WASHINGTON (CN) – Facing a loss of regulatory authority and continued criticism over its handling of lending practices, the Federal Reserve Board announced Thursday that it will restrict overdraft fees for debit cards.
“The final overdraft rules represent an important step forward in consumer protection,” Federal Reserve Chairman Ben Bernanke said. “Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.”
Unless a consumer knowingly elects the overdraft service, banks will no longer be able to charge fees when customers overdraw at the ATM or when using their debit cards.
The announcement comes as Congress considers reassigning the agency’s oversight of credit cards and mortgages as it and the Obama administration pursue far-reaching financial reforms.
The Fed was heavily criticized for not acting quickly and aggressively enough in tackling what many considered abusive lending practices.
Officials said the overdraft measure will help consumers, who pay between $25 billion and $38 billion in banking fees a year.
But the restrictions will not apply to checks, because the Fed determined that most consumers would rather be blocked from making a purchase than be allowed to overdraw on a small purchase, but that they often want the option when paying important bills like rent or utilities, which are frequently paid by check.
For the same reason, automatic withdrawals, which many use to pay monthly bills, will also be exempt from the restrictions.
The new rules, set to take effect in July, also prohibit banks from discriminating against customers who do not sign up for the overdraft program, requiring the same account terms, conditions and pricing as those who do opt into the program.