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'Bounced-check protection' rules draw critics

New Federal Reserve rules aimed at keeping so-called overdraft protection plans in check took effect July 1.

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Consumer groups had hoped that the Fed would tighten the reins on banks that generate significant fee income from the plans. Instead, consumer advocates say, the rules do practically nothing for consumers.

"These (rules) do nothing to prevent institutions from giving high-cost, short-term credit to consumers without their consent. And they do nothing to ensure that consumers receive adequate notice about the cost of these services," says Eric Halperin of the Center for Responsible Lending.

Bounced-check protection plans are a form of overdraft protection. You don't have to sign up for them; many banks automatically enroll just about all of their checking account customers. But they differ significantly from traditional overdraft protection where you sign up in advance and agree to have the overdraft paid with funds from a savings account or a credit card.

With bounced-check plans, if you bounce a check, you'll pay the bank's standard nonsufficient funds fee and, in some cases, a daily fee on top of that. The bank decides how much overdraft protection you get -- maybe $100, maybe $500. Most plans don't go over $1,000. And there's no guarantee that the bank will pay your check.

Writing a check isn't the only way you can overdraw your account with these plans. You can overdraw it with your debit card at the ATM or at the cash register with a pre-authorized debit. You get a short amount of time to repay the overdraft, usually two weeks to one month. Your account can be closed if you don't repay on time.

"A lot of consumers don't know that they can take money from an ATM even if they don't have it in the bank," says Jean Ann Fox, director of consumer protection at Consumer Federation of America. "If you knew that your bank would charge $35 for a $10 overdraft, you might decide to pay with a credit card, or pay with cash or put the item back on the shelf."

Consumer groups want the Fed to regulate these plans under Truth in Lending laws. That would force banks to get the customer's approval to sign them up for the program, and the banks would have to disclose the cost of the program as an annual percentage rate. That way, consumers would know what it costs to borrow money, just as they do with credit cards.

But the Fed opted to not put the plans under Truth in Lending because the banks are not making a promise to pay the overdrafts. Instead, the Fed is amending Regulation DD, which implements the Truth in Savings Act, a move that consumer advocates say isn't nearly strong enough.

"I think the Fed wanted to recognize that traditionally banks, on occasion -- and at their discretion -- may choose to cover an overdraft. If your bank has courtesy overdraft, you don't have an assurance that your bank will pay it. But that's not the way banks work now. These plans are automated, there's no bank officer making a decision one case at a time," says Fox.

Next: "Consumers want the bank to pay (overdrafts)."
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