FDIC issues further guidance on how banks handle overdrafts
November 30, 2010
Starting in July 2011, state-chartered banks will have to take an extra step to ensure their automated overdraft protection programs don't take advantage of customers who can least afford to pay the fees.
Under final new guidelines issued Nov. 24 by the Federal Insurance Deposit Corp., banks will have to contact customers enrolled in the programs who overdraw their checking accounts more than six times a year. The banks must inform them about cheaper alternatives, such as linking a checking account to savings accounts or inexpensive lines of credit. Banks also must limit how much customers can pay in overdraft fees a day -- either by limiting the number of transactions subject to a fee or limiting the total amount of fees that can be imposed in one day.
The new guidelines discourage unfair transaction posting -- the practice of reordering checks and debit card transactions to deduct the largest amounts first, thereby increasing the number of overdraft fees customers are charged. The Center for Responsible Lending urged other regulators to follow the FDIC's lead. The FDIC supervises only state-chartered banks and does not have authority over the nation's largest banks.
Checking account overdraft protection: Frequent users pay big bucks
The FDIC guidelines come on the heels of Federal Reserve regulations requiring banks to get customers' permission to enroll them in debit card overdraft protection programs, which charge customers a fee each time they overdraw their checking accounts. Before, banks covered the overdrafts automatically and some customers, not realizing their balances had reached zero, racked up hundreds of dollars in overdraft fee, with each fee typically averaging $35.
These fees are often spread disproportionately among bank customers, with about 90 percent of overdraft fee revenue coming from a small number of customers who frequently overdraw their checking account, according to Moebs Services a financial research firm in Lake Bluff, Ill.
Overdraft input from all sides
The FDIC received more than 900 written comments about the proposed guidelines. Most banks expressed concern about a growing regulatory burden, while many consumers gave examples of being subject to "repeated and often disproportionate" automated overdraft program fees.
"Consumers raised concerns about bank practices to maximize overdraft fees, confusion over disclosures of account balances, and transaction processing order," an FDIC report about the new guidelines stated. "After reviewing public comments, the FDIC continues to believe that there are significant reputational and safety and soundness risks associated with many overdraft payment programs."
