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Overdraft rules have a long way to go

July 06, 2010|David Lazarus

New rules kicked in last week for sky-high overdraft fees changed by banks. That's a good thing.

The bad thing is that the rules apply exclusively to ATM withdrawals and one-time-only debit card purchases, as opposed to recurring payments such as monthly deductions for a newspaper subscription or utility bill.

Banks also remain free to enroll customers without permission in overdraft programs covering other transactions, such as payments with checks.

And some are working hard to persuade customers to sign up again for full "protection," which can include fees as high as $39 for customers who didn't know that, say, a $2 cup of coffee surpassed available funds.

"Customers should just say no to these astronomical fees," said Jean Ann Fox, director of financial services for the Consumer Federation of America.

Overdraft fees are one of the banking industry's most profitable and consumer-unfriendly business practices. Banks currently generate about $38 billion annually from service charges on deposits.

Think of overdraft fees as mini-loans. You go over your spending limit, the bank fronts you some money to cover the payment, and then you have to pay back the cash — with interest.

The Federal Deposit Insurance Corp. said in a 2008 report that if you became overdrawn by $20, and if you got slapped with a $27 overdraft fee, repaying your account within a couple of weeks would be the equivalent of having received a loan with an annual percentage rate of 3,520%.

The Federal Reserve finally roused itself from its consumer-protection slumber and concocted new overdraft rules last year as part of a rejiggering of regulations for financial service providers.

Beginning July 1, people opening new checking accounts couldn't be enrolled automatically in overdraft programs involving debit cards and ATM withdrawals. The rule takes effect for existing account holders Aug. 15.

Many banks are responding by doing away with free checking unless a customer maintains a large balance or meets other requirements. Many are also continuing the practice of enrolling people in overdraft programs without prior approval for checks and other payments.

"When it comes to debit cards, we heard from our customers that they don't want to spend money they don't have," said David Owen, who oversees checking accounts at Bank of America. "Customers still see a lot of value in overdraft protection on the check side."

If that were true, of course, banks wouldn't have to force people to join overdraft programs. Customers would willingly opt in.

Owens is correct when he says many customers prefer debit card transactions to simply be rejected at the cash register rather than face overdraft fees. I suspect many people feel the same way about checks. If not, they can certainly sign up for overdraft protection.

Legislation is pending in both the House and Senate to require a customer's permission before any overdraft service can be offered. The banking industry is lobbying against the bills.

Leslie Parrish, senior researcher at the Center for Responsible Lending, said "opt in" should be the norm for all overdraft programs. She also said any fees for exceeding available funds should be commensurate with the amount you go over.

"The fees that are changed now have no relation to the service being provided," Parrish said.

The typical overdraft fee at leading banks runs from $33 to $37, according to a survey last week by the Consumer Federation of America.

More than half of the biggest banks also charge an additional fee if customers don't cover the overdraft within a few days.

And even though most banks limit how many overdraft fees can be charged on a single day, fees can still run in the hundreds of dollars.

"The new overdraft rules are a step in the right direction," Parrish said. "But there's still a long way to go."

Spokeo update

Remember Spokeo, the Pasadena-based website that spooked a lot of people with its stalker-ready aggregation of people's addresses, phone numbers and other personal information? My recent column on the company prompted many readers to opt out from being included in Spokeo's database — just as the site's co-founder, Harrison Tang, had done to protect his own privacy.

And now the Center for Democracy & Technology, a digital-rights advocacy group in Washington, D.C., has lodged a complaint with federal regulators over what it says are Spokeo's "unfair and deceptive business practices."

"We're not saying that they don't have a right to make information available about people," said Justin Brookman, a senior fellow at the center. "We're saying that consumers have a right to see what data they might have about them and to make changes."

Specifically, he said people may not be aware of the full scope of Spokeo's digital dossiers unless they pay at least $14.85 for a minimum three months of access to the site's premium service.

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