FDIC will hopefully go farther than the Fed on overdrafts.

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We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Monday, September 27th, 2010

This summer a new law, passed by the Federal Reserve Board, went into effect giving you the right to ‘opt-in’ to overdraft coverage for your debit card and ATM transactions. That means you now have the choice before you pay a hefty fee to borrow money from the bank to pay for debit card transactions you’d rather have declined.

But there’s still work to do to make sure you have the same choice for all transactions, such a paper checks and scheduled electronic bill payments. These types of transactions were not included in the Fed’s new law.

In August, the FDIC issued proposed guidelines for overdraft payment programs that go farther than the Fed’s new law. Although these guidelines apply to FDIC regulated banks they will set an important standard which will hopefully expand to all banks in the future. The Fed’s rules prevent unauthorized payment of debit overdrafts for a fee, but fail to address the abusive nature of the product for those who do opt-in or the aggressive tactics financial institutions use to make their money. The FDIC’s guidance could address some of these issues.

CU joined a number of groups to provide comment to the FDIC on its proposal, which does address some of the concerns leftover after the Fed was through regulating overdrafts. Though the FDIC’s guidelines go farther than the Fed, we highlight certain issues that need to be even stronger.

Require banks to obtain opt-in to overdraft coverage for all types of transactions.

The Fed’s new rule only applies to debit and ATM transactions. This means banks can still cover your paper check or electronic Bill Pay transactions for a high fee without getting your permission. CU has asked Wells Fargo to give their consumers a choice about covering these transactions. And the FDIC’s proposal states that banks should allow consumers to opt-out, or cancel, their coverage for checks and ACH transactions. But this is not enough. Consumers should not be automatically loaned money at a high fee, without their permission. We asked the FDIC to require its banks to obtain opt-in before charging an overdraft fee for these types of transaction also.

Curb excessive overdraft fees.

The FDIC’s proposal requires banks to contact consumers after 6 overdrafts and specifically tell them about cheaper alternatives like linking a checking account to a savings account. That’s all well and good, but to truly prevent serious financial harm, we feel it is necessary for the agency to set a firm limit of 1 overdraft fee per month with a cap of 6 allowable overdraft fees per year.

Prohibit all methods of transaction processing that increases overdraft fees.

After a Federal Judge outed Wells Fargo on its horrendous practice of manipulating transactions to maximize the overdraft fees it charged, a long standing unfair practice is now out in the open. The FDIC recognizes that this is a truly bad practice and provides in its proposal, two examples of appropriate transaction cleaning processes which we support. Banks should clear items in the order received or by check number. We also ask that the FDIC clarify an appropriate way for banks to clear different transaction types, like checks and debit card transactions.

Address deceptive opt-in solicitations.

Because the Fed’s new rule require banks to obtain opt-in before charging a fee for debit and ATM overdrafts, the FDIC’s proposal correctly advises banks not to steer frequent users of these programs to opt-in. We ask that the FDIC monitor solicitation materials regularly and ensure that they include adequate information about cheaper options and program costs.

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