WASHINGTON -- The Federal Reserve imposed rules Thursday making it harder for banks to hit customers with fees for overdrawing their accounts, in the latest crackdown from the government that could curtail a major revenue stream for financial institutions.
The Fed's policy requires customers to opt in to "overdraft protection" programs, meaning they would have to agree to pay a fee any time they overdraw their accounts at automated-teller machines or using a debit card. If they don't agree, any effort to withdraw money would likely be rejected if it overdrew the account. Currently, banks can honor a withdrawal and levy a fee on the customer for becoming overdrawn.
Overdraft fees can be sizable and add up. Sometimes customers who overdraw their accounts by just a few dollars are hit with $30 fees for each additional transaction. Banks bring in from $25 billion and $38 billion a year when customers overdraw their accounts, Fed officials said.
The move comes after a prolonged fight between the banking industry and consumer groups over such fees. Banks have argued they provide consumers a service, allowing them to temporarily become overdrawn, while consumer groups have charged that the fees are unreasonably high. Bank regulators had largely allowed banks leeway in this area, making the Fed's move a major policy change.
Still, the central bank stopped short of restrictions pushed by some Democrats and consumer groups. The Fed exempted bounced-check fees from its new policy. It also refrained from crafting limits on how many times each day customers can be charged.
Some analysts said the Fed's rule could lead banks to make up the lose revenue by charging for other services, such as checking accounts. Perhaps in anticipation of this shift, the Fed prohibited banks from charging higher fees to customers who don't want overdraft protection. The new rules go into effect July 1.
Congress and the central bank in tandem have placed similar constraints on credit-card and mortgage fees. The Fed is under pressure in this area, with congressional and White House proposals aiming to strip it of powers to write consumer-protection rules, and has recently beefed up its efforts.
The Fed's policy requires customers to opt in to "overdraft protection" programs, meaning they would have to agree to pay a fee any time they overdraw their accounts at automated-teller machines or using a debit card. Above, the Federal Reserve Bank, Washington, D.C.
"The final overdraft rules represent an important step forward in consumer protection," said Fed Chairman Ben Bernanke. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."
Democrats and consumer groups that had pushed for strict curbs on overdraft fees welcomed the Fed's move but said more needed to be done. On Tuesday, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) called the Fed's track record on bank regulation and consumer protection an "abysmal failure."
Overdraft fees have come under increased criticism in the past year because some banks that received bailout funds padded their balance sheets with such fees. After a backlash, Bank of America Corp. and J.P. Morgan Chase & Co. announced they would offer overdraft protection to only those customers who requested it. The banks also said they would limit the amount of times each day customers could be hit with these fees.
Bank of America expects to lose between $150 million and $200 million in revenue during the fourth quarter as a result. It is also testing annual fees on a limited number of existing credit-card accounts. A bank spokeswoman said there is no connection between the two events. "That is not how we look at it," she said.
Michael Moebs, an economist and chief executive of Lake Bluff, Ill.-based Moebs $ervices, said the new Fed policy will cost banks on average a minimum of $5 per checking account. For the U.S. banking system, he predicts a cost of about $600 million, or 2% of the estimated $38.5 billion in consumer overdraft revenue.
"The consumer should welcome these changes," Mr. Moebs said. "However, those who keep their checking account in good order will view this as government interference."
The new limits will likely prompt banks to seek new revenue sources in a weak economy. Some have started raising credit-card interest rates ahead of new regulations that will take effect next year. Industry executives have said they may consider reinstating annual fees for credit cards and imposing minimum balances on checking accounts. Industry analysts speculate that the restrictions will ultimately result in even tighter bank lending.
The banking industry's response to the new policy was subdued, a recognition that it is bracing for even tougher rules in the coming months.
"This new rule addresses the primary concerns that have been raised by consumers and policy makers and will help bring consistency and clarity to overdraft programs," said Ed Yingling, chief executive of the American Bankers Association, a banking trade group. "Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently.
— Dan Fitzpatrick, Sudeep Reddy and Robin Sidel contributed to this article. —