(FinalCall.com) – Carolyn Williams was unsure about the exact amount in her bank account when she went shopping. She wasn’t really worried because she knew her debit card would only cover costs for the amount of money she had in the bank.

Mrs. Williams learned an expensive lesson when she checked her account and discovered that not only was she charged for more than she had but each purchase over the amount of money she had also cost her $35 in bank fees.

“I spent $50 more than I had in my account on three purchases and I was charged $35 each time. So a $50 overdraft cost me $105 I couldn’t believe it. Why didn’t they just decline the charge?” she asked The Final Call.


“This is a problem. I didn’t ask them to advance me the $50 but they did and it cost me a whopping $105. I didn’t have the $50 now I’m overdrawn $165.”

This practice of advancing loans to bank customers is under review by the Federal Reserve Board. It is considering implementing a new rule that would require financial institutions to get explicit permission before enrolling their account holders in an overdraft system that automatically approves debit card and ATM transactions, and assesses an average $34 fee if there is a negative balance in the account.

In a recent study by the Center for Responsible Lending, U.S. consumers overwhelmingly said they want to be asked their preference before a bank or credit union enrolls them in a program to cover debit card purchases when they do not have the funds.

Financial institutions typically enroll their customers in a system that covers debit card overdrafts and then assesses them an average $34 fee for each transaction, often on the purchase of an item that costs less than the fee itself.

The vast majority, 83 percent of these consumers also wanted their bank to ask permission before enrolling them in such an overdraft program, rather than just doing so automatically.

Almost half of all overdrafts–46 percent–are triggered by debit cards at the ATM or the point of sale. These overdrafts could be easily prevented with a warning or denial. Most debit point-of-sale overdrafts are small, averaging less than half this $34 fee, meaning that these overdraft loans cost nearly $2 for every dollar advanced to cover the shortfall.

“Consumers should be able to decide whether banks should cover shortfalls in the first place,” said Leslie Parrish, senior researcher at the Center for Responsible Lending. “Otherwise, they’re making high-priced loans that consumers haven’t asked for and in many cases don’t even want.”

The Federal Reserve Board set a March 30 deadline for comments on two alternative proposals aimed at giving consumers better protection against abuses in unauthorized overdraft fees.

The Center for Responsible Lending believes the better of the two alternatives would require banks to obtain permission from customers before charging them overdraft fees on ATM and certain debit card transactions.

Though broader protections would still be needed, this opt-in alternative would begin to give consumers a true choice about when and how they are assessed charges and fees for short-term credit.

The other, opt-out alternative would do little to change current practices, which amounts to a system of abusive short-term loans that strip nearly $17.5 billion from consumers annually.

Fox News reported that the Federal Reserve hopes by the summer to address the issue by rolling out rules requiring customers to either opt in or opt out of overdraft services.

“Banks rely on consumers being overwhelmed with paper,” explains Ed Mierwinski of U.S. Public Interest Research Group. “Opt out will not protect consumers from an absolutely unfair product that hurts you more than helps you.”

On March 10, more than 50 diverse organizations supported legislation introduced by members of Congress to create a new federal agency to ensure the safety, fairness and sustainability of credit and payment products.

In a letter to Senators Richard Durbin and Charles Schumer and Representatives William Delahunt and Brad Miller, who are sponsoring the bill, the groups said, “It is now widely accepted that the current international economic crisis was triggered by the failure of federal regulators to stop abusive lending, particularly in the housing sector. By creating a separate agency focused exclusively on credit safety, your legislation will not only better protect consumers, but the entire economy.”

The legislation would create a new Financial Products Safety Commission to ensure that credit and payment products do not have predatory or deceptive features that can harm consumers or lock them into unaffordable loans.

The groups said that the legislation would offer a dramatic improvement over the current splintered, ineffective financial regulatory system because the new agency would be required to make consumer credit protection its top priority.