Fed to Limit ATM Fees

Ben Bernanke said new regulations on ATM cards should help consumers.

Banks won’t be able to charge overdraft fees on ATM or onetime debit-card overdrafts beginning July 1 for some customers.

The Federal Reserve issued new rules Thursday that set a date for the death of some overdraft fees, which have been a cash cow for banks and a source of political heat as scrutiny on banks has intensified in the past year.

Consumers will have to be given detailed notice on card policies, including fees. And only if consumers opt in will banks be allowed to charge for overdrafts on routine purchases at retail stores or ATMs.

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

Federal Reserve regulators, in a statement, say that most consumers prefer not to be enrolled in onetime overdraft-protection services without the option to opt in themselves. The rules do not cover overdraft fees for checks.

"Overdraft fees can be costly," said Fed Governor Elizabeth A. Duke, the chair of the Board's 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."

The Fed’s action comes as Congress turns up the heat on banks. Both Senate and House bills on financial oversight include creation of a consumer financial protection agency to look out for consumers’ interests when they deal with banks. The Obama administration also supports creation of such an agency.

Both the House and Senate bills restrict banks’ ability to charge overdraft fees on debit-card transactions without consumer consent.

“Don’t do people favors without asking them,” said House Financial Services Committee Chairman Barney Frank. Dodd was harsher. He said banks, “shouldn’t be trying to bolster their profits at the expense of the consumer.”

And bolster banks’ profits the overdraft fees most certainly do.

Fed officials tell the New York Times that the banking industry pulls in $25 billion to $35 billion a year in overdraft fees. That includes checks and electronic transactions not covered in the new rules. So the banks’ cash cow isn’t dead. But it won’t be giving as much milk in the future.

The Times calls this move the latest of several rules the Fed has come out with to crack down on bank behavior, including rules on predatory loans and abusive mortgages.

But the Fed itself has not been immune to criticism from Congress. It has been criticized for standing by while the subprime-mortgage crisis got out of hand and the financial system nearly collapsed. The financial consumer protection agency proposed in Congress would take away some of its ability to issue rules such as the one it issued Thursday.

That authority would rest with the financial consumer protection agency, which is proposed to regulate everything from credit and debit cards to mortgages.

And Dodd, who unveiled his bill earlier this week, would go further. He would create a super regulator to watch over the entire financial system, while eliminating existing agencies and limiting the Fed’s role to setting monetary policy.