Fed adopts strong rules blocking bank overdraft fees

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Financial institutions will be prohibited from charging consumers fees for paying overdrafts on automated teller machines or one-time debit card transactions unless a consumer agrees to the protection first, according to strong new rules for the $38 billion overdraft industry approved Thursday by the Federal Reserve.

“Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft protection,” said Federal Reserve Chairman Ben Bernanke.

Many consumers automatically receive overdraft protection, where they can overdraw their accounts, and banks will cover the transaction with fees as large as $35 for each overdraft, regardless of the size of the draw.

With the new rules, consumers will be unable to withdraw money from ATMs if they have no funds and they opt out of the protection. The central bank added that tests show that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions.

The rules do not cover overdraft protection for checks or recurring ATM payments. A Fed official said that based on its studies consumers preferred to have overdraft protection for checks or recurring ATM payments because these kinds of fees are for major payments they want to make sure get paid, such as mortgage or utility payments.

The study showed that consumers didn’t want overdraft protection for discretionary purchases, such as buying a coffee with at one-time debit card transaction, where the overdraft fee was often significantly larger than the purchase made.

The rule takes effect next August 15 for consumers that have existing accounts and choose to opt out of the protection and July 1 for new accountholders. Banks are expected to begin sending out notices to existing customers that have overdraft protection shortly to make sure they have time to receive responses by Aug. 15 so they are no longer charging consumers for overdraft protection if they don’t want it.

The central bank added that tests show that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions.

Consumer advocates heavily favor the opt-in option to help break the cycle of automatic enrollment that can lead to unhappy surprises.


(c) 2009, MarketWatch.com Inc. Source:? McClatchy-Tribune Information Services.