Debit Card Overdraft Fees – An Update

November 30th, 2009. By LucyC

First the good news—maybe—on November 12, the Federal Reserve announced that new rules governing the seemingly rampant application of overdraft fees linked to debit card use would be initiated. Now the bad news—maybe—the rules don’t come into effect until next summer—July 1^st, 2010 apparently. 

The development of these rules is a direct result of loud consumer reaction to the banks’ deceptive and abusive consumer lending practices.  

Of course the argument that the rules will provide any real benefit at all has just begun. More on that in a minute. 

So what protection will the new rules offer you? Here’s the scoop—straight from the Federal Reserve website: 

The final rules would “…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.” 

Presumably, this means you really do need to read the fine print when you get your bank cards. And the blurbage on the website goes on to state that if you choose not to opt for automatic overdraft protection you will not be penalized. The site states: 

“To ensure that consumers have a meaningful choice, the final rules prohibit financial institutions from discriminating against consumers who do not opt in. The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.” 

Now, overdraft fees will continue to be charged against checks that “bounce”—so these rules presumably only relate to debit cards—and only to certain types of transactions—gotta read the fine print—when it comes out. 

Some parties are arguing that these rules will not benefit the consumer in the long run because most community banks will simply opt out of overdraft protection to avoid paying the costs and penalties of complying with the rule. The argument goes something like “it will reduce access to credit just when it is needed most.” 

Of course all possible outcomes are hypothetical at this point. For my money, I’d be willing to bet most banks won’t opt out. According to an article in the New York Times, federal officials believe that the banks hauled in somewhere between “$25 billion to $38 billion a year in overdraft fees, including fees for checks and electronic transactions not covered by the new rules.” Even if those numbers are reduced by 75 percent the revenue is still pretty substantial. 

Cha Ching…

Tags: Banks, Debit Cards, Overdraft fees

This was posted on Monday, November 30th, 2009 at 5:49 pm and is filed under Financial . Feel free to respond, or trackback. Read our comments policy.