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Personal Finance

New law aims to protect you from overdraft fees
Minneapolis Star Tribune


June 30, 2010

A new law meant to keep a $3 cup of coffee from becoming a $40 headache took effect Thursday. Now banks must get a new customer's permission to cover debit charges that would put their account in the red -- and bring on a hefty fee.

While many have labeled the nationwide change a victory for consumers, some experts caution that the new rules could lead to new fees as banks scramble to come up with programs to make up for lost income.

Banks can no longer automatically enroll customers into so-called overdraft protection services that pay their debit card transaction even when they don't have the funds to cover them. The change will take effect Aug. 15 for existing customers.

Under the new regulations, ATM and single debit card transactions will be denied when accounts have insufficient funds unless customers choose to opt in to overdraft programs.

But several consumer groups share one message: Don't. "I'd be hard-pressed to think that there's many consumers who would rather pay a $35 fee for your coffee or a small lunch as opposed to avoiding those fees altogether," Consumers Union attorney Lauren Bowne said. "People need to understand that if they do nothing, that's how they get the protection. The protection is the law."

Overdraft programs have long been targeted by consumer groups that found banks charge hefty fees -- $34 on average, one group found -- for every overdraft, and charge multiple fees daily once accounts go in the red. The groups argue that customers are often unaware of less-expensive options offered by banks, including attaching checking accounts to reserve lines of credit.

Consumers paid an estimated $23.7 billion in overdraft fees in 2008, an amount that increased 35 percent in two years, according to a recent report from the Center for Responsible Lending, a Durham, N.C.-based think tank. More than 50 million customers overdrew their checking account at least once in 2008, and more than half overdrew their account five times.

The change doesn't apply to check transactions or pre-authorized payments, such as monthly bills, which banks can still cover and then charge consumers for.

The new law becomes effective as financial reform legislation sits in limbo in Congress. Among other things, that congressional bill would create a Consumer Financial Protection Bureau that would defend consumer interests.

The already-passed Federal Reserve rule stands to save consumers $12 billion annually, said Consumers Union's financial services campaign manager, Gail Hillebrand.

Put in other terms, the banking industry stands to lose about $12 billion, or 44 percent of its overdraft income, Hillebrand said.

Many banks began to loosen sometimes-egregious programs in the fall as new rules were debated. Some, including Wells Fargo, eliminated overdraft fees altogether when accounts were overdrawn by $5 or less. They also limited the number of overdraft fees a day to four -- down from 10.

It may be too early to tell how the changes will affect banks long term. But as the dust settles on the changing overdraft landscape, banks may begin to open their doors to new revenue streams, said Greg McBride, senior financial analyst

So-called second-chance checking services, for customers who once were blacklisted by the banking industry for past debts, could be one example of how banks may become more responsive to a widening marketplace, McBride said.



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