The Wall Street Journal and USA Today have one of the biggest news stories of the day: The Federal Reserve is planning to upend the overdraft racket by forcing banks to allow customers to “opt in” rather than automatically enrolling them in overdraft “protection.” That’s something the vast majority of us don’t want and haven’t been able to get out of.
The Journal reports Fed Governor Daniel K. Tarullo said:
… the central bank would likely require customers to agree in advance they want “overdraft” protection on their bank accounts. Until his statement, it had been unclear whether the Fed would go this far or simply require banks (sic) give customers the ability to opt out of such a program if they don’t want it.
In other words, banks, kiss much of your $38.5 billion-a-year cash cow bye-bye (and consumers, look forward to a nice raise). That’s why this is such a big story. As the Journal’s Damian Paletta says in a nice bit of understatement:
Many bank customers are seen to be less likely to opt in to these programs if given a choice.
Of course, how effective this new regulation will be at squelching this disaster for consumers is largely dependent on whether the Fed forces banks not to mislead, I mean “market,” overdraft “protection.” Some required boilerplate explaining first the costs of doing so, including that the average household in America pays $368 in overdraft fees every year, ought to put any subsequent spin in context. Its effectiveness will also depend on whether the Fed forces banks to end overdraft protection for existing customers and make them retroactively opt in. The press needs to pay close attention to this stuff and not walk off with the trophy just yet.
Because while the banks have made noise about voluntarily moderating their overdraft predation, you can bet they won’t flack it when they start ramping it up again when the press and legislators inevitably turn their attention elsewhere. That’s why regulation and laws are necessary.
USA Today’s Kathy Chu, whose reporting on the issue has been as instrumental in forcing this turn of events as anybody’s, quotes the Center for Responsible Lending recommending that:
Regulators also need to require banks to tie the amount of the overdraft fee to their cost for the transaction, rather than allowing banks to charge whatever they want, says Eric Halperin, director of the Washington office for the Center for Responsible Lending.
That would take care of that 4500 percent APR thing.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.