New Fed Rule Set To Take Effect on July 1, 2010

The Federal Reserve System (the Fed) has a new rule on overdraft fees set to take effect on July 1, 2010.

The rule is officially known as Regulation E: Electronic Fund Transfers. Announced on November 12, 2009, the rule is designed to protect consumers from banks who have implement what many believe are predatory overdraft fee policies.

Essentially, the new rule prevents banks from automatically enrolling new checking account customers into their overdraft protection programs.

Background: in the past, most major banks have had opt-out overdraft protection programs, meaning that customers had to proactively say they did not want to be enrolled. The result was that they were being automatically signed up for these programs.

Overdraft protection sounds at first glance like something that protect consumers from having their charges and checks rejected due to a too-low checking account balance. However, many consumers feel that the programs are actually cleverly-disguised ways for the banks to make more money. And they could be right: overdraft protection programs have resulted in banks making over $30 billion per year in overdraft fees alone.

The banks make their money by charging overdraft fees of up to $35 per occurrence, with no limit on the number of charges per day.

One of the main points of consumer confusion with overdraft protection programs has been the fact that the banks will not reject debit charges made against a checking account with a too-low balance to cover the charge. This can make an unsuspecting consumer liable for $100 or more in overdraft charges in a single day, since their charges are not rejected at the register.

While the new Fed rule is designed to raise consumer awareness about how overdraft protection programs work by making banks ask customers to opt-in to the programs, many watchdogs say the new rule is not enough and that the problem is likely to continue.

One alternative that many consumers are following is to switch to banks that do not charge overdraft fees.

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Get a list of no-overdraft-fee banks in your area at: Escape Overdraft Fees.