Fed: Consumers must opt in to debit card overdraft fees

New overdraft rule is mandatory by July 1, 2010

By Connie Prater

Consumers will be able to avoid getting hit with costly overdraft fees on their debit cards under new rules released Thursday by the Federal Reserve.

Lawmakers and consumer advocates, however, said the new Fed rules don't go far enough in protecting consumers from abusive overdraft practices and vowed to continue efforts to pass more stringent legislation.

Starting July 1, 2010, banks will be required to allow debit card customers to opt-in to overdraft fees rather than automatically enrolling card users in programs that charge $20 to $30 whenever there are insufficent funds to cover purchases. That means consumers who do not opt in and who attempt to make transactions without sufficient money in their accounts to cover the purchase could have their debit cards denied at the cash register. (See 6 ways to avoid debit card overdraft fees.)

HIGHLIGHTS OF NEW FEDERAL OVERDRAFT FEE RULES
What: The Federal Reserve issued rules Thursday requiring banks to get consumers' permission to charge overdraft fees when there are insufficient funds in an account to cover purchases. Who is affected: Anyone with an ATM or debit card. The rules apply to existing as well as future cardholders. How soon does it take affect: Banks must implement the rules no later than July 1, 2010. They cannot charge overdraft fees to existing customers without prior consent after Aug. 15, 2010. What's not covered: Banks can still charge whatever they want for overdraft fees. They can also assess multiple fees during a single month. Members of Congress are vowing to push for legislation to address these practices.

Under the Fed rules, banks would have to explain what overdraft protection is, the details of how it works and the fees associated with it before asking consumers to opt in to the program. (See model opt-in disclosure.)

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

Another blow to banks
The new rules are the latest setback for the nation's banks and credit unions already reeling from the effects of the economy and new consumer credit card rules coming online. Thursday's overdraft regulations are sure to trim back what had become a growing income source, estimated at $23.7 billion in 2008 and projected to hit $38.5 billion in 2009.

In third quarter financial statements filed this month, Wells Fargo indicated it expects to take in $300 million less in fee revenues in 2010 because of policies the bank has implemented to help consumers limit overdraft and returned item fees. Facing a rising tide of consumer complaints, Bank of America and Chase have also revised their policies to give customers the choice of using overdraft services.

Edward L. Yingling, president and CEO of the American Bankers Association trade group, said the bankers have created an overdraft task force to look at consumer concerns as well as how technology can be improved and the role of retailers and merchants processing transactions.

"This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs. Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently," Yingling said in a statement.

The Fed rules also come as lawmakers in both houses of Congress are considering bills (H.R. 3904 and S. 1799) to curb overdraft abuses. The proposed bills are more far reaching than the Fed rules and include bans on multiple overdraft fees during a single month. Those bills also seek to regulate how debit card transactions are processed by banks. Consumer advocates have complained that transactions are processed to maximize fees for banks rather than chronologically as they occur. A hearing on the Senate bill is scheduled for Nov. 17 before the Senate Banking Committee.

Lawmaker: Fed rules don't go far enough
Rep. Carolyn Maloney, co-sponsor of the House bill, applauded the Fed for recognizing that the overdraft fee problem needs review, but said the Fed rules don't go far enough to address all of the practices harmful to consumers.

While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue.

-- U.S. Rep. Carolyn Maloney

"While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue," Maloney said in a statement. "The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed's new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!"

She added: "My bill does all that -- it caps the quantity of fees at one per month or six per year, requires that fees be reasonable, and prohibits posting-order manipulation, and includes all transactions, not just debit cards. Those are provisions I believe make for the strongest consumer protections, that's why Chairman [Barney] Frank and I have proposed this legislation, and that's what I believe the House will be passing."

Consumer groups have called overdraft fees "high-cost loans" and note that banks can decline debit transactions when there aren't enough funds but don't because of the profits they can make from the fees consumers pay. Advocates say banks often don't explain to consumers that they can avoid overdraft fees by linking their debit cards to other savings accounts or opening a line of credit -- less expensive alternatives to overdraft fees.

Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending, criticized the Fed's "failure to propose or enact necessary safeguards against a host of unfair practices."

"Congress needs to step in to stop the abusive practices the Fed has known about for nearly a decade, but once again has failed to address," Halperin said in a statement.

Fed research: Consumers want choice
According to the Fed, which conducted consumer research on overdraft practices, most consumers would prefer to have a choice in enrolling -- or "opt in" for -- overdraft programs for ATM and debit card transactions. The research also showed that most people do want overdraft coverage for important bills such as rent, telephone and other utilities. Thus, the new rule applies to ATM and one-time debit card transactions but not checks. A 2009 study by the Center for Responsible Lending found most overdraft fees were generated at the point of sale, when consumers are using their cards at check-out.

