In response to complaints from consumers over unexpected overdraft fees from banks, the Federal Reserve instituted a new rule which forces banks to secure consent from the consumer before allowing them to overdraft their accounts, which can result in significant fees.

The reasoning behind the new rule is consumers say they assume when they use their debit card they won’t be allowed to spend more than is within their account. Many people evidently keep spending without being aware they are being charged a fee anywhere from $25 to $35 per transaction after they go through their own money. Essentially the overdraft is a loan, and thus the fees.

With the new rule, all banks will be required to communicate with all of their existing or new customers on whether they want the option of an overdraft or not. For those customers who choose not to use an overdraft, all transactions will be denied once their funds are used up. The rule, which covers ATM and debit card transactions, will take effect on July 1, 2010.

While the majority of big banks, like JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) already made these changes when pressure from the fees escalated in an environment not friendly to banks.

Still, regulators wanted to see the rule made official because of concerns that smaller banks may not take the sames steps as their larger counterparts.

Overdraft fees earned banks up to $38 billion annually, according to officials at the Federal Reserve, adding that the figure included check overdraft fees.

This is probably good for both sides of the issue, as consumers who aren’t good with balancing their accounts will not have to pay for that failure through huge fees, while banks will be protected from criticism over imposing these fees on an unaware public.
 
I do wonder how long this new rule will be relevant as consumers are locked out of whatever activity they’re engaging in when they aren’t allowed to transact it because of insufficient funds? 

There’s also the factor of a large number of people wanting the overdraft protection for that very purpose. Those consumers that opt-out of the rule are of course not covered by it.