New Fed rule to end overdraft fees for the majority of Americans

The Federal Reserve on Thursday announced new rules that will soon limit the overdraft fees banks can charge their customers.

The new policy, which begins July 1, puts an end to the $25-or-more penalties banks can levy on consumers who spend more than they have. Buyers now will have to consent to those fees before banks can charge them — or they will lose the ability to spend even a penny more than their accounts contain.

“The final overdraft rules represent an important step forward in consumer protection,” the Federal Reserve Chairman Ben Bernanke said in a statement. “Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.”

Thursday's news was hardly unexpected: Provisions to change overdraft rules were already part of the financial regulatory reform bills pending in both chambers of Congress.

The idea first gained political momentum after Senate Banking Committee Chairman Chris Dodd (D-Conn.) suggested a version of the reform that would limit overdraft fees to just once a month.

The Fed's policy, however, takes that one step further and virtually eliminates all penalties for Americans who consent to the change. But the rule will not apply to checks written for an amount exceeding an account holder's balance.

Consumer groups are still likely to hail the Fed's announcement this week, as they have long fought what they thought were abusive overdraft punishments. But the banks are sure to balk at the rule, as overdraft charges account for billions in revenue they take in every year.