The Fed rule also took steps to prevent banks from discriminating against customers who do not opt in by requiring that they have the same account terms, conditions and features as account holders who opt in to the fees. Anyone with ATM or debit cards prior to July 1, 2010, cannot be charged overdraft fees after Aug. 15, 2010, unless the bank or credit union has first gotten the consumer's consent to participate in an overdraft program.

"Overdraft fees can be costly," Fed Gov. Elizabeth A. Duke, who heads the agency's Committee on Consumer and Community Affairs, said in a press release. "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."

Said Maloney at an Oct. 30 congressional hearing on her overdraft bill: "The overdraft problem is significant and getting worse. The quantity of debit card transactions now exceeds the quantity of credit card transactions."

Money and credit lessons learned from TV

What our favorite TV characters teach us about finances

By Gina Roberts Grey

The loveable television characters we welcome into our homes once a week can actually teach valuable lessons about managing money and protecting credit. Take another look at the financial pratfalls of these classic characters, this time without the laugh track. Their antics cause only imaginary harm to a budget, but beneath the comedy lay real money lessons:

Matt LeBlanc and Courteney Cox, who portrayed Joey and Monica in the hit TV series "Friends."

The show: 'Friends'
The Character: Joey
A recurring role on a soap opera means Joey finally has wads of money. Instead of budgeting his disposable income and saving some for a rainy day, Joey hastily moves into a lavish apartment. Without considering the "what ifs," he furnishes it with expensive extravagances, such as porcelain greyhounds, and racks up massive credit card bills. When his soap opera character is suddenly killed off, his income stream also dies. The change forces Joey to move back in with Chandler and rebuild his financial life.
The lesson: There's nothing wrong with treating yourself to a little extravagance once in a while, as long as you feed your savings account first. Living for today might be fun, but it could leave you out in the rain if your income is reduced, you lose your job or face a medical, car or other emergency.
The fix: Always pay yourself first. If you come into money, whether from a job bonus or large raise or inheritance, "don't be in a rush to spend it," says Melanie Donaghy, vice president of Wells Fargo Online Banking. Use extra cash to stash money in a retirement fund, pay off credit cards, invest in laddered CDs or a savings account. Then you can treat yourself to a "want purchase."

"King of Queens" cast Jerry Stiller, Leah Remini and Kevin James, who played Arthur, Carrie and Doug. Photo: Sony Pictures Television

The show: 'King of Queens'
The characters: Doug and Carrie
When Doug and Carrie notice they've made progress with their money management skills and are starting to get out of debt, they decide to "treat" themselves. The $400 price tag on Carrie's new jacket sends Doug into a tailspin. Carrie goes to return the jacket, but finds a "loophole in the system" that convinces her if she returns things she buys -- even if she wears them -- it's as though she never really spent money. Proud of her discovery, Carrie tells Doug she's being thrifty. Doug tells her she's being "shoplifty."
The lesson: It's understandable to want to splurge after meeting a financial goal, but Jim Randall, author of "The Skinny on Credit Cards," urges keeping your eye on the ultimate goal. "You don't want to fall into a routine of taking one step forward, two steps back."
The fix: Randall says if you are going to allow yourself a small splurge, make sure it won't put you deeper in debt. "Don't reward yourself for digging out of debt by tacking on a little more," he says.

Unctuous Edward W. "Eddie" Haskell was brought to the small screen by Ken Osmond. Watch the full clip.

The show: 'Leave It to Beaver'
The character: Eddie Haskell
The charming troublemaker brags to his buddies about his father giving him a credit card earmarked for emergencies. When Wally's car battery dies, Eddie happily steps up, flashing his card to all his friends. Although Eddie's heart was in the right place, he shows off his buying power and charges without regard for how to pay the bill. When Mr. Haskell finds out, Eddie finds himself in a familiar tight spot.
The Lesson: Randall says it's not necessarily a kid's fault if they can't control spending. "Giving a kid a credit card without proper supervision or education of the ramifications of impulse spending can leave you stuck with a hefty bill." That can also send a parent's credit score tumbling if the bill can't be paid or if the balance maxes out the card's credit limit.
The fix: Be proactive. Randall suggests sending your kid back to school before adding your child as an authorized user on your credit account. "Give your kids a lesson in tracking purchases and balances online, saving receipts and how nearing credit limits can impact credit scores," he says.

Jason Alexander portrayed perpetually parsimonious George Costanza in "Seinfeld."

The show: 'Seinfeld'
The character: George Costanza
His thriftiness didn't just border on cheap -- George Costanza gleefully crossed that border and moved in to stay.

To cut corners, George ordered bargain wedding invitations that were discounted because they had subpar adhesive. His "deal" wound up killing his fiancee since the too-good-to-be-true glue was toxic, which she ingested while licking the envelopes.
The lesson: Sometimes saving a buck or two can cost you twice as much in the long run. "If a price sounds too good to be true, it probably is," says Bruce McClary, credit counselor at ClearPoint Credit, a nonprofit debt counseling agency.
The fix: Weigh all your buying options. Price match to make sure you're truly getting a good deal.

