FDIC gives banks final rules on overdraft protection programs

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Just in time for the holiday shopping season, the Federal Deposit Insurance Corp. on Wednesday gave banks final guidance on how to reduce problems with automatic programs that prevent customers from overdrawing their checking accounts -- often with hefty fees attached.

The new guidelines, originally proposed in August, aim to provide people with better information about the cost of automatic overdraft protection and to force banks to intervene when customers use the backstop too often. A 2008 FDIC study found that some people were chronically using overdraft protection as a way to obtain short-term -- and very expensive -- loans.


Standard fees are $20 to $30 each time a customer overdraws an account.

‘While many community banks already prudently manage their overdraft programs, some banks operate automated programs that lead to excessive use of these high-cost, short-term credit products,’ said FDIC Chairwoman Sheila C. Bair. ‘When banks spot a pattern of excessive use of an automated overdraft program, they should contact their customers about a more appropriate and lower-cost alternative that better suits their needs.’

Among the new guidelines, the FDIC expects the state-chartered banks it supervises to:

  • Review their marketing and disclosure for the programs ‘to minimize potential customer confusion and promote responsible use.’
  • Train staff to explain the program’s features and other options.
  • Monitor the programs for excessive use and offer alternatives to customers who overdraw their account more than six times in any 12-month period.
  • Set ‘appropriate daily limits’ on the number of overdraft fees a customer can be hit with.
  • Consider eliminating overdraft fees for transactions that overdraw an account by a small amount.
  • Consider using text messages, e-mail or other options to alert customers when their account balance gets low.

The FDIC said that since August it had received more than 900 comments about the rules from consumers, financial institutions and industry groups. Most from the industry worried about additional ‘regulatory burden,’ while most consumers supported the rules.
In response, the FDIC issued eight pages of guidance Wednesday and warned banks that regulators would consider how overdraft protection programs are run when examining the institutions.

The new FDIC guidelines, which cover personal checks and automatic debit transactions, follow overdraft rules enacted by the Federal Reserve in June for debit card and ATM transactions. Those rules required customers to opt in to such programs.

The FDIC is not requiring customers to opt in to overdraft protection for checking accounts but said banks should allow them to opt out of the coverage.

Consumer Reports released a poll this week that found 22% of customers have opted in to automatic overdraft protection for their debit or ATM cards and that 70% said they wanted the same right for protection on their checking accounts. About half of the respondents said they would choose that coverage.

‘Consumers shouldn’t opt in to high-cost overdraft loan programs, because there are more affordable options available when checking account funds fall short,’ said Pam Banks, senior policy counsel for Consumers Union, which publishes Consumer Reports. ‘Bank customers should have the same right to choose when it comes to overdraft programs covering checks.’

-- Jim Puzzanghera