Federal Regulation of Overdraft Protection Charges

10.08.2010 | Author: admin | Posted in Finance

Overdraft protection programs are so popular that most major banks now have them in place. The programs work by covering any outstanding checks, credit or debit charges made against a checking account that has an insufficient balance. In return, the bank charges a hefty overdraft fee – usually from $20 to $35 – per instance.

This can all really add up fast. Since such a program will allow a customer to make multiple charges in a single day even if their balance is in the red, technically a person could run up $100, $150 or more in overdraft fees in a single day.

Pluses and Minuses of Overdraft Protection

Of course, the “protection” part of all of this could be seen as a plus for bank customers. After all, the system provides a built-in safeguard against customers getting that embarrassing “your card has been declined” message at a local restaurant or merchant. Yes, it is kind of nice that the bank just takes care of the charge. That is the plus side of overdraft protection.

But, on the minus side, there are all of those fees. You see, when your bank covers your overdrawn charge and charges you a fee in return, guess who comes out with the sweeter deal? Sure, maybe the bank carries your $20, $100, etc. charge for a couple of days, and that may cost them a few cents in interest. But, then they turn around and charge you $35 for the favor. That’s a pretty good profit margin for them!

The Need for Regulation by the Fed

The Federal Reserve sets and oversees the rules and regulations over all banks in the U.S. Since around 2008, consumer groups and members of the U.S. Congress began questioning the validity of some of the overdraft protection policies that many banks had in place.

For example, critics argued that banks were signing up new checking account customers into their overdraft protection programs without adequately explaining the details of the program. This, critics claimed, led to widespread misunderstandings about how the programs worked, which ultimately cost customers money.

Each year, banks bring in about $30 billion in overdraft fees.

Federal Regulation of Overdraft Protection Charges – 3 Main Points

Starting July 1, 2010, the Fed began requiring banks to follow newly-established guidelines concerning the programs. Here are 3 noteworthy points about the guidelines:

  • The new Fed guidelines require banks to make overdraft protection an opt-in feature. Previously, most protection programs were opt-out-based, meaning that if a customer did not specifically say they did not want to participate in a given program, they were automatically enrolled. Now, customers must actively choose to be enrolled in the program.
  • The guidelines also prevent banks from discriminating against people who do not choose to opt in to overdraft protection programs. This means that customers who do not opt in must still be granted access to the same account terms, conditions and features as those who do opt in.
  • The guidelines do NOT prevent banks from charging excessive overdraft fees. This means that, if a customer does want to be protected from overdrafts by the bank in order to cover items such as paying the rent or utility bills, the customer could very well still end up paying very high fees.

    • If you want to avoid paying overdraft fees altogether but still want overdraft protection, the smartest thing to do is to switch to a no-overdraft-fee bank. These banks will cover your overdrafts but will never charge you a penny in fees.

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