Overdraft Fees Needs Regulation Says Chief Of FDIC

Recently, some major banks have announced a pull back of their policies regarding overdraft fees. Right now, debit card holders are finding out that debit cards have too much in common with credit cards, namely: overdraft fees.

Overdraft fees are part of the overdraft program which is supposed to protect a card holder from embarrassment when he or she makes a transaction and does not have the money in the debit card to cover for it. Overdraft fees turned out to be very expensive to card holders. At the moment, overdraft fees can be as high $35 and this can be charged multiple times a day. Most banks allow debit card holders to make multiple transactions even when, during the first transaction, the card holder had insufficient funds to cover the purchase. When a debit card holder’s checking account goes in the red and is unbalanced by the end of the month, another fee will also be added.

One can make an argument about overdraft policies and how they protect card holders from embarrassment. However, it is much more difficult to argue the merits of the decision of most major debit card issuers to automatically enroll debit card holders to their overdraft protection programs. Even more difficult to argue is the fact that debit card issuers do not allow their debit card holders to opt out of the overdraft protection program. Fortunately for debit card holders, of the major banks have announced their intentions to change their policies and allow debit card holders to opt out of the program.

The head of the Federal Deposit Insurance Corp. (FDIC) is not impressed however. Amidst the announcement of debit card issuers to change their policy on opt-outs, Sheila Bair, FDIC Chair, is still calling for more robust restrictions for fees charged on checking accounts overdrafts. According to Bair, the recent moves of the banks are “significant improvements”. However, she questions if they “go far enough”.

According to her, that remains as an open question. “We do need some regulatory standards in this area. We need the Fed to finalize rulemaking in this area”, she said.

The Federal Reserve has already announced of plans for the release of an overdraft rule by year’s end. It is still unclear how far the extent of the rule will be and whether the rule will require debit card issuers to curtail their overdraft practices.

Analyst of Rochdale Securities, Richard Bove, is worried by the plans of the Federal Reserve. He warns that, if limitations are placed on overdraft fees, debit card issuers might start closing debit card accounts because of the resulting loss in profits.