Scrutiny of banks’ overdraft fees intensifies

NEW YORK -- Several of the country's biggest banks recently announced consumer-friendly makeovers of their overdraft programs. The changes may be too little, too late.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., is the latest federal official to call for tighter regulation of overdraft programs, which have become an industry standard in recent years.

In an interview with USA Today published yesterday, Bair questioned whether the changes banks announced last week "go far enough."

"We do need some regulatory standards in this area. We need the [Federal Reserve] to finalize rulemaking in this area," she said.

Overdraft programs typically penalize customers with a fee of about $25 or $35 for making purchases when there isn't enough money in their accounts.

Consumers are generally automatically enrolled in the programs and can't opt out. Critics say the programs are misleading because most people assume they can't spend more than they have when using debit cards.

Last week, Bank of America, JPMorgan Chase, U.S. Bank and Wells Fargo announced plans to start requiring customers to opt in to the programs.

But even with the bigger banks backing off automatic enrollment, federal regulations could force smaller and community banks to follow suit, said Linda Sherry, a spokeswoman for Consumer Action, an advocacy group in Washington. "There's so much money in this for even the small banks, I can't see them backing off it without a fight," she said.

The Federal Reserve has proposed two approaches for dealing with overdraft programs.

The first would bar a bank from assessing fees on a customer's account unless notice and an opportunity to opt out of the bank's overdraft-protection service was provided in advance. Under the second proposal, a bank would have to secure the customer's consent, or require him to opt in, before overdraft fees could be imposed.

The law the Fed is using doesn't give the agency authority to cap or limit the fees.

Resistance to the central bank's proposal is expected, as overdraft fees have become an important revenue stream for banks. In 2007, the industry earned about $29 billion from overdraft fees, according to Oliver Wyman, a Boston-based consulting firm for the banking industry.

As part of the changes announced last week, Bank of America, JPMorgan Chase, U.S. Bank and Wells Fargo also said they were capping the number of times per day customers would be penalized for overdrawing accounts.