By Michelle Singletary
Thursday, March 26, 2009
Consumer advocacy groups are urging bank customers to weigh in on a proposed rule change by the Federal Reserve concerning a practice called overdraft protection.
What with a bad economy, unemployment and a dismal housing market to worry about, you might be tempted to ignore this issue. But if you've ever had to pay a nasty $35 charge for spending more than what you had in your bank account, this is one debate you need to participate in, urges Consumers Union and the Center for Responsible Lending.
The Federal Reserve has proposed a rule change giving customers the right to instruct their bank whether or not to pay overdrafts for automated teller machine (ATM) withdrawals or one-time debit card purchases.
It used to be that overdraft protection was just for check transactions. For a fee, the bank would honor a check even if there weren't enough funds in the account. That overdraft service is now extended to ATM withdrawals and point-of-sale debit card purchases. In most cases, customers are automatically enrolled.
ATM and debit cards have been marketed as the good plastic -- unlike credit cards, these were supposed to be the same as cash. Customers think they can't swipe and spend more than what is in their bank account, but they are wrong. This plastic is not the same as cash.
A national poll by the Consumer Reports National Research Center found that 48 percent of consumers erroneously thought their ATM card would not work if they attempted to withdraw more money than was available.
An overdraft study published late last year by the Federal Deposit Insurance Corp. found that at least 81 percent of banks allowed overdrafts at ATMs and point-of-sale/debit transactions. An overwhelming majority of banks in the FDIC survey did not inform customers that they lacked enough money in their accounts to cover their electronic transactions.
Only about 8 percent of the financial institutions informed consumers that funds were insufficient before transactions were completed, thus giving them a chance to avoid both the overdraft and the fee. Fees assessed by banks ranged from $10 to $38. The median fee was $27.
In its proposed change to Regulation E (electronic fund transfers), the Federal Reserve is considering two alternatives:
First option: Institutions would be prohibited from automatically enrolling customers for overdraft protection services. Instead they would have to first give customers notice and a reasonable opportunity to opt out of the service.
Second option: Institutions would be required to get a customer's permission upfront to provide overdraft protection. Customers would have to choose to opt in before any fees could be assessed for an overdraft authorization.
The proposed rule change would apply only to overdrafts for ATM withdrawals and debit card purchases. It would not affect overdraft protection for checks or recurring debit charges.
"After evaluating the comments and conducting additional consumer testing, we expect to issue a final rule later this year," Sandra F. Braunstein, director of the Fed's division of consumer and community affairs, told a House subcommittee recently.
The Fed wants to know what consumers think. You only have until Monday to submit a comment. The easiest way is to respond by e-mail or go online. E-mail your comments to firstname.lastname@example.org. Put "Docket No. R-1343" in the subject line. Online you go to http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
I really don't see where there's any debate on this issue. People should have the opt-in choice so they can avoid transactions that have wreaked havoc with their finances.
For example, a 72-year-old retired schoolteacher on a limited income was charged $1,000 in ATM and debit overdraft fees within six months. Her fees totaled nearly $350 for one month alone. The woman's daughter, who has since taken over managing her mother's account, was outraged to learn the bank had regularly allowed electronic transactions when her mother's account was in the negative.
"How insane to continue accepting overdrafts when the funds aren't there," the daughter said.
Without question, bank customers should responsibly manage their money and banking accounts. But the ease of using ATM and debit cards has made people careless.
The more consumer-friendly way to address this problem is to allow people to be informed that they are broke before a transaction is approved. At that point, they can decide whether they want to accept the overdraft protection and the fee. I doubt the banks will suffer a significant loss of income. There are plenty of people who will still choose to pay the price for this service.
-- On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and at http://www.npr.org.
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