Does Overdraft Protection Really Protect You?
Last week, the Federal Reserve proposed new rules forbidding "unfair or deceptive" practices by credit card issuers, such as arbitrarily raising interest rates and applying finance charges to debt that has already been repaid.
That, not surprisingly, grabbed the average consumer's attention, judging by all the e-mails and phone calls this personal finance writer received.
But there was a part of the 510-page proposal that was largely overlooked. The Federal Reserve also proposed banning "unfair or deceptive" practices related to overdrafts in deposit accounts.
You may know it as overdraft protection. If you overdraw your account, many banking institutions will cover that payment, but they'll usually charge you a fee for it.
The Federal Reserve along with two other banking regulators, the National Credit Union Administration and the Office of Thrift Supervision, have taken issue with financial institutions that assess overdraft protection fees without giving consumers the right to opt out of such program.
If the rules are finalized, which the Federal Reserve is hoping will happen by the end of the year after the public has had 75 days to comment, all banks, credit unions, and other financial institutions would, among other things, have to give their customers the right to opt out. They would also have to disclose on periodic statements the total amount assessed in overdraft and returned item fees. At the moment, only those institutions that promote or advertise their overdraft protection programs have to do that.
And if they're providing account balances through some sort of automated system, they would have to disclose how much is available for the customer's immediate use, not what is available when the bank covers an overdraft.
"Historically, banks paid occasional overdrafts on an ad hoc basis, but today overdrafts are often paid routinely using automated programs," Federal Reserve Chairman Ben S. Bernanke said when announcing the proposal last week. "While some consumers prefer to have most of their transactions honored or approved, overdraft services can be expensive and other consumers may prefer not to exceed their account balance. The proposal seeks to give consumers greater control, by ensuring they have ample opportunity to opt out of overdrafts."
Consumer groups said the proposal does not go far enough. They argue that consumers should have to opt in to overdraft protection programs rather than opt out.
"The OTS and Fed proposal show that these agencies recognize that abusive overdraft loans are a significant problem," said Eric Halperin, DC director of the Center for Responsible Lending. "However, they would continue to allow banks to enroll customers, who never signed up for it, into the most expensive credit program the bank offers."
They also urged the agencies to consider banning overdraft fees caused by check holds resulting from a bank's policy to delay the availability of deposited funds. "These rules should also recognize that it is an unfair practice for a bank to charge an overdraft fee or a bounced check fee for a problem caused by the bank's decision to place a hold on the consumer's check deposit," said Gail Hillebrand, financial services campaign manager of Consumers Union.
It's now up to the public to weigh in. The proposed rules can be found at www.federalreserve.gov.
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