There have been rumblings for quite some time about more regulation on overdraft services. Consumer advocates have been lobbying for change because they believe that “overdraft transactions are a high cost form of lending that traps low and moderate income consumers.” See Truth in Savings Proposed Rule. Federal Register Vol. 73, No. 97 at 28740. These advocates also worry about “debit card overdrafts where the dollar amount of the fee may far exceed the dollar amount of the overdraft, and multiple fees may be assessed in a single day for a series of small-dollar transactions.” Id.
Arguably, these overdraft services also keep consumers away from check cashing companies and keep them in traditional financial services with overall lower costs. However, examples such as the consumer who buys a pack of chewing gum with a debit card and is hit with a $20.00 fee for the transaction don’t help. Especially when, prior to overdraft services attaching to the account, the same purchase would simply have been denied without a fee.
Overdraft services are popular with credit unions and I would argue that credit unions are not among the primary abusers of extensive fees tied to these programs. Yet, the proposed changes to Truth in Savings are targeted at all financial institutions that offer the programs.
Highlights of the rule include setting requirements for notices to be given to consumers concerning opt-out rights, disclosure of overdraft service costs on statements and separating out balance inquiries to show funds available with and without the overdraft service.
Consumers can opt out of overdraft services now. The proposed rule would require financial institutions to provide the notice of this at various points prior to assessing fees to the consumer. Currently, giving the consumer specific costs of overdraft services in the consumer’s statement is reserved for financial institutions that advertise overdraft protection. This rule would eliminate that exception. The problem for credit unions is that some data processors still can’t comply with these requirements. ATM processors would face similar hurdles on ATM balance printing.
The comment period ends July 18, 2008. We’re slated to discuss this proposed rule (among other things) on CIiCU this month as well.