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Fed Issues Final Overdraft Rule
The Federal Reserve Board issued a final rule that will require credit unions and other financial institutions to obtain a consumer's affirmative consent (“opt-in”) before charging overdraft fees for ATM and one-time debit transactions.
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The proposal was issued in January and compliance will not be required until July 1, 2010. Here are the highlights:
* This rule applies to all financial institutions offering overdraft protection plans that cover overdrafts associated with ATM and one-time debit card transactions.
* The rule will require that consumers opt-in to the payment of overdrafts for ATM and one-time debit card transactions before fees may be assessed.
* Before the consumer opts-in, he or she must be given a notice that explains the overdraft services, the fees, and the consumer’s right to opt-in. The rule provides a model notice.
* Consumers will have an ongoing right to revoke this consent.
* This rule will apply to all consumers, including existing accountholders.
* Financial institutions can’t require that a consumer opt-in to ATM and one-time debit card overdrafts in exchange for having overdrafts paid on checks.
* Financial institutions must provide consumers who do not opt-in with the same account terms, conditions, and features that are provided to those who do opt-in.
In a comment letter to the Fed earlier this year, the Credit Union National Association (CUNA) proposed limiting opt-in to new members. The Fed’s rule, however, will apply to all accountholders—presenting significant compliance issues for some credit unions.
Overdraft fee income
Deposit service charges, namely overdraft-protection fees, constitute a significant portion of overall fee income—nearly 45% for credit unions, according to the Credit Union National Association’s 2008-2009 Credit Union Fees Survey Report.
In fact, many financial institutions have turned to “no fee” checking accounts to increase the number of checking accounts they hold and, in turn, the potential use of overdraft protection features.
Not coincidentally, these programs have come under increased scrutiny in recent years. Consumers paid $17.5 billion in overdraft protection fees during 2007, according to a study by the Consumer Federation of America and U.S. Public Interest Research Group. The study revealed that overdraft fees at the nation’s 10 largest banks increased 15% from 2005 to 2007.
Media talking pointsMark Wolff, CUNA’s senior vice president of communications, advises credit unions to use these talking points if contacted by the media about overdraft protection programs: * It protects members from the cost and embarrassment of bouncing a check or multiple checks. Most merchants charge a nonsufficient funds (NSF) fee of $30 per check on top of the financial institution’s NSF fee. * It’s a convenient service, which is why many members choose it over options such as overdraft transfers from other accounts or lines of credit. * Credit unions have a long history of providing member education and financial counseling services. Many credit unions employ these efforts as a key component of their overdraft programs. * Overdraft programs are a way that mainstream lenders such as credit unions can keep consumers out of the hands of payday lenders, pawn shops, and the like. * Credit unions that charge fees for the programs do so in order to make the business model work on a service that many of their members value and are willing to pay for. In fact, credit unions typically charge less than other financial institutions offering similar services. The average overdraft fee at a credit union is $25, considerably less than the $35 average fee at the nation’s big banks. |
The House and Senate have introduced legislation addressing overdraft fees. On Oct. 19, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) introduced a bill that would limit fees financial institutions can charge on overdraft protection services.
The FAIR Overdraft Coverage Act would:
* Require financial institutions to get consumers’ consent before enrolling them in an overdraft protection program for ATM and debit card transactions;
* Limit the number of overdraft coverage fees that could be charged to one per month and six per year;
* Require fees to be proportional to the cost of processing the overdraft;
* Prohibit institutions from manipulating the order in which they post transactions in order to rack up extra fees;
* Require that accountholders be notified when they overdraw an account and be given the option of being notified by e-mail, text, or traditional mail; and
* Require a warning if an ATM or branch teller transaction will overdraw an account, and give the accountholder the option to cancel the transaction.
CUNA maintains that overdraft protection plans—when structured properly and used appropriately by members—are a service that’s fully consistent with credit union philosophy and credit unions’ mission to serve members.
Currently, 52% of credit unions that offer checking accounts offer automated overdraft protection programs, up from 44% in 2006, reports CUNA’s fee survey. Five percent provide the protection without charging a fee to the member, while 47% do so for a fee.
What do you think?
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