The Federal Reserve announced Thursday new banking rules, which require consumers to opt-in before overdraft protection fees are allowed on their ATM and debit cards. This is a huge win for consumers who are being soaked for close to $40 billion dollars in overdraft fees in 2009 alone. These new rules will take effect on July 1, 2010. What is missing from the Fed’s reform is a limit on the number of overdrafts charged in one period and a ban on the reordering of transactions. Congress is promising even tighter overdraft reforms.
To be honest, I am shocked this reform came so quickly. Banks will lose billions of dollars per year in fees and they can’t be happy about this. As I wrote in my previous post, Plight of the Consumer, the banks arrogance in raising interest rates ahead of the deadline for the CARD Act has infuriated consumers and politicians alike. And, it has caused a backlash by the Fed, who is under tremendous pressure to act like a bank regulator.
“The Federal Reserve Board on Thursday announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act.” …
The Impact on Consumers
Overdraft charges are grossly unfair to consumers, because of the predatory way in which they have been implemented. Even those who place blame directly with the consumer for overdrawing their bank account would have a hard time arguing the high fees are reasonable to cover the bank’s cost of an overdraft. And, there is no justification to support the way banks reorder transactions to generate cascading fees. Or, that banks pay third party vendors a percentage of the fees to maximizes overdrafts.
Here are some fun facts about the demographics of NSF fees:
- Among young adult accounts (ages 18 to 25), 46.4 percent incurred NSF activity, compared with 12.2 percent of accounts held by seniors (over age 62).
- More than 38 percent of low-income accounts had at least one NSF transaction, compared with 22 percent of upper-income accounts.
- Customer accounts with 20 or more NSF transactions (4.9 percent of accounts) were charged $1,610 per year in NSF fees on average.
My Experience with Overdraft
Back in 2000, I opened a joint account for a widowed relative to help with her expenses. This worked great until 2001, when the new overdraft policies went into effect. Soon, I was being hit with hundreds of dollars in fees as she was now able to overdraw the account without any warning to her. I went into the bank and asked them to remove the overdraft protection, but they said it wasn’t possible. We both knew they were lying. So, I promptly closed the account and will never do business with that bank again.
A different relative, racked up close to $1,000 in overdraft fees last year and he asked me for help. He was foolish enough to buy a lot of small items using his debit card and in one week he incurred a cascading overdraft that cost him $250 in fees on about $25 in overages. I asked the banker to reset the overdraft on his debit card to zero and he said that he couldn’t. I told him that I knew that he could and asked him why he wouldn’t. He quietly told me that he wasn’t allowed to.
In either case, we should have been able to set the overdraft limit to zero, which is exactly what this new reform will allow. Consumers didn’t ask for overdraft. It was forced on us by banks and they are profiting handsomely. To give consumers a choice on overdraft is only fair and long overdue.
Props to Carolyn Maloney
I have never held back in criticizing our Government and lately there has been plenty to criticize. However, there are some public servants who work tirelessly on our behalf and these people are rarely praised or recognized for their contributions.
For years, Carolyn Maloney has stood up to predatory banks on behalf of consumers. She was the impetus for the Credit Card Bill of Rights, which was recently passed as the CARD Act of 2009. And, she was a champion for the overdraft reform that was just implemented by the Federal Reserve.
Despite personal tragedy in her life and many setbacks from the powerful banking lobby, she stood up for the little guy and she won. American consumers may save hundreds of billions of dollars in future years because of Carolyn Maloney and Chris Dodd (D-CT), Chairman of the Senate Banking Committee. We owe them a debt of gratitude.
The Bottom Line
The bottom line is that banks have finally pushed the public too far and they are starting to pay for it. The arrogance shown by banks after receiving a trillion dollar bailout has made voters fiercely angry and politicians are feeling the heat. This has shifted political influence away from lobbyists and back to voters. I just hope this reform lasts beyond the next election.
“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”
Dan Quayle – 44th Vice President
This post was featured on the Carnival of Money Hacks. This is my first time submitting to the Carnival of Money Hacks and I am honored to be posted among such a talented group of bloggers.