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November 13, 2009 in Business
Fed asserts protective role in banning fees on overdrafts
Flexing newfound muscle as consumer protector, the Federal Reserve on Thursday banned overdraft fees on automated teller machine and debit-card transactions unless consumers have actively opted for an overdraft protection service.
The new rules mean that banks will be required to get their customers’ permission before charging fees when debit-card and ATM transactions trigger an overdraft. Customers who don’t elect to have overdraft coverage will see their charges rejected if they put their bank accounts into the red.
Consumer advocates lauded the move as long overdue but said stronger measures contained in pending legislation introduced by Democrats were needed as well.
The Fed’s rule, which takes effect July 1, does not cover fees for overdrawn checks or overdraft charges from recurring debit transactions, such as automatic payments for bills. The proposed laws would cover those transactions as well.
“The Fed should be applauded,” said Lauren Bowne, staff attorney for Consumers Union, which had argued that the overdraft charges were really a form of high-interest loans. “Soon, banks will have to persuade their customers that these overdraft programs are beneficial compared to other lower-cost alternatives.”
But other research and consumer groups were disappointed.
“We appreciate that the Fed chose to implement the strongest overdraft reform rule it was considering,” said Eric Halperin, head of the Center for Responsible Lending’s Washington office. “But this improvement is undermined by the Fed’s failure to propose or enact necessary safeguards against a host of unfair practices.”
Over the protests of consumer groups, service charges on bank-deposit accounts have been an increasing profit center for banks in recent years, totaling about $182 billion in the five years through 2008, according to the Federal Deposit Insurance Corp.
In the first six months this year, such fees raked in $21.5 billion, nearly as much as the $22.1 billion total for all of 1999, the FDIC tally shows.
Under former Chairman Alan Greenspan, the Federal Reserve had maintained a hands-off attitude toward regulations designed to protect consumers, with Greenspan arguing that free-market competition would work to benefit the public.
But current Fed Chairman Ben Bernanke has adopted a more consumer-friendly stance following the Fed’s failure to rein in mortgage lending, which is widely blamed for helping to create the global financial crisis, and the response in Congress, where some legislative proposals challenge the central bank’s authority.
The Fed’s move toward consumer protection comes as the Obama administration is trying to strip the agency and three other bank regulators of such powers and place them with a new Consumer Financial Protection Agency.
The Fed’s mission, originally defined as promoting full employment and maintaining price stability, was expanded to consumer protection in the 1960s when Congress tapped it to oversee enforcement of the landmark Truth in Lending Act.
The central bank was further given the authority to write rules governing home lending in 1994 but never did so until last year, after the collapse of the mortgage and housing markets had occurred.
“Their failure to act to rein in mortgage lending ultimately triggered the collapse of the economy,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group.
Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has introduced legislation limiting bank overdraft fees, and Rep. Carolyn Maloney, D-N.Y., has introduced a similar bill in the House.
Advocacy groups say consumers would rather have a debit-card transaction denied than pay substantial overdraft fees.
According to the Center for Responsible Lending, the average shortfall is $17 for an overdraft triggered by a debit-card transaction – and the fees for covering the transaction can cost twice as much.
The group also contends that most banks manipulate their debit-clearing systems so that high-dollar transactions are debited first each day, which also can drive up fees.
Northwest wheat 
Ninch on November 13 at 7:36 a.m.
This is really only protection for “stupid and/or irresponsible consumers” who do not have a clue about their bank balance and yet continue to use debit cards and write checks. My family surely does not need it…My kids and I are fully cognizant that our bank accounts have “overdraft protection” and not once has either of us had to use it and thus pay the fees (of which we are also very aware). We also know that we can opt out of the overdraft protection option, but in an emergency situation the fees may be well worth it.
As for automatic payments… very convenient, but again if your bank account is in danger of being overdrawn, automatic payments are a very bad choice. I think consumer education would be a much better approach, but then again way too many “consumers” keep having to pay fees because they did not “learn” from the first overdraft penalty. Some people just do not want to grow up and continually expect others to watch out for their interests. Disgusting.
Note… the actions that the so-called “consumer” advocates still want over and above these recent “protections” will reduce overdraft fees for the scofflaws but will lead to banks and credit unions charging “fees to all of us” for the privilege of having and using debit cards, which are now free. Is that fair or equitable? Hardly.
Bottom line, as usual the responsible “consumers” will end up paying for the irresponsible ones because the latter need “special protections” from their own bad behavior.
Megan_B on November 13 at 9:27 a.m.
One fee I would like to see diminished is the one placed on your account for trying to deposit a bad check. If your employer’s account doesn’t have enough money to back-up the check, and you try to put it into your account, you’re charged around $12 as a fee. How on earth were you supposed to know the check was bad? This is why most companies charge a huge fee is your check is bounced, but not all recipients of these bad checks have the power to do the same.
lewis8457 on November 13 at 9:47 a.m.
banks are a scam the poor people can not afford, banks should only be used by rich people.
making people think they need credit is one of the biggest banking scams in this country
i can cash my paycheck at wal-mart for 3 bucks why would i go to a bank and pay 5?
madscientist on November 13 at 12:56 p.m.
Lewis,
or you can open a bank account (for free) and deposit your check, and keep all the money. What a concept!