Big Banks Prepare for Regulation E

WICHITA, Kan., March 31 /PRNewswire/ -- According to a press release from the United States Federal Reserve Board, big banks are in for some big changes this summer, reports Solomon Finance.  Regulation E, in summary, is a new regulation that will go into effect July 1st, 2010. This regulation prohibits banking institutions from charging "Overdraft" or "NSF" fees to a customer without receiving consent from the customer to "Opt-In" to the bank's "Overdraft Services."  

What this means for customers is they now have a choice in whether or not they would like to have the option to overdraft on their checking or savings account, or rather to simply be "declined" on the transaction that would overdraft the customer's account.  What this means for big banks is a little more complex, and certainly unsure.  A national study by Bretton Woods states: "Bank and credit union income from non-sufficient funds (NSF) and overdraft (OD) fees exceed $38 billion." The article then estimates that banks will lose approximately $7.3 billion in OD/NSF fees for the remainder of 2010 alone!  

One particular method of protecting overdraft/NSF income had already been implemented, even before the conception of Regulation E.  As mentioned in the Bretton Woods report, "…States that permit payday loans, households with checking accounts pay up to 13% less in overdraft [fees]…" which would explain why big banks have contributed millions of dollars in lobbying efforts to regulate against the Payday Lender Industry. Opponents to short-term lending often cite "outrageous" APR percentages and predatory practices as the primary factors in the push for regulation, when in reality the same calculations applied to overdraft/NSF fees would prove the APR percentages to be higher than the cash advance loan products that they criticize.

For example (from the ABC News Associated Press) when looking at fees for $100, the typical $15 fee associated with a payday loan equates to 391% APR, whereas a $29 NSF charge would figure out to be 755% APR.  But no matter how you look at it, banks are constantly gathering support against any threats to their NSF income, and in some cases they are beginning to offer small loans with terms very similar to the short-term payday loan product in order to ensure the minimization of potential NSF losses over the upcoming years.

SOURCE Solomon Finance