banks the FDIC oversees to offer customers lower-cost overdraft alternatives rather than charge unlimited high-cost overdraft feesas many banks do, even on small debit card transactions.
Under the proposal, a bank would contact a customer who incurs six overdraft fees within 12 months and offer and explain less costly options. The bank would be encouraged to provide the customer with a reasonable opportunity to choose one of them. Banks the FDIC oversees also would be discouraged from re-ordering transactions to maximize overdraft fees.
The proposal comes just days before new Federal Reserve's August 15th rules take effect requiring banks and credit unions to obtain a customer's signature before enrolling them in a costly overdraft program for debit cards.
Many banks don't give consumers real choices among alternatives, Calhoun said. Instead, they steer customers into the highest cost overdraft coverage they offer.
