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