Fed Won't Regulate Bounce Protection

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The Federal Reserve said last week it won't issue new rules to regulate overdraft, or "bounce" protection, despite calls to do so by consumer groups. These kinds of programs, which are becoming increasingly popular among credit unions, allow consumers with low balances to overdraw their accounts in exchange for fees that consumer groups claim amount to high-cost loans.

After studying the issue for a year, the Fed said it will not apply the Truth-In-Lending laws to such programs, which would have required broad disclosures on fees. Consumer groups charge the programs, generally used by low- and moderate-income consumers, amount to high-charge loans because a fee of $15 to $35 for a two-week overdraft of $100 is often equal to an annual interest rate of as much as 500%. Some programs add a daily fee if the overdraft remains outstanding beyond a certain number of days.

To subject overdraft protection programs to Truth-In-Lending would require credit unions and banks to disclose the annual percentage rate, which could discourage consumers from using them. Instead, the Fed said it will regulate these programs under its Truth-In-Savings rules.

Some consumer groups, including the Consumer Federation of America, had proposed regulating overdraft protection by limiting or restricting fees for small overdrafts.

The Fed did issue for public comment some minor amendments governing the way these programs are marketed.

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