Banks Given New Guidelines For Overdraft Coverage

Thanks to a change in the law, bank customers have the right to "opt in" for overdraft coverage that used to be mandatory, carrying with it hefty fees whenever a consumer exceeded their account balance.

But even though consumers no longer have to be covered by these plans, the Federal Deposit Insurance Corporation (FDIC) is telling its member banks they must still maintain "robust" oversight of the overdraft programs for consumers who choose to remain enrolled. FDIC has issued guidance to make sure member banks comply with the rules.

"This guidance promotes common sense overdraft programs by setting out our expectations. While many community banks already prudently manage their overdraft programs, some banks operate automated programs that lead to excessive use of these high-cost, short-term credit products," said FDIC chairman Sheila C. Bair.

"When banks spot a pattern of excessive use of an automated overdraft program, they should contact their customers about a more appropriate and lower-cost alternative that better suits their needs."

In response to concerns about automated overdraft programs, the FDIC on August 11, 2010, proposed guidance for public comment on how the banking institutions it supervises should monitor and oversee overdraft programs. The proposed guidance stemmed from both the FDIC's November 2008 Study of Bank Overdraft Programs that disclosed growing use of such programs and increases in consumer complaints related to overdraft programs.

The FDIC said it received more than 900 written comments on the proposed guidance from financial institutions, their industry trade groups, individual consumers, consumer advocacy and public interest groups, and one member of Congress. The final guidance incorporates suggestions from commenters to refine and clarify expectations.

The guidance won enthusiastic support from at least one consumer group.

"Unfair transaction posting"especially the practice of reordering checks and debit card transactions to deduct the largest checks and charges first"significantly increases the number of overdraft fees customers are charged," said Michael Calhoun, president of the Center for Responsible Lending (CRL). "Customers are charged a separate fee"usually about $35 per item-for each charge that is posted to an overdrawn account. By posting the largest items first, the balance dips below zero sooner, and each subsequent, often small transaction, triggers a fee."

Calhoun said the FDIC guidance sets a standard he thinks other federal regulatory bodies should follow.

The final guidance provides information to assist FDIC-supervised institutions in identifying, managing and mitigating risks associated with overdraft payment programs, including risks that could result in serious financial harm to certain consumers. The guidance focuses on automated overdraft programs and encourages banks to offer less costly alternatives if, for example, a borrower overdraws his or her account on more than six occasions where a fee is charged in a rolling 12-month period.

Additionally, to avoid reputational and other risks, the FDIC expects institutions to institute appropriate daily limits on customer costs and ensure that transactions are not processed in a manner designed to maximize the costs to consumers, such as by processing checks from the largest to the smallest. The guidance also reminds institutions of existing requirements under applicable laws and regulations.