Banks Will Be Required to Get Opt-In From Customers as Congress Considers Even Tougher Protections

WASHINGTON, Nov. 12 /PRNewswire-USNewswire/ -- Under new regulations just announced by the Federal Reserve, banks will no longer be allowed to automatically enroll their customers in expensive overdraft loan programs. Banks will be required to get their customers' permission first before they can charge expensive fees when debit and ATM card transactions trigger an overdraft.

The Fed's new rules are a positive step for consumers but proposals in Congress would provide even stronger protections, according to Consumers Union, the nonprofit publisher of Consumer Reports.

"The Fed should be applauded for ending automatic enrollment in costly overdraft programs that cost consumers billions of dollars in fees every year," said Lauren Bowne, staff attorney for Consumers Union. "Soon banks will have to persuade their customers that these overdraft programs are beneficial compared to other lower cost alternatives."

Most banks automatically enroll their customers in so-called 'overdraft protection' programs, which are really high-cost loans that generate billions of dollars in excessive fees every year. Banks are expected to collect more than $38 billion in fees from overdrafts triggered by debit and check transactions this year.

Debit card overdrafts could be prevented with a simple warning that there are not enough funds in the account, or by declining the transaction. Instead, most banks let these transactions go through and charge consumers a fee for each overdraft. The FDIC found that the median fee for overdrafts is $27 even though overdrafts triggered by debit transactions have an average value of only $20.

Automatic fee-based overdraft programs are the most expensive option for consumers so banks don't have an incentive to sell lower cost services, such as linked accounts or lines of credit. The FDIC has concluded that the fees assessed for these other types of programs are significantly lower than for automatic overdraft loan programs.

Consumers Union supports efforts in Congress to enact additional protections for consumers to limit abusive overdraft practices by banks. Legislation recently introduced in the House and Senate would limit banks to charging one overdraft fee per month for a total of six per year; prohibit banks from manipulating the processing of transactions to increase overdrafts, and clarify that banks must clearly disclose the cost of overdraft fees as required under the Truth in Lending Act.

"The Fed's new rules are a big step forward that will give consumers more choice and protect them from excessive overdraft fees," said Pam Banks, policy counsel for Consumer Union. "But more protections are needed to ensure that consumers who decide to opt-in to overdraft loan programs aren't subject to excessive fees and other abusive practices."

SOURCE Consumers Union