Overdraft

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No more overdraft fees without opting-in

The era of the $35 cup of coffee has come to an end, for most.

Unless a consumer chooses to opt-in for overdraft protection, their ATM and debit purchases will be declined if an account has insufficient funds. Prior to Sunday, banks could automatically enroll their customers in the service, which covers the point-of-sale transaction but can result in steep penalties. Shoppers at the counter might turn red with embarrassment when their purchase is refused, but the alternative is for their account to go further into the red -- with fees up to $35 for each swipe of the card.

When added to the cost of a 99-cent taco, $35.99 doesn't exactly fit on the value menu. Just last week, a federal judge accused Wells Fargo of "profiteering" by employing overdraft policies that led customers to pay multiple fees. The bank was ordered to return $203 million to its customers. However, Wells Fargo intends to appeal and several other banks have indicated that they will not change their policy of processing the day's largest transactions first (as opposed to chronological order), which increases the likelihood of multiple small transactions incurring overdraft fees.

But if customers don't have overdraft protection anymore, the banks can't collect.

Banks were prohibited from automatically adding new customers to overdraft protection programs starting on July 1. The latest Federal Reserve rule goes a step further by dropping the service for existing customers who never asked for it. Newsweek reports that banks have aggressively encouraged their customers to stay enrolled:

In the days leading up to Sunday, nearly anyone with a bank account has likely received mailings, emails, phone calls, ATM screen prompts and an in-branch hard-sell to keep them in these programs, a lucrative source of revenue for banks of all sizes. Don't expect the cajoling to stop any time soon, as banks keep up a full-court press post deadline to reclaim those who opted out, either by choice or inaction.

In July, the National Foundation for Credit Counseling did an online survey (PDF) which found that 26% of their 2,089 respondents planned to opt-in for the protection.

Senate hearing on overdraft fees Nov 17

On Tuesday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, Protecting Consumers from Abusive Overdraft Fees: The Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act, to discuss bank overdraft programs and whether “regular folks get a fair deal from their banks.”

In Chairman Christopher Dodd's (D-CT) opening remarks, he acknowledged that banks have a “right to charge a fair fee for legitimate services,” however banks have been providing “misleading overdraft programs that encourage consumers to overdraw their accounts,” which serve as “a way for banks to profit by taking advantage of customers.” Senator Jim Bunning (R-KY) took a different approach to the debate over bank overdraft programs, stating that “there is no excuse for not knowing how much money is in [an] individual[’s] account” and “consumers must be expected to face the consequences of their actions.”

Testifying before the Committee were the following witnesses:

  • Mario Livieri, Consumer, State of Connecticut
  • Michael D. Calhoun, President, Center For Responsible Lending
  • Frank Pollack, President and CEO, Pentagon Federal Credit Union
  • John Carey, Chief Administrative Officer, Citibank NA
  • Jean Ann Fox, Director of Financial Services, Consumer Federation of America

Rep. Hinojosa drops support of bank overdraft legislation

"A senior lawmaker last week dropped his support for legislation limiting bank overdraft fees, saying the Federal Reserve has taken a better approach to the issue.

Rep. Rubén Hinojosa (D-Texas) took his name off the co-sponsors list for the bank overdraft bill backed by Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.), chairman of the House Financial Services Committee. The legislation is seen as a key part of the Democrats’ effort to reform the financial sector in the wake of Wall Street’s meltdown last year.

A spokeswoman for Hinojosa said he dropped his support for the bill because of the Fed’s recent action on overdraft fees.

The Fed issued a rule on Nov. 12 that would require banks to ask consumers permission before subscribing them into overdraft fee programs.

“When the Congressman saw the Federal Reserve approach, he started leaning more towards the Federal Reserve's idea. He does believe there is a problem that needs to be fixed,” said Patricia Guillermo, a spokeswoman for Hinojosa.

Rep. David Loebsack (D-Iowa) also dropped his support for the bill this week. But it was a clerical error that he was counted in the first place, according to one of his aides.

