More consumer protections on bank overdrafts may be coming

Kathy Kristof, Tribune Media Services

Last month, Federal Reserve rules went into effect that barred banks from automatically charging existing account holders overdraft fees on ATM and debit-card transactions.

But more consumer protections concerning overdrafts could be on the way.

The Federal Deposit Insurance Corp. has proposed guidelines that would result in sweeping changes to the standard way banks handle consumers who habitually overdraw their accounts. If enacted, the measures would in effect eliminate “gotcha” practices that result in some hapless consumers paying hundreds of dollars annually in penalties.

“American families, especially those most vulnerable financially, could save millions of dollars a year in costly overdraft fees if guidelines the FDIC proposed” are adopted, said Michael D. Calhoun, president of the Center for Responsible Lending in Washington.

“The guidelines would encourage the banks the FDIC oversees to offer customers lower-cost overdraft alternatives, rather than charge unlimited, high-cost overdraft fees—as many banks do—even on small debit-card transactions.”

Unlike the new Fed rules on ATM and debit-card transactions, the proposed FDIC measures would also affect traditional check and automatic debit transactions.

Two aspects of current overdraft policies concern the FDIC, said Sandra L. Thompson, director of the FDIC’s division of supervision and consumer protection. One is that some overdrafts are essentially undocumented loans. A 2008 FDIC study found that people who had five overdrafts or more per year accounted for 90 percent of all overdrafts. Those chronic overspenders were not simply making errors; they were using overdraft plans as short-term loans, Thompson said.

But contrary to prudent bank practice, such transactions are not evaluated and approved based on bank lending standards. They could put bank deposits in jeopardy, Thompson said.

“We want to make sure that when a person goes into a bank, they know their money is safe,” she said. “Our mission is primarily public confidence.”

Second, there’s a perception issue. If people believe banks habitually trick them out of money through sneaky fees, it undermines confidence in the entire banking system, Thompson said.

The FDIC proposals could be altered after a 45-day public comment period. But here’s what the agency would expect banks to do:

— Review the marketing and disclosure of their overdraft programs to minimize potential customer confusion.

— Train bank tellers and customer-service representatives to explain overdraft program features and other, less costly options that a bank offers.

— Monitor overdraft programs for excessive or chronic use. If a customer overdraws more than six times in a rolling 12-month period, the bank should take “meaningful action,” including contacting the customer to discuss less costly ways to have overdrafts covered. These could include linking a savings account or credit card to the customer’s checking account or offering an overdraft line of credit.

— Place a cap on the number of overdraft fees that could be charged in a single day, or create a daily limit on the total amount that could be debited in overdraft charges to a single account.

— Suggest low-cost financial counseling for those whose overdraft activity indicates they may need remedial help.

— Eliminate misleading balance information that results from including the overdraft credit limit in the “available balance.”

The FDIC also wants banks to review their check-clearing procedures to ensure that the order they’ve selected is not designed to maximize overdraft fees.

Currently, the bulk of the nation’s largest banks clear the largest checks first. They say that this reordering of checks ensures that a customer’s most important payments, such as on a mortgage or car loan, are paid when the customer is most likely to have sufficient funds. But consumer advocates maintain that the practice is a thinly disguised bid to boost overdraft fees by wiping out an account balance faster, making every subsequent transaction subject to an overdraft fee.



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