Fed would give choice in overdraft protection

March 24, 2009|By EILEEN AMBROSE

Here's a math problem for you:

Jane buys a $4 bagel and $2 cup of coffee with a debit card. Jane's bank account is short on cash, so her bank automatically covers the transaction for her. How much was breakfast?

$40. That's $6 for the food and $34 for the typical bank overdraft fee.

It's a trick question. But many consumers have felt tricked by overdraft protection programs. Once reserved only for checks, overdraft protection is now often automatically extended to ATM and debit card transactions.

Some consumers are unaware that the bank is covering their overdrafts, so they keep using their cards and racking up fees.

Banks and credit unions defend these programs as a convenience to customers, but consumers have cried foul. The Federal Reserve is now seeking public comment on its proposal to fix the problem.

The Fed is proposing either an opt-in or an opt-out requirement. With opt-in, your institution would have to get your permission to enroll you in the service before it could charge you an overdraft fee. The other way, your bank couldn't charge you an overdraft fee unless it gave you time to opt out of the service and you didn't.

The Federal Reserve proposal would cover only small ATM and debit-card transactions. Overdraft fees on such transactions total $7.8 billion a year, estimates the Center for Responsible Lending.

Opt-in is a better option for consumers.

Anyone with a little knowledge of human nature knows that if consumers must opt out of a program, most of them don't get around to doing so.

That's why so many employers - with Uncle Sam's blessing - automatically enroll workers in retirement plans with an opt-out provision. Once enrolled in a 401(k), workers generally stick with it.

With opt-in, consumers who want their lender to cover a shortfall can choose it knowing they will pay a fee. Everybody else can deal with the inconvenience or embarrassment of having a transaction rejected for insufficient funds, and be richer for it.

Or, they can set up less expensive ways to cover overdrafts, such as linking a checking account to a savings account that can be tapped when there's a shortfall or establishing a line of credit. These options have costs, too, but less than bank overdraft programs, says Eric Halperin, with the Center for Responsible Lending.

The largest bank in the Baltimore area, Bank of America, covers ATM and debit card overdrafts for a $35 fee. PNC Financial Services, the area's third-largest bank, charges $31 to $36.

But PNC spokesman Patrick McMahon says customers can avoid a fee in several ways. They can opt out of the service or have the bank alert them by e-mail or text message when their account is low. And customers are given notice at the ATM if they are about to trigger an overdraft, so they can cancel the transaction.

Most often, he says, consumers want ATM and debit transactions to go through.

If you want to weigh in, you have until March 30 to let the Fed know your thoughts.

Submit comments online to regs. comments@federalreserve.gov. Make sure you put "R-1343" in the subject line. Or fax your comments to 202-452-3819.

More than 1,600 comments have been posted on the Fed's Web site.

Financial institutions that have submitted comments support the opt-out option.

"Our experience is that our members have come to expect this service to be available. We get appreciative comments of the cost savings it provides by not having to pay the merchant a 'return fee,' " writes Ascentra Credit Union in Iowa.

"Opt-in is the only way that consumers will be protected," counters Lauren Zeichner Bowne, a staff attorney with Consumers Union, which has been encouraging consumers to share their stories with the Fed.

Many have. Edward Rudow of Montgomery Village, for instance, wrote to complain that his college-age son was charged $170 in overdraft fees for five purchases that were less than $5 each and made on the same day.

And PierAngeli Morrison of Laurel told the Fed, "Now that taxpayer money has bailed out the banking industry, it is time for the banking industry to play fair and to curb excessive fees, i.e. ATM fees and overdraft fees."

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