Financial institutions brace for overdraft law changes

First, it was credit card reform. Now, the hot button between lawmakers and financial institutions is overdraft coverage fees.

More than one government agency is weighing in, and that's been a cause of confusion and concern for banks and credit unions.

On Nov. 12, the Federal Reserve announced regulations that prohibit financial institutions from charging overdraft fees on certain transactions without prior consent from customers. While those new rules go into effect July 1, Congress is considering its own bills dealing with overdraft programs, which charge fees in exchange for the institution's payment of a transaction when accounts lack adequate funds.

Both the Fed and the congressional bills are intended to protect consumers from exorbitant fees.

Weighty fees

Banks and credit unions are expected to collect $36.7 billion in income from overdraft fees in 2009, according to Illinois-based research firm Moebs Services Inc. For almost 45 percent of banks and credit unions, overdraft fee collections are greater than their net incomes, Moebs' data shows.

While fees are moneymakers, bankers note that overdraft coverage is a customer service.

"It's a convenience to the customer," said Bill Owen, senior vice president at the Springfield branch of Bank of Bolivar. "If we did not allow the overdraft, what would customers' options be? Where would they go? They'd go to title companies, who are charging substantially more than the banks."

Bank of Bolivar customers who have had an account for 30 days and keep a balance of at least $300 are offered overdraft protection. If customers agree to that protection, the bank will cover the cost of the transaction up to $800 and charge the customer a $28 fee.

"Basically, this is an unsecured small loan. The cost is $28 to have that loan available," Owen said.

Other financial institutions charge similar fees. At Arvest Bank, overdraft fees range between $15.93 and $17.43. At Regions Bank, first-time overdraft coverage fees are usually waived, said Ron Hawley, regional president for southwest and central Missouri. The next overdraw will cost a customer $25, followed by incremental hikes for multiple violations up to $35 for four or more times. At TelComm Credit Union, overdraft fees are $24.

Customers do, however, have the ability to opt-out of overdraft protection.

Transactions singled out

The new Federal Reserve rules prevent financial institutions from paying an overdraft transaction on a debit card or ATM transaction without an opt-in from the customer. By singling out specific types of transactions, the Federal Reserve may be creating logistical problems for financial institutions, said Michal Moss Early, senior vice president and sales manager at Arvest Bank.

"What they're trying to do is separate protection for check cards versus paper checks. That's very different than how banks see things currently," Early said, noting that financial institutions treat account transactions, whether they're originated via debit card, ATM or paper check, in the same way.

It's unknown whether the opt-out options in place at banks and credit unions will be enough to comply with the Fed's regulations that go into effect in July.

Bankers say problems could arise if the regulations require insitutions to distinguish paper from plastic transactions by allowing customers to opt-in on paper transactions but opt-out on ATM and debit card purchases. That could require a rewrite of financial institutions' computer software.

Fear of the unknown

U.S. House Resolution 3904, The Overdraft Protection Act of 2009, was referred to the House Committee on Financial Services on Oct. 22. And the Senate Committee on Banking, Housing and Urban Affairs held hearings on Senate Bill 1799, The Fairness and Accountability in Receiving Overdraft Coverage Act, on Nov. 17.

While the bills pass through committees and hearings, bank and credit union officials are hesitant to speak about the pending legislation.

At this point, both Senate and House bills would require customer opt-ins before financial institutions pay on overdrawn accounts and charge overdraft fees. More concerning to bankers is that the bills seek to limit overdraft coverage fees to one per month and six per year.

"Financial institutions make money on fees. If you change that, you may change the way checking accounts work," said Don Ackerman, president and CEO of TelComm Credit Union, noting that institutions offering free checking may have to start charging monthly account fees.

Timing is another matter. In the first three quarters of 2009, Federal Deposit Insurance Corp. said 83 of its insured banks failed. Limiting the amount struggling banks can collect on overdraft fees could spur even more failures, Bank of Bolivar's Owen said.

"If they want to look at this when times are good is one thing," he said. "But right now, to be looking at bank revenue streams is really going to be counter-productive."

Waiting and changing

Most institutions appear to be taking a wait-and-see attitude about the bills in Congress, while trying to make sure that their organizations are compliant with the Federal Reserve regulations.

According to a statement released by Commerce Bank, some changes can be expected within months.

"Given this highly uncertain environment and other potential upcoming legislative action, we are being careful not to make any changes in haste. In keeping with this approach, Commerce Bank is planning to introduce additional changes to our overdraft policies in the first quarter of 2010, which will assure that we are in compliance with the effective date of (the)... Federal Reserve action," the statement said.

Regions Bank also will revise its policies to waive overdraft fees against transactions less than $5 and to cap overdraft coverage fees at four per day, Hawley said.[[In-content Ad]]