A spokeswoman for Loebsack said the Iowa Democrat was included among the bill’s supporters because of “a staff-related error with the bill numbers and we never meant to co-sponsor.”

Maloney and Frank’s bill goes farther than the Fed. It would restrict the number of overdraft fees that banks may charge to one per month or six per year and also limits the total fees that banks may charge. Under the bill, banks would have to charge fees proportional to the overdraft.

Banks will collect a record $38.5 billion in overdraft fees in 2009, according to Moebs Services, an economic research firm. That revenue is almost twice as much as the $19.9 billion they earned from overdraft fees in 2000.

Consumer groups have attacked banks for subscribing their customers into overdraft protection programs without permission. Banks generally charge $35 fees for each overdraft, and have also been criticized for manipulating the order of transactions to impose fees on each overdraft.

The overdraft fee bill has been met with heavy resistance from lobbyists for the banking industry who believe customers would be bothered if they found their ATM and debit card transactions rejected after they overcharged their accounts. But public interest groups have argued legislation is needed to protect consumers, considering a $5 cup of coffee could end up costing $40 due to bank overdraft fees.

After the Fed’s announcement, Maloney indicated legislation was still needed.

In a statement, she said she was glad the Fed recognized the need to police fees, but criticized the bank for not going far enough. The Fed’s rule would still allow an unlimited amount of fees and not make them proportional to the size of the overdraft.

Banking and credit union trade associations criticized the bill at an Oct. 30 House Financial Services Committee hearing.

“Consumers value depository institutions paying their overdrafts —have come to expect it — as it helps to avoid the embarrassment, inconvenience, fees imposed by merchants and others, and other adverse consequences of having a check bounce or a transaction denied,” said Nessa Fadis, vice president and senior counsel for the American Bankers Association’s Center for Regulatory Compliance, in prepared testimony at the hearing.

But public interest groups say that customers do not ask for the protections that often come with expensive fees.

“Consumers do not apply for this form of credit, do not receive information on the cost to borrow bank funds via overdrafts, are not warned when a transaction is about to initiate an overdraft, and are not given the choice of whether to borrow the funds at an exorbitant price or simply cancel the transaction,” said Jean Ann Fox, director of financial services at the Consumer Federation of America, at the same hearing.

The bill enjoys a base of support in the house. Fifty-nine members in the House are co-sponsoring the bill, including senior members like Frank and Maloney as Republican Walter Jones (N.C.). Similar legislation has also been introduced in the Senate by Sen. Christopher Dodd (D-Conn.), the Senate Banking Committee chairman, and has earned 7 co-sponsors so far.


Federal Reserve rules restricting overdraft fees

"Yesterday, the Federal Reserve Board announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer affirmatively consents, or opts in, to the overdraft service for those types of transactions. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act, and become effective July 1, 2010.

The release accompanying the final rules notes that the average cost of overdraft and insufficient funds fees was just over $26 per item in 2007. "Overdraft fees can be costly," said Governor Elizabeth A. Duke, the chair of the Board's Committee on Consumer and Community Affairs. "Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs."

The Board engaged a testing consultant to test two notice options, amongst others items: opt-out notice vs. opt-in notice. The Board reported that, in general, testing participants understood the concept of overdraft coverage, and that they would be charged fees if their institution paid their overdrafts. Test participants also indicated that they would want their transactions paid into overdraft and prefer an opt-in vs. an opt-out notice.

The final rules require institutions to provide consumers with the right to opt in to the institution’s overdraft service for ATM and one-time debit card transactions. Before opting in, financial institutions must provide the consumer with a notice that explains the applicable overdraft services, the fees associated with the service, and the consumer's option to authorize the overdraft services. For consumers who do not affirmatively consent to the institution’s overdraft service for ATM and one-time debit card transactions, the final rules require institutions to provide those consumers with the same account terms, conditions, and features that they provide to consumers who do affirmatively consent. Federal Reserve Chairman Ben S. Bernanke stated: “The final overdraft rules represent an important step forward in consumer protection … [b]oth new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.”


"Starting next summer, financial institutions will no longer be able to charge overdraft fees in most cases unless customers opt in to the service, officials at the Federal Reserve announced Thursday.

