Complaint Review: LEASE FINANCIAL GROUP LLC - Chicago Illinois

WASHINGTON The Federal Reserve announced new rules on Thursday that would sharply restrict banks and others that issue debit cards from charging overdraft fees without the express permission of the cardholder.

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The rules, which take effect next summer, are the latest issued by the Fed after criticism that it did not move quickly and aggressively enough to root out deceptive and abusive consumer lending practices.

Under the rules announced on Thursday, consumers must be given a notice that explains the debit card policies, including fees. Without permission from the consumer, the card issuer cannot charge for overdrafts at retail stores or A.T.M.s. The disclosures are required to be made in simple and easy-to-understand notices that customers should soon be receiving.

Fed officials said the new rules would not cover overdraft fees for checks. Research studies have shown that consumers are less aggravated by overdraft fees on checks than those on debit cards. When debit cards are used for small transactions at places like coffee shops, the overdraft fee could be significantly larger than the purchase itself.

The new rules also will not cover overdrafts from recurring debit card transactions, like payments for utility bills that are set up in advance.

The final overdraft rules represent an important step forward in consumer protection, the Federal Reserve chairman, Ben S. Bernanke, said. Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.

The rules will take effect for new cards on July 1. For existing accounts, issuers will not be able to charge overdraft fees without the permission of the cardholder after Aug. 15.

Because the new rules do not cover many other types of transactions, they were criticized by consumer groups.

Some of the time protection is never as good as round-the-clock protection, said Ed Mierzwinski, consumer program director at the United States Public Interest Research Group.

Some industry executives, however, said that the restrictions were too harsh and would have a significant impact on consumers by limiting the availability of credit just when it was needed most.

I would suspect that many community banks will simply stop offering overdraft protection to avoid the costs and penalties of complying with the rule, said Camden R. Fine, president of the Independent Community Bankers of America, which represents about 5,000 financial institutions. If that happens, it will not be the banks that suffer as much as it will be the consumers and small businesses that have taken bounce protection for granted. In many ways this rule and proposals in Congress turn back the clock 25 years and deny a service that was demanded by the consumers in the first place.

Fed officials said that the banking industry received $25 billion to $38 billion a year in overdraft fees, including fees for checks and electronic transactions not covered by the new rules.

Other Fed rules in the last two years have been directed at predatory loans, abusive mortgage practices, opaque home equity loans and misleading information about credit cards. Some of the credit card rules were superseded by legislation signed this year by President Obama that requires the card companies to give notice before raising rates and makes it more difficult for them to market cards to students.

The Fed announcement was endorsed by senior Democratic lawmakers who also urged the agency to do more.

Giving customers the chance to choose whether they want overdraft protection is important, but we need to do far more to protect customers from abusive bank products, said Senator Christopher J. Dodd, Democrat of Connecticut. We still need to stop the excessive fees, repeated charges, lax notification, and processing manipulation that have become standard in these so-called overdraft protection programs.

Last month Mr. Dodd, chairman of the Senate Banking Committee, and Senator Charles E. Schumer, Democrat of New York, introduced legislation to limit the number of overdraft fees to one a month and to require a bank to seek permission from consumers to cover debit card and check purchases that would push their bank balance below zero.

Under the proposal, banks would have to cap the number of overdrafts that they charge at six a year and require fees to be proportional to the cost of processing the overdraft.

On Tuesday, Mr. Dodd proposed a sweeping overhaul of the regulatory system that included consolidating bank regulators and creating a consumer financial protection agency that would take the Federal Reserve out of the business of regulating credit cards and mortgages.

The House Financial Services Committee has already approved similar legislation on the new consumer protection agency that was proposed by the committees chairman, Barney Frank, Democrat of Massachusetts. The Obama administration has urged the creation of such an agency, which has been opposed by the bank industry.

Overdraft fees can be costly, said Elizabeth A. Duke, a Fed governor who is chairwoman of the boards committee on consumer and community affairs. Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs.