WASHINGTON — The Federal Reserve will begin banning banks from charging many overdraft fees unless customers sign up for the service, an unprecedented move that comes as a wave of consumer reforms sweeps Washington.
The new regulations, announced Thursday, cover overdrafts from ATM withdrawals and debit card purchases, which account for roughly half of overdrawn transactions, and help to address widespread complaints that consumers who were unaware they had insufficient funds were being charged exorbitant fees for purchasing a cup of coffee, for example. The rules, which take effect July 1, come as banks have drawn increasing scrutiny in the wake of the financial crisis for charging high fees and interest rates at a time when consumers are struggling.
Banks will be required to send customers a notice explaining their overdraft protection services and fees before they are asked if they want to sign up. But the regulations do not cover payments made by check or recurring debit card charges, such as automatic bill payments. They also give banks wide latitude over the structure of overdraft fees once customers opt in, though Fed officials said the regulations allow consumers to drop the service at any time. Two bills targeting the fees are under consideration by Congress and would place tougher restrictions on the industry.
The Fed has been under pressure since the financial crisis began to demonstrate its concern for protecting consumers and has imposed new limits on mortgage and credit card lenders. The recent spurt of rulemaking follows a decade of inaction during which the Fed ignored mounting evidence of abuses and repeated pleas from consumer advocates. As a result, the Obama administration wants to strip the Fed of some of its responsibilities and create a new agency devoted to protecting consumers. Fed Chairman Ben Bernanke has declined to take a public position on the proposal, but he has highlighted the Fed's recent actions as evidence that the institution is aware of its past shortcomings and working to improve.
Fed officials said Thursday they had been working for several years to refine their regulations on overdraft charges, which infuriate consumers but are a significant revenue stream for banks. Fees from overdrawn U.S. accounts are estimated to hit $38.5 billion this year, up from $36.7 billion in 2008, according to research firm Moebs Services in Lake Bluff, Ill. A survey of smaller banks released by the FDIC last year showed about a quarter of accounts had been overdrawn at least once in 2006, the year the study was performed.
Ashley Richardson, 26, said she has been hit with fees of $37.50 by U.S. Bank for purchases of as little as $2 or $3 that overdrew her account. The Los Angeles resident said she's asked to opt-out of the overdraft program without success.
"I'm a very unhappy customer," she said.
Steve Dale, a U.S. Bank spokesman, said the bank wouldn't comment on specific customer complaints. But the Minneapolis-based bank plans to eliminate fees if an account is overdrawn by less than $10 and will allow customers to opt out of the overdraft program. Those changes, announced in late September, will go into effect Jan. 1, he said.
Other larger banks, including Bank of America, JPMorgan Chase & Co. and Wells Fargo & Co. also have said they plan to reform their practices after coming under fire for the fees.
But consumer groups and other regulators, including Federal Deposit Insurance Corp. Chairman Sheila Bair, said new rules were still necessary to ensure smaller banks followed suit.
Edward Yingling, chief executive of the American Bankers Association, a trade group, said the regulations strike a balance between consumer concerns and industry needs. But the group also said its members will be hard-pressed to find replacements for that revenue, especially as the recent wave of financial reforms has limited their ability to charge riskier customers higher fees and higher interest rates for loans. That could mean banks will begin considering charging for popular services that they had provided for free, such as checking and nonminimum accounts.
"There are additional risks and costs that the final rule creates, and they'll have to make adjustments," said Nessa Feddis, ABA senior counsel.
Information from the Associated Press was used in this report.