Just say No to overdraft “protection”

Reposted from Ed Mierzwinski on US PIRG’s Consumer Blog

Don’t say yes to overdraft “protection” — it’s now the law that banks need your consent for OD on new accounts

– Ed Mierzwinski

As of today, August 1, banks will need a new customer’s opt-in (must affirmatively agree or say yes) before imposing so-called overdraft protection on debit and ATM card transactions. Effective August 15, banks will need a current customer’s consent to continue imposing the so-called benefit that hurts you and enriches the bank. Don’t say yes. Ignore the entreaties, pleas, exhortations, solicitations, supplications and, especially, ignore the opt-in forms from your bank or credit union. Overdraft “protection” doesn’t protect you, it costs you, $35 a pop. Worried about the social stigma of having your card declined at the coffee bar? Start carrying $5-10 bucks in your wallet again.

I will admit, it is somewhat fascinating, if scary, to see some of the sales pitches prepared by the PR flacks and behavioral economists at the bank  — after all, they need to sell it now, because they need to convince you that it makes sense to opt-in to a product that allows the bank to overdraw your account at a coffee shop so that you can pay $39 for a latte– $4 for the coffee and $35 for the “protection.” Bob Sullivan of the Red Tape Chronicles has more.

The Federal Reserve rules represent one of its few ventures into consumer protection but are no reason to consider the Fed a robust consumer protection agency. These new rules are essentially a do-over from a series of ill-advised, bank-friendly regulatory decisions by the Fed over the last ten years that distorted reality as they re-defined the definition of a loan to allow overdraft protection without APR (interest rate) disclosures) or concomitant consumer protections. At the same time, its fellow regulator, the obscure but powerful Office of the Comptroller of the Currency (OCC), aided and abetted abusive overdraft practices by national banks, according to a report by our colleagues at the Center for Responsible Lending. Fortunately, we will soon have a Consumer Financial Protection Bureau to enforce the rules.

In 2009, I testified in favor of even stronger remedial legislation that still has not been considered in committee. We also joined comprehensive comments on the proposed rule.

Some large banks, such as Bank of America, are dropping the “protection”  schemes, but we are watching closely to see what their next fee-gouging practice will be. Meanwhile, Chase and others are aggressively attempting to confuse consumers into saying yes or opting-in.

Despite all my caveats, the new rules — because they require a pro-consumer opt-in — are welcome and will save many customers billions of dollars. Now, we need legislation to protect everyone who does opt-in, by capping the number of overdrafts allowed and adding more consumer rights. We also need strict enforcement of the rules, particularly as to whether bank efforts to sell the product to consumers are unfair and deceptive. That’s why we need the CFPB.

Note: Consumers who don’t opt-in won’t face OD fees at the ATM or debit card point of sale, but could still face bounced checks or OD fees on certain recurring electronic transactions.