Overdraft fees: Finally, fair warning

By Michelle Singletary
Sunday, November 15, 2009

It only took a deep recession but finally the need to protect consumers is outweighing the almighty concern for business to make a buck.

By next summer, financial institutions will be prohibited from charging customers overdraft fees on transactions at automated teller machines and with debit cards unless the customer consents to such overdraft protection.

What the Fed is doing deserves kudos.

"The final overdraft rules represent an important step forward in consumer protection," Fed Chairman Ben S. Bernanke said.

But as far as the new rules go, the change doesn't go far enough, some consumer advocates complain.

"We appreciate that the Fed chose to implement the strongest overdraft reform rule it was considering," said Eric Halperin, director of the Washington office of the Center for Responsible Lending. "But this improvement is undermined by the Fed's failure to propose or enact necessary safeguards against a host of unfair practices."

For instance, Halperin said, the regulatory change does not prohibit institutions from charging an unlimited number of overdraft fees in a single day, even if the transactions are for small amounts.

Although long overdue, these new rules will at least help many people avoid the nasty bite of overdraft charges for ATM and debit-card transactions. That's something to praise.

The final rule requires consumers to give their informed consent, or opt in, before overdraft fees may be assessed on ATM and debit card transactions. The rule does not cover checks. It also doesn't cover recurring debit charges a person may have set up to pay utility or other bills.

Fed officials said that, based on consumer testing, they decided not to include checks. Research showed that most consumers wanted overdraft services to cover important bills.

"As we implement this new rule, we will work hard to balance enhanced consumer protections while retaining the benefits of processing important payments such as utilities, rent and mortgage payments," said Edward L. Yingling, chief executive and president of the American Bankers Association.

Institutions have a mandatory compliance date of July 1. However, existing bank customers could technically still be charged an overdraft fee until Aug. 15. The Fed said the extra time was given so customers could explore less expensive options to cover shortfalls in their banking accounts.

This is what will happen: Existing and new account holders will be sent a written notice, through the mail or electronically, telling them that if they want overdraft protection for ATM and one-time debit-card transactions (such as the purchases you might make at the grocery store, gas station or Starbucks), they have to opt in. The notice has to explain the financial institution's overdraft services, including the fees associated with the service, and the consumer's choices. The institutions are required to provide written confirmation of your opt-in choice.

If you don't respond to the notice, it's considered not opting in. If you don't opt in, the bank cannot charge you an overdraft fee even if it mistakenly allows an ATM or one-time debit-card transaction to go through when there is not enough money in your account. Institutions have to provide consumers who do not opt in with the same account terms, conditions and features as provided to consumers who elect to take overdraft protection.

Be prepared, because not opting in means your electronic transactions will probably be denied if you are lacking funds and still try to buy something or withdraw money.

Whether you choose to opt in or not, you have the right to change your mind.

Overdraft fees have become a huge revenue generator for financial institutions. The average cost of overdraft fees was just over $26 per item in 2007, according to a report from the Government Accountability Office, although larger banks tend to charge more.

Overdraft fees rose 35 percent from 2006 to 2008, according to the Center for Responsible Lending. The nonprofit group said banks and credit unions collected nearly $24 billion in such fees in 2008.

More than 50 million Americans overdrew their checking account at least once over a 12-month period, with 27 million account holders incurring five or more fee assessments.

After the new rules go into effect, if you agree to be charged an overdraft fee for your ATM and debit-card transactions, don't whine when the bill for that protection comes due. You finally have fair warning.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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