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Taylor Price, who uses a debit card for almost all his purchases, thinks the new federal rules that prevent banks from charging overdraft fees without his permission could save him big in the future.

Last fall, the 19-year-old college student ordered his usual cheap lunch: two tacos for $1 at Jack in the Box in Santa Rosa.

To his surprise, the cash-strapped student ended up paying about $41 for those two tacos because he didn't have enough money in his account and he got charged overdraft fees by Wells Fargo.

"I knew I was low," Price said. "But I thought if I didn't have the money, it wouldn't work."

He was wrong. But come this summer, that changes.

Under new federal regulations, banks and credit unions will no longer be able to process debit or ATM card transactions unless the underlying checking account has sufficient funds -- or the cardholder gives explicit permission to process underfunded transactions.

The new rules take effect July 1 and apply to existing customer accounts starting Aug. 15.

The rule change has been widely applauded by consumer advocacy groups, which were frustrated that most banks automatically enrolled customers into the fee-laden programs.

But it could cost financial institutions billions of dollars in lost revenue, and the industry is still grappling with how to respond.

Exchange Bank, Sonoma County's largest local bank, generates about $2 million in overdraft fees on debit cards annually, said Brad Hunter, head of electronic banking. Officials are still determining how to deal with any revenue loss from the new rules.

The entire banking industry might have to abandon some perks as a result, he said.

"This may be the death of free checking," Hunter said, echoing others in the banking industry. "A lot of institutions justify free checking because they can make it profitable by the overdraft fees."

Exchange Bank officials are watching how the state's two largest players -- Wells Fargo and Bank of America -- adjust to the new rules before making any decisions.

So far, two dramatically different approaches have emerged from the major banks.

On Monday, Bank of America followed Citibank's lead and announced it was doing away with its $35 overdraft fee associated with debit cards -- a move that The New York Times estimated could cost the nation's largest bank billions of dollars. Bank of America customers will no longer be allowed to use debit cards to overdraw their accounts, even if the customer is willing to pay the $35 fee the bank currently charges.

On the flip side, Chase has launched an aggressive direct-mail campaign to encourage customers to enroll in its voluntary overdraft protection program.

"Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you," the bank is telling customers.

Chase wants customers to opt in to the program, which will allow it to continue providing the service and collecting its $25 to $32 fee.

Wells Fargo hasn't announced any revisions to its overdraft fees yet.

"We are getting ready to share our plan with employees," Wells Fargo spokeswoman Julie Campbell said Friday. "And then we will roll it out to customers."

The rule changes do not impact under-funded checks, which can still be processed by banks and credit unions even if customers have not given their permission.

Exchange Bank is leaning toward letting customers opt in to an overdraft program for debit cards and ATMs, rather than eliminating it entirely like Bank of America, Hunter said. But it has no plans to run an aggressive campaign similar to the Chase direct mailings that have arrived in Sonoma County mailboxes, and which have been lambasted by consumer advocacy groups as misleading.

Redwood Credit Union, the county's second-largest financial institution, will offer its members the opportunity to opt in to its overdraft protection for debit card transactions, according to a statement by Cynthia Negri, who oversees credit and debit card services. The credit union declined a request for an interview to discuss how the new rules would affect its revenues. Currently, members are automatically enrolled in the program and charged $22 per transaction.

Banks and credit unions say their overdraft programs provide an important service. Many customers at Exchange Bank want it to cover their phone bills, utility bills and other critical payments, even if they have to pay its $28 fee, Hunter said.

He understood that people got frustrated having to pay the fee after buying a cup of coffee, but said with debit card purchases there was no way for the bank to distinguish between a critical payment and a luxury purchase.

Jeannine Moore, a spokeswoman for the Consumer Credit Counseling Service, agreed that consumers are better off with an opt-in program than no program at all. Sometimes customers need help covering a bill, and they are better off paying the fee, she said.

Moore re-directed some of the outrage over overdraft fees back at consumers.

"The banks aren't the villains. It's a matter of people taking responsibility for their personal finances," she said. "Ultimately it is your own account, and you need to manage it."

A small percentage of people account for the bulk of overdraft fees, according to a study by the Federal Deposit Insurance Corporation.

About 14 percent of customers accounted for about 93 percent of overdraft fees charged by banks, according to the 2008 study. And an incredible 5 percent of customers accounted for 68 percent of the fees, annually paying $1,610 in charges.

These few customers have essentially subsidized free checking for everybody.

But the prospect of losing free checking doesn't bother Ginna Green, a spokeswoman for the Center for Responsible Lending.

"Consumers aren't looking for a free ride, they are looking for a fair ride," she said. "I think when fees and costs are up front, consumers are happy."

You can reach Staff Writer Nathan Halverson at 703-1577 or nathan.halverson@pressdemocrat.com.

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