The Federal Reserve released a long-awaited rule Thursday requiring banks and credit unions to get consumers’ permission before charging steep fees to pay debit card and ATM overdrafts.The final rule, which comes amid intense congressional scrutiny of bank overdraft practices, will take effect by July 1, 2010, for new customers and Aug. 15, 2010, for existing customers. The Fed released a preliminary rule on debit card and ATM overdrafts late last year, but didn’t say then if it would require banks to get consumers’ consent before signing them up for these programs.
Fed Chairman Ben Bernanke in a statement said the new regulation “represent(s) an important step forward in consumer protection.”
Yet, Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents the nation’s largest banks, says the restrictions will “result in confusion and frustration” for millions of Americans whose debit card and ATM overdrafts are rejected.
Consumer advocates also criticized the Fed rule, saying it doesn’t go far enough to curb overdraft fees that are pushing some people into financial turmoil. The regulation, for instance, doesn’t restrict fees charged by banks for overdrawn checks and recurring debit card transactions, such as monthly bill payments. Legislation introduced by Rep. Carolyn Maloney, D-N.Y., and separately by Sen. Chris Dodd, D-Conn., would restrict both check and debit card overdrafts.
“The Fed is acting 10 years late to partially solve a problem that Congress is going to have to completely solve,” says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. “They’re trying to do the least that they can get away with.”
Overdraft fees have long been a profit center for banks, but USA TODAY research has found that they are now the industry’s single-largest driver of consumer fee income. In 2009, banks are expected to reap a record $38.5 billion from overdraft and insufficient-funds fees, nearly twice the $20.5 billion they stand to collect from credit card penalties.
Mierzwinski says Congress should force institutions to disclose APRs when extending overdraft credit and limit the number of fees that can be charged.
Some experts warn that as regulators restrict certain practices, banks will just find new ways to make money off vulnerable consumers.
“Banks are highly acclimated to exploiting the next great legislative loophole,” says Jake Drew, a former vice president in MBNA and Bank of America’s revenue-optimization group. “The best banking reform efforts of the Federal Reserve and Congress, so far, are merely symptomatic and reactive.”
Via USA Today