U.S. banking regulators consider toughening overdraft rules even more

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By Ylan Q. Mui and Sonja Ryst
Washington Post Staff Writer
Tuesday, August 17, 2010

New regulations took effect this week banning banks from allowing consumers to automatically overdraft their checking accounts -- and charging those customers high fees in the process -- a practice that government officials say unfairly penalizes the poor.

Federal regulators are considering making the rules even tougher. Last week they proposed new restrictions on smaller banks that have been pushing into the overdraft business as big banks have scaled back.

As of Sunday, banks could no longer authorize debit card purchases and ATM withdrawals if there was not enough money in the account to pay for the transaction unless customers opt in to the service. The new rules effectively put an end to the infamous $40 cup of coffee, in which a customer overdraws an account with a $3 latte and gets hit with a $37 overdraft fee. They do not, however, cover checks or recurring debit card charges, such as automatic bill payments.

"I think it will help consumers manage their account more responsibly," said Pam Banks, senior policy counsel for Consumers Union, an advocacy group.

Though the rule has been hailed as a significant win for consumers, it represents a severe blow to the banking industry, which is also grappling with new restrictions from an overhaul of the rules for credit cards and investment banking.

Research firm Moebs Services estimated that overdraft charges brought in $37.1 billion last year, and banks have reported that limiting the fees will cost them hundreds of millions of dollars. Several banks have dropped their overdraft programs altogether, including Bank of America. (Citibank has never charged overdraft fees.)

Banks have spent the summer deluging customers with e-mails, letters and phone calls informing them of the change and, in some cases, urging them to opt in. In a poll in July, research firm Mintel Comperemedia found that more than a quarter of consumers had enrolled in such a program and another quarter planned to opt in. The rest of those surveyed said they would not sign up for overdraft. Still, the survey found that many consumers were not familiar with the details of the changes.

"Consumers are aware that changes are coming to their overdraft programs but are not exactly sure what it means for them," said Susan Wolfe, vice president of financial services at Mintel.

Navy Yard resident Cassandra Stewart, for one, said she thinks the new rules are a little confusing. She said she learned about overdraft fees the hard way. She used to overdraft her checking account to pay for expenses such as eating out or going to the grocery store. The next day she would deposit enough money to cover her withdrawal. But when she later checked her account, she would discover that her bank had hit her with an overdraft fee of about $35.

When her bank gave her the choice to leave the overdraft program, Stewart said, "I opted out to make sure that I don't get into the same predicament."

Some banks see an opportunity as some of the nation's largest financial institutions exit the overdraft businesses. A Moebs survey this summer found that about 7 percent of banks have begun offering overdraft programs, compared with about 6 percent that eliminated them.

"Community banks, small regionals and credit unions are picking up the slack," said Mike Moebs, economist and chief executive of the firm.

Indeed, research by the Center for Responsible Lending, a consumer advocacy group, found that some industry consultants are encouraging these banks to target the most frequent overdraft offenders. The Federal Deposit Insurance Corp. found in 2008 that multiple offenders held only 9 percent of the accounts at banks that it oversees but generated 84 percent of the fee revenue.

The FDIC last week proposed more stringent overdraft guidelines for the roughly 5,000 community banks in its jurisdiction. They would strictly prohibit banks from encouraging frequent offenders to enroll in overdraft programs without clearly informing them of alternatives. Banks also could be required to contact customers with six or more overdrafts in a year and offer them other options.

The guidelines would mandate that banks place an "appropriate" limit on overdraft fees, such as limiting the dollar amount or the number of times the fee is assessed, a provision that has long been sought by consumer groups but was not included in the Federal Reserve's regulations that took effect this week. Finally, the guidelines call for a review of the order in which banks process checks to limit overdraft fees. The deadline for public comment on the proposed rules is Sept. 27.

The FDIC said the number of complaints it has received about overdraft doubled from 2008 to last year, prompting the agency to craft guidelines that go beyond the Fed's regulations.

"Many institutions have lived up to these guidelines, but we want to make sure that the guidelines and our expectations are clear," said Sandra L. Thompson, director of supervision and consumer protection at the FDIC.


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