WASHINGTON — In a blow to the industry, the Federal Reserve Board aligned itself with congressional leaders Thursday by finalizing a rule that would force banks to get their customers permission before they enroll them in overdraft protection programs.
The 92-page rule covers transactions conducted at automatic teller machines and one-time debit card transactions and takes effect on July 1. Banks would be prohibited from offering different terms or conditions on accounts for customers that decide to forgo the protection.
Even if customers elect to take advantage of overdraft protection services, the Fed would give them the right to reject the coverage at any point in the future. Before choosing the coverage, banks would have to provide customers with a notice detailing what overdraft protection entails and what the charges will look like.
Checks are not covered by the rule. Federal Reserve officials said Thursday that consumer testing found customers want their checks — which often go toward larger transactions such as rent or utility payments — to be paid.
Industry leaders have argued they automatically provide overdraft coverage as a service to their customers. But the charges have been sharply criticized during the financial crisis as nothing more than a revenue generator. Indeed, many banks have come to increasingly rely on such fees for profits during the recession. Fed officials estimated that banks generate between $25 billion and $38 billion from overdraft fees covering ATM, debit card and check transactions.
"There is legitimate unhappiness over excessive overdraft fees," House Financial Services Committee Chairman Barney Frank said during a panel debate last month.
The Fed's move comes as both chambers of Congress have pursued legislation of their own that would rein in overdraft fees.
Senate Banking Committee Chairman Chris Dodd introduced a bill on Oct. 19 that would require banks to give customers the choice to opt-in to protection programs before they could be charged a fee. Frank and Rep. Carolyn Maloney, D-N.Y., offered similar legislation in the House on Oct. 22.
Both bills would ban the manipulation of check clearing to maximize potential overdraft fees.
In explaining the rationale for its rule, the Fed pointed to consumer testing that found bank customers would rather not be automatically enrolled in overdraft protection for ATM or one-time debit card transactions.
But the debate on Capitol Hill over regulatory reform likely also played a role. Bills introduced by Frank and Dodd would strip consumer protection authority from the Fed and other banking regulators and invest it in a new agency. Dodd went further with legislation he proposed this week, which would also take away the Fed's banking supervision powers.
"The final overdraft rules represent an important step forward in consumer protection," Fed Chairman Ben Bernanke said in a press release. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."
Fed Gov. Elizabeth Duke, who heads the central bank's committee on consumer and community affairs and is a former community banker, said overdraft fees "can be costly."
"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," she said in a press release.
