Jennifer S Martin

The largest problems facing regulation of consumer depository accounts are ones created by the need to keep regulations in pace with innovation. That is, bank innovation results in products on the marketplace that are either completely new or are comprised of such variation that the products might as well be new. Services associated with debit cards are a perfect example because debit cards were not commonplace until the late 1990s. Debit cards attach to regular bank depository accounts, yet are not checks, pure ATM cards, or even credit cards. Due to the changing nature of banking products, any regulation must be flexible, rather than static. With respect to debit cards, innovation has progressed unchecked in the wake of consumer excitement for the innovation itself, without creating a parallel regulatory framework. Accordingly, any discussion of the issues consumer depository accounts should take up an examination of the relationship between consumers and banks and explore possible improvements to existing regulatory structure so it may better adapt to innovations in banking products.

Full disclosure of the benefits and detriments of the overdraft programs prior an active enrollment decision is the best approach. If under the Final Rules a consumer enrolls in overdraft protection, resolution of assent and fairness hinges upon the disclosure of the terms of the overdraft service and the practices involved in securing assent. For instance, even though Regulation DD affirmatively requires disclosure of fees, a GAO study found that consumers have difficulty obtaining account terms and conditions and complete fee information even when requested. Moreover, even if the bank discloses the fees, the government does not regulate the reasonableness of fees or the manner in which they are imposed. The terms of overdraft fees are most likely ones of “adhesion,” in that they are offered or imposed without the ability to negotiate them, “take it or leave it” terms. If the GAO is correct, then Banks often fail to disclose the terms at all, even when asked. So, will the Final Rules result in substantial changes in banking practices?

Disclosure is at the cornerstone to most consumer regulations and is the primary prong of financial regulation. The Final Rules address disclosure issues primarily through the model opt-in form that accompanies the rules (the “form”). Importantly, the form: (i) requires that banks affirmatively give customers knowledge of enrollment in overdraft services; (ii) specifies the fee amounts that a bank charges per overdraft transaction, any daily fee charged for the account being overdrawn, and any daily limits on overdraft fees; and (iii) contains information about other, less costly banking services and where the consumer can obtain more information. These changes are significant because under current practice banks enroll many consumers without their knowledge or consent and without such disclosures. Up front disclosure is a key feature of the Final Rules, especially since consumers sometimes have difficulty obtaining fee terms at many banks despite Regulation DD requirements of fee disclosure. Of course, no form is perfect and there remains the potential for consumer confusion.

Curbing bank practices that disadvantage consumers by increasing the amount of overdraft fees incurred is the second prong in the solution to the problems with overdraft protection services banks currently offer. On this point, the Final Rules fall short. Although the Proposed Overdraft Rules addressed the issue of debit card holds by reducing many of the holds from days to just hours, the Final Rules contain no restrictions on holds, leaving wide discretion for the length and size of holds. It is doubtful that a consumer who goes out to gas up the car and buy groceries will know that in order to avoid an overdraft fee caused by a two hour gas pump hold on their card, he or she may want to buy groceries before gas when account balances are low. The Final Rules also do not take up other banking practices that increase the amount of overdraft fees, such as batch reordering of transactions from largest to smallest.

The final prong of any solution regarding overdraft fees must address the size and numerosity of fees imposed for consumers who opt-in the service. While banks typically impose credit card over the limit fees on a monthly basis, banks charge overdraft fees on a per transaction basis. Some consumers may continue to believe that credit and debit cards work the same in this respect. Consumers also tend to believe that government regulation is merit oriented, rather than disclosure based. While some in Congress have urged restrictions on overdraft fees to a “proportional” amount, the Final Rules do not take up fee size (see Dodd Says Senate May Expand Beyond Fed Overdrafts). To the extent that some banks charge overdraft fees on NSFs of less than $5, the size of the fee imposed is clearly material to consumers. Some banks have altered current practices to address this issue.

While the Final Rules represent an improvement over the status quo in terms of informing consumers about enrollment in overdraft services, they do not represent a complete solution to open issues of debit and ATM overdrafts. From the industry perspective, there are genuine operational issues at some banks that will require retooling of existing systems. Much of this must take place by July 1, 2010. Despite the successes in the Final Rules, consumers should not believe that they represent a panacea for overdrafts. If they do, disappointment will follow. This type of regulation is long overdue, probably owing to the more recent development of the product and regulatory system’s inability to respond effectively and promptly to developing issues in newer products. At its simplest, a solution to the problems of consumer choice and disclosure in debit card overdrafts favors a default rule system that gives the consumers an arrangement with the lowest cost. Despite the criticisms herein, the Final Rules go a long way toward that goal.