Federal Reserve issues new rules restricting overdraft fees on debit cards

Beginning next summer, banks will have to stop charging overdraft fees on debit- and ATM-card transactions without the permission of the cardholder, according to a new rule announced Thursday by the Federal Reserve.

Banks have been taking heat over the fees for months, and Bank of America (BAC) and JPMorgan Chase (JPM), among others, announced in October that they would allow their customers to opt out of overdraft protection, ending practices that consumer advocates disdain.
All told, banks reap $25 billion to $38 billion annually from overdraft fees, including fees on checks and other transactions that aren't covered by the Fed's new rule, The New York Times reports. That's serious money for consumers and the financial industry alike.

"The final overdraft rules represent an important step forward in consumer protection," said Fed Chairman Ben S. Bernanke in a statement. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Consumer advocates seem sure to embrace the rule, which will prevent banks from automatically enrolling debit card customers into sometimes expensive "overdraft protection" programs that can prove quite costly. That's especially true if you think of them as loans. Indeed, given the average overdraft fee of $27 at banks surveyed last year by the Federal Deposit Insurance Corp., annual percentage rates can exceed 3,500%.

The rule seemed to sit well with the banking industry as well. Edward L. Yingling, the president of the American Bankers Association and one of the financial industry's most oft-quoted spokesmen, said the changes would "help bring consistency and clarity to overdraft programs."

Bills that would restrict overdraft fees are also making their way through Congress. In October, Sen. Chris Dodd, the chairman of the Senate Banking Committee, introduced a proposal that would cap the number of times per month financial institutions could impose the fees on a given account. The proposed bill would extend beyond debit cards to cover transactions by check.
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