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Research Says Overdraft Limits Won’t Hurt Banks

A new rule limiting banks' ability to charge controversial overdraft fees isn't likely to cripple the industry's profitability, new research says.

The research - to be released today by bank consulting firm Bretton Woods - is the latest to address the impact of pending Federal Reserve restrictions on the financial industry. These restrictions, which take effect in July, require banks and credit unions to get consumers' consent before charging them steep fees for paying debit card and ATM overdrafts.

Bretton Woods estimates that the Fed rule will cost banks and credit unions roughly $7.3 billion in fee income, significantly less than other consultants' projections. In 2009, banks earned more than $38 billion in overdraft fees, according to industry estimates. Overdrafts have become the single largest driver of consumer fee income, USA TODAY's research has found.

G. Michael Flores, founder of Bretton Woods, says that while the new rule represents a "watershed event" in regulation, it doesn't threaten most banks' viability because it limits only a "percentage of overdrafts, not all overdrafts."

Also, institutions are offsetting the rule's impact by raising existing bank fees or imposing new ones to recoup some lost overdraft income, Flores says.

Yet, if further restrictions are imposed on this income stream, the industry could see a "cascade" of small bank failures, Flores adds.

Adam Levitin, an associate professor at Georgetown Law School, says banks have a right to make profits but they should have to do so fairly.

Banks "were profitable before they had the current level of overdraft income, and they can remain profitable even if it is reduced," says Levitin.

Consumer advocates say that the Fed rule is a good first step. But it doesn't prevent banks from charging overdraft fees on recurring debit card transactions - such as monthly bill payments - or on checks.

Banks can also continue to clear large transactions first, emptying the account quicker, and charge overdraft fees as high as they want.

President Obama has championed the creation of an independent Consumer Financial Protection Agency - a proposal now under consideration by the Senate - to regulate ongoing overdraft and credit abuses.

"Even with the (Fed rule) in place, there are a lot of abuses in the marketplace," says Leslie Parrish, a senior researcher at the Center for Responsible Lending, a consumer advocacy organization.

"There are still ways that banks can have their customers rack up hundreds of dollars in overdraft fees per day," Parrish says.

Scott Talbott, senior vice president at the Financial Services Roundtable, which represents large banks, says the Fed's rule already gives consumers clear disclosures and more control over their fees. "There are always going to be people who, whatever the rules are, will say that more needs to be done," he says.

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