The Federal Reserve said it plans to release a rule in the next month that requires banks to get consumers' permission to charge a fee for paying certain transactions that overdraw their account.
At a hearing before the Senate Banking Committee Wednesday, Federal Reserve Governor Daniel Tarullo said that the new regulation would allow a consumer "to know that he or she was opting into a program like this."
The Fed's move comes amid congressional outcry about high overdraft and bank fees that are pushing consumers deeper into debt. The agency released a preliminary rule on debit card and ATM overdrafts late last year, but didn't say then whether it would require banks to get consumers' consent to sign them up for these programs.
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Tarullo's remarks came in response to questions from Sen. Charles Schumer, D-N.Y., who blasted bank regulators Wednesday for a poor record of consumer protection. Schumer said regulators seemed to be more concerned about the financial condition of banks than of consumers.
"What are you doing to ensure that consumers aren't bearing the brunt of banks' efforts to (bolster) their balance sheets?" Schumer asked.
Overdrawn transactions have long been a profit center for banks, but USA TODAY's research has found that they've now become the single-largest driver of consumer fee income. In 2009, banks are expected to reap a record $38.5 billion from overdraft and insufficient-funds fees, nearly twice the $20.5 billion they stand to collect from credit card penalties.
Some large banks, including Chase and Bank of America, have rolled back some of their overdraft policies. Capital One this week became the latest to do so when it posted a notice online saying it plans to cap the maximum number of overdraft fees that could be charged per day – to four – and not charge a fee when consumers overdraw by $5 or less per day.
Michael Moebs, founder of Moebs Services, an economic research firm, says banks should go further and lower their overdraft fees. Banks would still make money, he says, but the reduced fees would also help consumers.
Regulators also need to require banks to tie the amount of the overdraft fee to their cost for the transaction, rather than allowing banks to charge whatever they want, says Eric Halperin, director of the Washington office for the Center for Responsible Lending.
Schumer said regulators' inaction shows the need to create an independent consumer financial protection agency, which would regulate overdrafts and other forms of consumer credit.