Flexing newfound muscle as consumer protector, the Federal Reserve on Thursday banned ATM and debit card overdraft fees unless customers have opted to pay to ensure that balance-busting transactions go through.
The new rules, which take effect July 1, mean that if you don't have overdraft protection, any debit card purchase or ATM cash withdrawal will be rejected if it exceeds the amount of money in your account.
And if you do want overdraft protection, your bank will have to give you a notice explaining the service and its fees before you can accept it.
Overdraft fees typically range from $10 to $38 for each transaction, according to a 2008 study by the Federal Deposit Insurance Corp.
Such fees and other service charges on bank-deposit accounts have been an increasing profit center for banks in recent years, totaling $21.5 billion in the first six months of this year, nearly as much as the total for all of 1999, the FDIC said.
Consumer groups said that the rule changes were long overdue but that they didn't go far enough.
"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."
Even with the Fed's action, however, banks will still be able to provide, without your consent, automatic overdraft coverage of checks and recurring debit transactions -- and charge you for the privilege.
The Fed indicated it exempted such items because its research found that most bank customers want overdraft protection for payments of important bills such as rent, utilities and phone service.
Legislation introduced by Democrats in Congress includes a ban on automatic overdraft protection of checks and recurring charges, a prohibition backed by consumer advocates.
"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."
Edward Yingling, president of the American Bankers Assn., said the rule "addresses the primary concerns that have been raised by consumers and policymakers . . . 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."
Under former Fed Chairman Alan Greenspan, who argued that free-market competition would work to benefit the public, the agency maintained a hands-off attitude toward regulations designed to protect consumers.
But current Chairman Ben S. Bernanke has adopted a more consumer-friendly stance in the wake of the Fed's failure to rein in mortgage lending, widely blamed for helping create the global financial crisis.
The Fed's move toward consumer protection also comes as the Obama administration is trying to strip the agency and three other bank regulators of such powers and place them with a proposed 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 didn't act on it until last year, after the collapse of the mortgage and housing markets.
"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 B. 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 multiply overdraft fees by manipulating their debit-clearing systems so that high-dollar transactions are debited first each day.
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A glance at the Fed's decree
Highlights of the Federal Reserve's rules for ATM and debit card overdraft charges that take effect
* Customers must tell banks they want overdraft coverage of one-time debit-card and ATM transactions before banks can charge them for it.
* Banks must provide clear descriptions of the fees they charge for covering overdrafts before customers opt for the service.
* The "opt in" right applies to all customers, not just those opening new accounts.
* Consumers who don't opt in must be given the same account terms and features as consumers who do opt in.
* Banks can still automatically cover overdrafts created by checks and recurring debit charges, such as repeating monthly bill payments.
Source: The Federal Reserve