A new federal rule may help many bank customers better understand overdraft protection for their accounts, and perhaps avoid costly fees.
The Federal Reserve on Thursday approved new requirements under the Truth in Savings Act for what is often termed "bounced check" or "courtesy overdraft" protection. The changes require more disclosure of fees and extend prohibitions against misleading advertisements. They take effect July 1, 2006.
The changes would benefit consumers who might better avoid what are effectively astronomical interest rates, often hundreds of percent a year, when they overdraw.
Conversely, they could hurt banks that depend more heavily on deposit service fees, as the industry faces slowing loan growth and as mortgage banking lags its 2003 peak.
Andrew Collins, an analyst at Piper Jaffray Co., wrote that Minnesota's TCF Financial Corp., Alabama's Compass Bancshares Inc., Louisiana's Hibernia Corp. and New Jersey's Commerce Bancorp Inc. rely more than many banks on deposit service fees as a source of revenue.
"These banks could experience greater downward revenue pressure under a scenario where deposit service charges continue to decline," he wrote.
Larger banks that rely more than rivals on the fees include Bank of America Corp., M&T Bank Corp. and UnionBanCal Corp., Collins added.
Banks last year collected $32.77 billion in service fees on checking and other deposit accounts, according to the Federal Deposit Insurance Corp. Perhaps one-fourth of such fees come from bounce protection, analysts said.
Banks have long paid occasional or inadvertent overdrafts as a customer service. But many have not told consumers when items would be paid or returned. And many do not warn customers when they transact that they are overdrawing their accounts.
Overdraft fees often reach $20 to $30 per item. Some banks impose a $2 or $5 fee for each day an account is overdrawn.
This can lead to effective interest rates of several hundred percent a year.
Changes
If, for example, you have $20 in your checking account, withdraw $40 from an automated teller machine and buy $40 of gas with a debit card, and your bank charges $25 per overdraft, you would owe $110.
The Fed will now require banks to specify when opening accounts the kinds of transactions for which they might impose overdraft fees.
They also require banks that promote the payment of overdrafts in ads to disclose in periodic statements the total fees for paying overdrafts and for returning items unpaid.
Ads must disclose the types of transactions covered, the time period consumers have to cover overdrafts, and the circumstances when overdrafts will not be paid, and cannot call an overdraft service a line of credit.
Some consumer advocates wanted overdraft protection regulated under the more stringent Truth in Lending Act, forcing banks to call the service a loan -- its "true nature," as the Fed put it. The Fed said it may revisit this issue.
