New rule will bar overdraft fees, protection

Of more than 25 percent of consumers who overdraw their bank accounts every year, many are surprised to learn that their banks automatically enrolled them in overdraft coverage when they opened their accounts. The banks cover consumers’ shortfalls but the penalties they charge for doing so often far exceed the transactions. If consumers don’t pay their banks back within a few days, they can incur more fees.

To better protect consumers, beginning this summer the Federal Reserve Board will prohibit banks from charging overdraft fees for debit card and ATM transactions unless their customers consent, or “opt in.” Many consumers are expected to pass, choosing to have their transactions declined for no fee when they don’t have enough money in the bank. The Federal Reserve’s new rules do not apply to checks or automatic bill payments.

Although consumer groups applaud the Federal Reserve’s move as a good first step, they say more needs to be done. Currently, a bank can charge a customer a fee for each transaction that falls short. There is no cap on penalties. Legislation is pending in Congress that would limit the number of overdraft charges and require that fees be proportional to a bank’s costs.

“We think there is more comprehensive overdraft reform that needs to take place,” said Leslie Parrish, senior researcher for the North Carolina-based Center for Responsible Lending. “For now, we urge consumers not to opt in.”

Overdraft fees are big business for an industry struggling to regain its footing. Financial institutions collected nearly $24 billion in overdraft fees in 2008 –$12 billion of which was generated from debit cards and ATMs, according to the center’s research.

Most of the debit card transactions that trigger overdraft fees are for small ticket items, with the typical costing around $20. Meanwhile, the average overdraft fee was $34, the center found.

“Most people are being charged $2 in fees for every dollar that they spend,” Parrish said.

Even so, the Federal Reserve’s new rules may already be changing the financial landscape. In March, Bank of America, the country’s largest bank, announced that it will stop allowing customers to overdraw their checking accounts with their debit card transactions, a move the bank said its customers wanted.

Other financial institutions plan to continue providing overdraft coverage but are working to make it more palatable to customers. In an e-mail, a spokesman for Atlanta-based SunTrust said the company is still “working through the final details of changes to our overdraft policy.” The bank currently charges a $36 fee for most debit card overdrafts. Another $36 “extended overdraft fee” is imposed when an account balance remains overdrawn for seven consecutive days.

To reduce customer fees, JPMorgan Chase & Co. last week started posting debit card and ATM purchases in the order they occur, rather than after larger checks, which often created more overdrafts. It also eliminated fees on accounts overdrawn by $5 or less.

In January, the company dropped the number of daily overdraft fees a customer can incur with from six to three. Chase spokesman Tom Kelly said these changes and the Federal Reserve’s “opt in” rules are expected to cost the bank $500 million annually after taxes. He declined to say how much the company makes from the fees.

In recent weeks, Chase has come under criticism for aggressive marketing to get customers to opt in. “Overdraft can be confusing, so we are encouraging customers to come in, talk to a banker and make an informed decision whether or not to opt in,” Kelly said.

With so much money at stake, consumer advocates are warning account holders to resist the sales pitch. “Don’t let your bank scare you into signing up for something that is so unfair to you and lucrative to them,” said Jean Ann Fox, director of financial services for Consumer Federation of America.

Change is coming

• Current practice: With standard overdraft practices, your bank will cover your debit card or ATM transaction for a flat fee of about $20-30 each time you overdraw your account. For example, if you make a purchase with your debit card and overdraw your account, your bank will charge you a fee. If you then make another purchase, you will be charged another fee.

• What's new: Under new Federal Reserve Board rules, your bank must first get your permission to apply its standard overdraft practices to debit card and ATM transactions before you can be charged overdraft fees. The new rules do not cover checks or automatic bill payments that you may have set up for paying your mortgage, rent or utilities.

• Existing accounts: If you do not opt in, beginning August 15, your bank's standard overdraft practices won't apply to your everyday debit card and ATM transactions. These transactions typically will be declined when you don't have enough money in your account, but you will not be charged overdraft fees.

• New accounts: If you open a new account on or after July 1, your bank cannot charge you overdraft fees for everyday debit card and ATM transactions unless you opt in. If you open a new account before July 1, 2010, your bank will treat you as an existing account holder: you will receive a notice about your bank's standard overdraft practices and will have to decide if you want them for everyday debit card and ATM transactions.

• Other options: Your bank may also offer a line of credit or a link to your savings account or credit card to cover transactions when you overdraw your account. Banks typically charge a fee each time you overdraw your account, but these overdraft protection plans may be less expensive than their standard overdraft practices.

Source: Federal Reserve Board

Check our sources

• Consumer Federation of America

• Center for Responsible Lending

• Federal Deposit Insurance Corporation

• Federal Reserve Board

Have a news tip?

If you have a tip about government waste, consumer rip-offs or threats to your health and safety, contact us by email or phone: 404-526-5041.