Federal scrutiny growing on bank overdraft charges

Recent changes do not go far enough, some say

Soon, Bank of America will change the way it charges customers overdraft fees. Soon, Bank of America will change the way it charges customers overdraft fees. (Damian Dovarganes/ Associated Press/ File)
By Candice Choi and Jeannine Aversa
Associated Press / September 29, 2009

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NEW YORK - Several of the country’s biggest banks unveiled consumer-friendly makeovers of their overdraft programs last week. The changes may be too little, too late.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., is the latest federal official to call for tighter regulation of overdraft programs, which have become an industry standard in recent years.

In an interview with USA Today published yesterday, Bair questioned whether the changes banks announced last week “go far enough.’’

“We do need some regulatory standards in this area. We need the [Federal Reserve] to finalize rulemaking in this area,’’ she said.

Bair or an FDIC representative were not immediately available for comment yesterday.

Overdraft programs typically penalize customers with a fee of about $25 or $35 for making purchases when there isn’t enough money in their accounts.

Consumers are generally automatically enrolled in the programs, and can’t opt out. Critics say the programs are misleading because most people assume they can’t spend more than they have when using debit cards.

Last week, Bank of America, JPMorgan Chase, US Bank, and Wells Fargo announced plans to start requiring customers to opt into the programs.

Even with the bigger banks backing off automatic enrollment, however, federal regulations could force smaller and community banks to follow suit, said Linda Sherry, a spokeswoman for Consumer Action, an advocacy group in Washington, D.C.

“There’s so much money in this for even the small banks, I can’t see them backing off it without a fight,’’ she said.

Scott Talbott, a spokesman for the Financial Services Roundtable, an industry group, said competition will eventually drive smaller banks to follow the lead of the larger banks. Given the changes announced last week, he said, any regulations would be redundant.

“The industry has already made a number of changes. The regulations are no longer needed,’’ Talbott said.

Meanwhile, the Federal Reserve plans to issue a final rule on the matter by the end of the year.

The central bank has proposed two approaches for dealing with overdraft programs. The first would bar a bank from assessing fees on a customer’s account unless notice and an opportunity to opt out of the bank’s overdraft protection service was provided in advance. Under the second proposal, a bank would have to secure the customer’s consent, or require them to opt in, before overdraft fees could be imposed.

Neither Fed option would put a limit on the fees charged. The law the Fed is tapping to try to crack down on overdraft abuses doesn’t give the agency authority to cap or limit the fees. It’s unclear whether the Fed could do so under other powers.

The Fed’s proposal would apply to overdrafts for ATM withdrawals and one-time debit card purchases. It would not cover overdrafts involving checks or recurring overdrafts on debit cards. Consumer testing by the Fed found that people would not opt out if that meant their most significant bills - typically paid by check or recurring debit - would not be paid.

The American Bankers Association is urging the Fed to permit banks to require customers to opt into a blanket overdraft program.

Resistance to the central bank’s proposal is expected, as overdraft fees have become an important revenue stream for banks. In 2007, the industry earned about $29 billion from overdraft fees, according to Oliver Wyman, a Boston-based consulting firm for the banking industry.

As part of the changes announced last week, the Bank of America, JPMorgan Chase, US Bank, and Wells Fargo also said they were capping the number of times per day customers would be penalized for overdrawing accounts. For instance, Bank of America and Wells Fargo say they will penalize customers no more than four times a day.

One of the criticisms of overdraft programs is that fees can continue piling up if customers don’t realize they’ve overdrawn the account, and continue spending.

The changes from the banks came after Senator Chris Dodd, Democrat of Connecticut, said he planned to introduce legislation to prevent auto enrollment into overdraft programs. Representative Carolyn Maloney, Democrat of New York, has introduced similar legislation.

It’s not clear how much traction the legislation would get, given all the other matters in Congress right now, Sherry of Consumer Action noted.

Earlier this year, President Obama signed a credit card law that banned automatic enrollment in over-the-limit programs, which work much the same way as overdraft programs. The law does not apply to debit cards.