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Overdraft fees are a major source of income for banks – $ 31.3 billion in 2020. They are also a constant source of confusion and consternation for bank customers (especially when – surprise – a $ 5 latte ends up costing $ 150).
As a brief history, there was a time when banks would pay an occasional overdraft for a well-established customer and a real human being would call the customer and politely request that a deposit be made to cover the overdraft. A modest one-time fee may or may not be charged for this courtesy. But then banks discovered they could automate overdraft payment, market “overdraft protection” as a customer service, and make bottom lines by charging fees.
Beginning in 2007, in response to a tsunami of complaints, the Federal Reserve began to develop rules for overdrafts. In 2009, these rules were incorporated into Regulation E, a lengthy regulation providing the fine print of an important federal consumer law, the Electronic Fund Transfer Act.
When the Fed started making rules for overdrafts, the idea was to treat all overdrafts the same, regardless of what triggered the overdraft. But then the Fed concluded that the problems weren’t with the checks. Rather, they were with ATM and debit card transactions. With checks, the Fed found that customers were generally grateful when their bank paid an insufficient funds check, thus keeping the mortgage up to date, the lights on, the car running, etc., and they didn’t mind. to pay fees. On the other hand, with overdrafts caused by ATM withdrawals and debit card purchases, the Fed found that many customers preferred their bank not to pay the overdraft, thus avoiding fees.
Thus, the Fed modified its regulatory proposal. Under the revised proposal, banks would only be able to charge a fee for an overdraft resulting from an ATM withdrawal or debit card purchase if the bank customer had given consent. The proposal initially contained two alternatives for giving consent. In the first case, customers opted for a bank’s bank overdraft program, after disclosure of its terms. In the second case, clients gave their consent by not opting out of the program, after receiving notice of their right to do so. The “opt in†alternative prevailed and continues to be the law. And a bank’s right to charge a fee if it pays, or returns, a check written against insufficient funds is still not covered by the settlement. There, the banks set their own policies.
The Consumer Financial Protection Bureau, which took over responsibility for the Fed’s overdraft rules in 2010, began a review of those rules in 2019, in accordance with another federal law you have probably never heard of – the Overdraft Law. regulatory flexibility. This review has not yet led to any changes. Therefore, as it is, banks must have customer consent before they can charge a fee for paying an overdraft resulting from an ATM withdrawal or debit card purchase. But they don’t need consent to charge a fee for paying (or returning) a check written for insufficient funds. Ultimately, banks now have all kinds of overdraft policies in place and customers need to ask their own bank what the bank does with overdraft fees and what overdraft avoidance tools it might offer.
A better alternative is to keep enough money in your account to completely avoid overdrafts. Then nothing else will matter.
Jim Flynn works for Flynn & Wright LLC of Colorado Springs. Email him at [email protected].
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