The new regulations cover overdrafts from ATM withdrawals and debit card purchases, officials said. The rules are intended to address widespread complaints that consumers were unknowingly being charged large fees when, say, they bought a cup of coffee with a debit card without being aware they had insufficient funds. Banks will be required to send customers a notice explaining their overdraft protection services and fees before accounts are activated. The regulations take effect July 1, 2010.

Banks will still be able to assess fees for overdrafts occurring from checks or recurring debit-card payments, such as automatic bill payments. Officials said those forms of payments are typically used for bills, and their research shows that consumers would rather pay the overdraft fee than have such payments denied.

The rule also requires banks to offer customers who do not sign up for overdraft protection the same accounts, features and services as those who do.

The move is the latest incarnation of sweeping new protections for consumers. The regulations mirror so-called "opt-in" legislation proposed by Rep. Carolyn B. Maloney (D-N.Y.) and Sen. Christopher Dodd. (D-Conn.) that is winding its way through Congress. Overdraft fees, which a 2007 government report said averaged $26 per transaction, have long been a target of consumer advocates who say shoppers are often unaware when they have exhausted their funds. However, the banking industry argues that the fees are justified because it is essentially loaning money to consumers to cover the cost of the purchase."

Federal Reserve request for comment on final overdraft rules

The Federal Reserve Board on Friday proposed clarifications to aspects of its November 2009 final rule under Regulation E (Electronic Fund Transfers) and its December 2008 final rule under Regulation DD (Truth in Savings) pertaining to overdraft services.

The proposals are intended to address questions that have arisen and to provide further guidance regarding compliance with certain aspects of the final overdraft rules. In particular, the proposals would clarify that the prohibition in Regulation E on assessing overdraft fees without the consumer's affirmative consent applies to all institutions, including those with a policy and practice of declining automated teller machine (ATM) and one-time debit card transactions when an account has insufficient funds. The proposals would also make certain technical corrections and conforming amendments.

The Federal Register notices are attached. Comments on the proposals must be submitted within 30 days after publication in the Federal Register, which is expected shortly.

Federal Register notices:

  • Regulation DD Truth in Savings, Board of Governors of the Federal Reserve System, Proposed rule; request for public comment.

Court says Wells Fargo's overdraft fee system is ‘unfair and fraudulent’

Overdraft fees are the second-largest source of revenue for Wells Fargo’s consumer deposits group, the division of the bank dedicated to providing customers with checking accounts, savings accounts, and debit cards. The revenue generated from these fees has been massive. In California alone, Wells Fargo assessed over $1.4 billion in overdraft penalties between 2005 and 2007. Only spread income — money the bank generated using deposited funds — produced more revenue. As a result of a decision earlier this week by a federal district court in California, however, that may change.

The court’s ruling, in Gutierrez v. Wells Fargo Bank, N.A., No. C 07-05923 WHA (N.D. Cal. Aug. 10, 2010), arose in a case that did not challenge the amount of a single overdraft fee (currently $35). Rather, as the district court explained, the essence of this case was that Wells Fargo had devised “a bookkeeping device to turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract froma single mistake.” The court said that the “draconian impact of this bookkeeping device” had been exacerbated “through closely allied practices specifically ‘engineered’ — as the bank put it — to multiply the adverse impact of this bookkeeping device.”

These “neat tricks” generated “colossal sums per year in additional overdraft fees,” the court stated, “just as the internal bank memos had predicted.” According to the court, the bank “went to considerable effort to hide these manipulations while constructing a facade of phony disclosure.” The court held that “these manipulations were and continue to be unfair and deceptive,” in violation of the “unfair” and “fraudulent” restrictions of Section 17200 of the California Business and Professions Code. The court then ruled that, for the certified class of California depositors, “the bookkeeping device will be enjoined and restitution ordered.”

The decision is undoubtedly going to be appealed. But the court’s tone, findings, and conclusions are quite significant, and may indeed have a very practical impact on Wells Fargo right now, as well as on other banks.

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