FDIC Slaps Banks With New Overdraft Rules

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NEW YORK (MainStreet) — Banks may have thought they were out of the woods when it came to checking account overdraft fee regulations, but boy, were they wrong.

Now the Federal Deposit Insurance Corporation is out with fresh new rules that further hamstring banks on overdraft fees. The limits are harsh on banks, but some consumer advocates are saying that’s a good thing.

A 2008 study found that there was a core group of bank customers who were repeatedly tripped up by overdrafts, and were being overly penalized as a result, with a median overdraft fee of $27. The study also found that about 9% of bank customers had 10 or more overdrafts during the study period. Back in August, the FDIC proposed tougher overdraft restrictions that banks charged to these “habitual” offenders. The “gotcha” penalties would be reduced, so consumers wouldn’t face hundreds of dollars in fees.

The regulations, which kick in on June 1 next year, include the following stipulations:

  • Banks must review the marketing and disclosure practices for their overdraft programs "to minimize potential customer confusion and promote responsible use."
  • Banks must train staff to better explain features and other options.
  • Banks must monitor their programs for excessive use, and offer alternatives to customers who overdraw their account more than six times in any 12-month period.
  • Banks must set "appropriate daily limits" on the number of overdraft fees a customer can receive.
  • Banks must consider eliminating overdraft fees for transactions that overdraw an account by a small amount.
  • Banks must consider using text messages, e-mail or other options to alert customers when their account balance gets too low.

This summer, the Federal Reserve directed banks to allow customers to either opt in or opt out of overdraft coverage – meaning they could direct the bank to cover the debit and checking purchases (and possibly incur an overdraft fee), or reject the purchase at the checkout counter, with no bank penalty triggered. Consumer Reports says that only 22% of bank customers opted in for debit card overdraft protection.

“Now that banks are no longer allowed to automatically enroll customers into high-cost debit overdraft loan programs, the vast majority of consumers are saying 'no thanks,'" said Pam Banks, senior policy counsel for Consumers Union, the nonprofit publisher of Consumer Reports. "Consumers shouldn't opt-in to high-cost overdraft loan programs because there are more affordable options available when checking account funds fall short. Bank customers should have the same right to choose when it comes to overdraft programs covering checks."

For its part, the FDIC says that banks simply have to stop treating overdrafts as a profit center. FDIC Chairman Sheila Bair, speaking at a Consumer Federation of America conference in Washington, D.C. last week, said “One important lesson from the mortgage crisis is that selling consumer products that do not serve them well ends up hurting both consumers and banks, and weakening public confidence in the financial system as a whole.”

Consequently, it looks like the government is really going to start holding banks accountable for their overdraft orgy. Consumers can only say: It’s about time.

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