"Read all the fine print," says McClary. "Sometimes, a price appears lower, only to learn there are hidden fees built in that can blow your budget."

The show: 'Everybody Loves Raymond'
The characters: Ray and Debra

Ray finds out the diamond in his wife's wedding ring is fake and sets out to replace it without Debra knowing.

Patricia Heaton played Ray Barone's wife Debra on the sitcom "Everybody Loves Raymond."

Grabbing her ring off the table while she's in the shower, Ray leaves Deb in a panic, thinking she lost it and sets off to replace the counterfeit stone. The catch: He wasted his money. Debra confesses she found out years ago the diamond was fake and had the original stone replaced with her grandmother's very expensive real diamond. The couple ends up dumpster diving trying to find the family heirloom Ray mistakenly threw out.
The lesson: It pays to be honest. "In this episode, it would have prevented a major, unnecessary expense," says McClary. Financial deception among spouses can cost money, cause stress and weaken your relationship. For example, McClary says one negative hit resulting from a jointly held maxed out "secret" credit card or other financial deceptions can negatively impact future car loans, mortgage rates and insurance premiums.
The fix: Designate a neutral spot (perhaps a park or other public place) to routinely discuss financial matters and decisions. Agree to listen, not just talk. "Honesty truly is the best financial policy," McClary says.

The final scene
The networks are always lining up casts of new characters and scripting hilarious situations to befall them. As you welcome these sitcom sensations into your home, McClary suggests watching with an open mind. "Even though you tune into sitcoms for a few laughs, there are plenty of valuable lessons to learn, too."

American consumers getting a grip on debt

By Cara Henis

More American consumers are paying down -- and even paying off -- their debts, according to a September survey commissioned by Wells Fargo & Co. and conducted by Ipsos Marketing, a marketing research company.

The quarterly survey of more than 2,000 U.S. homeowners found that approximately 20 percent of homeowners paid off their debt completely between July and September of 2009, up from just 9 percent the previous three months. The percentage of homeowners making strides toward lowering their overall level of debt also rose dramatically, reaching 42 percent, up from 30 percent in the previous quarter.

Homeowners are also getting serious about putting money away. Twenty-seven percent of homeowners increased their savings, up by about 8 percent from the previous quarter. And even those who haven't begun saving yet are feeling the urge to do so. About 55 percent of those asked said the yearning to save is a "top influence" on their spending habits.

Despite the emphasis on savings, consumers are more willing to finance family fun and vacations than they have been in the past, the report says. Yet most are doing so while holding steadfastly to a budget.

"Don't let your eyes get bigger than your wallet," a survey participant said. "Spend only what you are reasonably sure you can afford."

Identity theft booms, even as thieves rely on old-fashioned methods

By Andrea Leptinsky

Identity theft skyrocketed last year in a huge about-face for fraud trends, insurance giant Travelers reported.

And while increasing in number, identity theft incidents also seem to be increasing in simplicity. Identity thievery has gone old school, with thieves grabbing wallets or laptops rather than sifting through electronic information to snatch personal data.

Identity fraud increased by 22 percent in 2008, and an identical increase is expected in 2009, Travelers said in a Nov. 2 report based on claims data from the insurer. That's an alarming change from previous years' identity theft statistics. From 2004 to 2008, the number of identity theft incidents had been on a steady decline, thanks in part to increased consumer awareness and new technology.

Why the increase? Travelers attributes the boom to the difficult economy. They say people -- perhaps beset by job woes or other financial troubles -- are turning more to burglary and other so-called "crimes of opportunity" to get by. Even though online security and data breaches often earn front-page news placement with their high-priced casualties, identity theft most commonly resulted from pickpocketing, purse swiping or computer theft. In instances where victims knew their identity had been stolen, the incident was the result of personal property theft nearly 78 percent of the time. Fourteen percent of identity theft incidents came from online or data breaches, and 5 percent from postal fraud.

Once your information has been obtained, thieves tend to open up new credit cards, Travelers reports. Stolen information is used for new accounts 75 percent of the time. Twenty percent of identity thieves will instead withdraw cash from existing accounts, and 16 percent will open utility accounts in the victim's name.

Don't be a victim
Reducing the risk of falling victim to identity thieves can happen in a few basic steps:

• Be aware. The Federal Trade Commission recommends studying up -- be aware of how information is stolen and what you can do to protect your own. Monitor your personal information to check for any irregularities and to uncover any problems quickly.
• Guard your Social Security numbers and financial information. Do not carry these types of information in your wallet or purse. Also, shred any financial statements or credit card applications you don't need.
• For extra protection, invest in identity fraud expense coverage. This type of coverage offers high-quality resolution services that can help resolve incidences of identity theft much faster than normal processes.

"Our data indicates that identity fraud can happen to anyone at any time," says Joe Reynolds, identity fraud protection manager at Travelers in a statement. "It really becomes a matter of being vigilant and prepared in the event identity fraud happens to you."