Forefront in the Classroom :: Winter 2009/2010 Volume 1 Number 1

The Federal Reserve Bank of Cleveland’s policy publication, Forefront, is a great tool for generating topical class discussions.


Say Goodbye to Hidden Overdraft and Gift Card Fees

The Federal Reserve recently moved to strengthen consumer protection rules on two fronts: overdraft fees, and retail gift cards. Read more (PDF)

Overdraft Protection

  1. Have you ever paid $25 for an ice cream cone or a cup of coffee because you were hit with overdraft protection fees when you used your debit card? Under rules that will take effect next summer, banks will have to get permission to charge customers overdraft protection fees. How would these new rules protect consumers?
    • The proposed rules require consumers to opt in if they want overdraft protection; they will not be charged overdraft protection fees that they have not agreed to.
  2. The Federal Reserve Board of Governors began accepting public comments on the proposed overdraft protection in November and will review the comments before announcing the final rules. How does the public comment period fit into the regulatory process?
    • The process begins when regulatory agencies like the Federal Reserve Board writes rules to govern banks and protect consumer’s financial transactions. During the process, the Federal Reserve Board and other regulatory agencies solicit the public's comments on the rules, enabling citizens to influence federal regulatory policy. The Board has also used independent research and consulting firms to conduct focus group testing of proposed consumer rules.
  3. Would the new rules for overdraft protection fees have any disadvantages for consumers?
    • Being denied a purchase because of lack of funds could embarrass customers in the checkout line.
  4. Would the new rules on overdraft fees create advantages for banks?
    • Banks could make more money in fees if consumers opt in and sign up for overdraft protection. But if consumers decide not to sign up for overdraft fees, or they opt out, the banks would not make more money in fees.

Gift Cards

  1. What are some of the advantages of receiving gift cards instead of cash?
    • You don’t have to carry cash with you when you shop. Gift cards can be reloaded with more funds. If you have lost an unused gift card and kept your receipt, you may be able to replace the card.
  2. What are some of the disadvantages of receiving gift cards instead of cash?
    • If you don’t spend a gift card, you could be charged inactivity fees after a certain period. But new rules on such fees, recently proposed by the Federal Reserve Board of Governors, may take effect in 2010.
    • Some gift cards may have expiration dates. The new rules would require that these be at least five years after the gift card was issued.
    • Store gift cards limit where you can do your shopping.
  3. Why does competition, which should benefit consumers, sometimes fail to do so?
    • If many firms offer similar products, consumers should gravitate to those with the lowest prices and highest quality. However, competition can only benefit consumers who have accurate information.

Housing and the Federal Reserve Bank of Cleveland

The Cleveland Fed’s President Sandra Pianalto’s presented remarks at the Ohio Housing Conference in Columbus, November 17, 2009. Read more (PDF)

  1. What is one of the traditional tools that the FOMC uses when economic activity is weak as it was during the recent economic crisis?
    • The Federal Open Market Committee (the Fed’s policy setting committee) typically lowers its short-term policy target, known as the federal funds rate. At this time the federal funds rate target has cut repeatedly and now stands at essentially zero. www.FederalReserveEducation.org to learn more about monetary policy.
  2. The Community Reinvestment Act (CRA) was passed in 1977 to encourage banks to support building and renovation in underserved neighborhoods, but with the foreclosure crisis, many of these neighborhoods have been left with vacant properties. How can the CRA be adapted to encourage lenders to support the housing activities that these communities need?
    • The Federal Reserve Board of Governors may write rules that would allow the CRA to provide incentives for banks to donate distressed real estate that they own to community development corporations.
  3. Ohio and Pittsburgh are both in the Fourth Federal Reserve District, but the housing crisis did not affect the low income communities in the same ways. Explain the factors that prevented economic growth and helped fuel the recession in Cleveland’s lower income communities.
    • Cleveland had greater foreclosure rates than Pittsburgh in demographically similar neighborhoods.
    • One discovery by the Federal Reserve Bank of Cleveland was that mortgage lending in Cleveland’s poorest area was originated by a small number of nonbank mortgage companies, but this was not the case in Pittsburgh. Residents in Cleveland’s lower income areas had less access to traditional financial service providers.

Making Financial Markets Safer for Consumers

In the wake of the mortgage meltdown, policymakers are discussing how best to protect consumers in financial product markets. The Federal Reserve Bank of Cleveland hosted a seminar, “Consumer Protection in Financial Product Markets,” in September 2009 to exchange ideas with other regulators about consumer protection and the role of the courts. Read more (PDF)

  1. The Federal Trade Commission (FTC) and the Federal Reserve Board of Governors work to ensure that consumers are not deceived by lending practices through regulations that the agencies write. Explain the FTC’s findings that some disclosure statements for consumer loans gave too much information and were just as confusing for consumers as those that did not give enough information.
    • Multiple page disclosure forms do not help if they are too complicated for consumers to understand, too long to read in one sitting, or come too late to affect the key choices.
    • There is a need for objective, research into which types of disclosures are most effective, taking into account consumers’ preferences, differing educational backgrounds, and time constraints.

Interview with Matthew Kahn

On October 1, 2009, Kahn presented a paper at the Conference on Appalachia and the Legacy of the War on Poverty at the University of Kentucky. Francisca Richter, research economist in the Community Development Department of the Federal Reserve Bank of Cleveland, interviewed Kahn before the conference. Read more (PDF)

  1. What type of cities has had an economic boom over the last 35 years and what factors have contributed to this economic boom?
    • First, urban economists in the United States note that people seek out warm weather so cities such as Dallas, Phoenix and Las Vegas have had economic booms over the past 35 years.
    • Second, coastal cities are in demand and are cities that have boomed.
    • Third, cities that have skilled populations, where the percentage of adults are college graduates, are cities where there is greater wage and population growth.
  2. What is a so-called green city and how have green cities fared?
    • San Francisco is what Kahn defines as a green city. San Francisco is a good city for pedestrians to walk in and locally, its air and water are clean. As far as its global environment is concerned, San Francisco is one of the greener cities in terms of carbon dioxide per capita because the electricity they use is generated from natural gas-powered plants, which are cleaner than coal-fired plants.