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Credit Card Applications » News » Other » Feds Announces New Rules on Overdraft Programs

Feds Announces New Rules on Overdraft Programs

January 01, 2010
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Federal Reserve has announced new rules that ban banks and other financial institutions to sign up its debit card consumers to overdraft programs and charge them with overdrawn fees without the latter's permissions.

Under new rules, banks should give consumers and card holders an option whether to enroll in overdraft programs or not.

Banks and card issuers cannot charge a consumer, who opted not to sign up for the programs, for overdraft fees in purchasing and for ATM withdrawals.

If a cardholder applied for this program, the bank has a responsibility to explain overdraft services and its fees. The rules also require debit card issuers to make the terms and conditions of services comprehensible and the notices they will be sent to consumers should be easy to understand.

According to the federal agency, consumers are allowed to terminate the services any time they choose.

On the other hand, new rules - which will take effect on July 2010 - do not cover regulations on overdraft fees and other standard procedure covered in the programs, such as recurring charges, late notification, and many others.

In relation to this, Representative, Carolyn B. Maloney (D-N.Y.) and Senator Christopher J. Dodd (D-Connecticut.) filed two bills, specifically aiming at restricting fees.

The two proposed bills seek to limit overdraft fees and charges which will be charged only once a month or six times a year. Fees shall be a fraction of the overdrawn amount.

Officials from the federal agency said banks and the financial industry earned $25 billion to $38 billion a year in overdraft fees. In 2008, banks recorded more than $36 billion earnings for these same services.

The use of debit cards has become prevalent as a result of massive reduction of credit lines and closed accounts. Through overdraft programs, consumers are able to spend more than the amount of their debit card accounts.

According to the Federal Deposit Insurance Corporation (FDIC) report, about 41 percent of overdraft transactions transpired from debit cards, 30 percent came from checks and only 7.8 percent were from ATM withdrawals.

Earlier, consumers have called the attention of legislators to look into the banks' policy on compulsorily enrolling its customers in their services and for excessive overdraft charges and fees.

Meanwhile, some banks have started changing their policy with regards to overdraft programs. Some of the changes, which will be implemented early next year, are giving its customers an option to sign up in their services, and no fees will be charged to consumers if the overdrawn amount is less than $5.

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