Overdraft protection bill deserves notice

March 26, 2009


Consumer advocacy groups are urging bank customers to weigh in on a proposed rule change by the Federal Reserve concerning the practice called overdraft protection.

With a bad economy, unemployment, and a dismal housing market, you might be tempted to ignore this issue. But if you’ve had to pay a $35 charge for spending more than what you had in your bank account, this is one debate you need to participate in, urges Consumers Union and the Center for Responsible Lending.

The Federal Reserve has proposed a rule change giving customers the right to instruct their bank whether to pay or not pay overdrafts for automated teller machine withdrawals or one-time debit card purchases.

It used to be that overdraft protection was provided just for check transactions. For a fee, the bank would honor a check even if there weren’t enough funds in the account to cover it. That overdraft service is now extended to ATM withdrawals and point-of-sale debit card purchases. In most cases, customers are automatically enrolled.

ATM and debit cards have been marketed as the good plastic — unlike credit cards, these were supposed to be the same as cash. Customers think they can’t swipe and spend more than what is in their bank account, but they are wrong.

A national poll by the Consumer Reports National Research Center found that 48 percent of consumers erroneously thought their ATM card would not work if they attempted to withdraw more money than was available.

An overdraft study published late last year by the Federal Deposit Insurance Corp. found that at least 81 percent of banks allowed overdrafts to take place at ATMs and point-of-sale/debit transactions. An overwhelming majority of banks in the FDIC survey did not inform customers that they lacked enough money in their accounts to cover their electronic transactions. Only about 8 percent of the financial institutions informed consumers that funds were insufficient before transactions were completed, thus giving them a chance to avoid both the overdraft and the fee. Fees assessed by banks ranged from $10 to $38. The median fee was $27.

In its proposed change to Regulation E (electronic fund transfers), the Federal Reserve is considering two alternatives:

• First option: Institutions would be prohibited from automatically enrolling customers for overdraft protection services. Instead they would have to first give customers notice and a reasonable opportunity to opt out of the service.

• Second option: Institutions would be required to get a customer’s permission upfront to provide overdraft protection. Customers would have to choose to opt-in before any fees could be assessed on their account for an overdraft authorization.

The proposed rule change would only apply to overdrafts for ATM withdrawals and debit card purchases. It would not affect overdraft protection for checks or recurring debit charges.

“We expect to issue a final rule later this year,” Sandra F. Braunstein, director of the Fed’s division of consumer and community affairs, told a House subcommittee.

The Fed wants to know what you think. You only have until Monday to submit a comment. The easiest way is to respond by e-mail or go online. E-mail your comments to Put “Docket No. R-1343” in the subject line. Online, go to

Without question, bank customers should responsibly manage their money and banking accounts. But the ease of ATM and debit cards has made people careless.

The more consumer-friendly way is to allow people to be informed that they are broke before a transaction is approved. At that point, they can decide whether they want to accept the overdraft protection and the fee. I doubt the banks will suffer a significant loss of income. There are plenty of people who will still choose to pay the price for this service.


SettingTheRecordStraight 9 years, 2 months ago

Do we really want the government so involved in our lives that Washington can tell businesses and their customers which types of transactions they can engage in?

jaywalker 9 years, 2 months ago

I hear ya, STRS, but banks allowing transactions to continue through when there are insufficient funds is just another way to fleece ya. Years ago my B of A bank card wouldn't allow me a penny more than what I had in. I even had a gas pump stop pumping when my account hit zero. They didn't take away that safeguard by accident. Not to mention there's no justification for a $35 ding, that's obscene and in my opinion it's akin to price gouging which is controlled already.

Kryptenx 9 years, 2 months ago

Banks also process transactions from largest to smallest amount now. If you have $200, $40, $8, and $3.50 payments pending, they will be processed in that order. Say you only have $238 in your account - you're now getting 3 overdraft fees even though the $238 can easily pay everything but the $200 payment. Why? Banks say that it is because one would rather have their McDonald's transaction bounce than their cable bill, yet this is BS, just a ploy to charge more overdraft fees. Notice that none of the transactions even bounce with overdrafting.

SettingTheRecordStraight 9 years, 2 months ago

I understand these frustrations, but my response would be that you signed legal documents allowing your bank to assess those fees. If the fees make you unhappy, find a bank that doesn't charge them; you're also free to keep enough money in your account that the fee issue never becomes a problem.

Unfortunately, free people and free markets today are assumed to be idiots and criminals, respectively. It's then that government passess unnecessary laws such as this.

jaywalker 9 years, 2 months ago

No doubt about it, swan. Charging $3 transaction fees for using the drive-thru tellers in an attempt to get you to transact through the ATM so they'll be able to eliminate a teller; B of A would charge an additional $1.50 when you use someone else's ATM, this on top of the other banks charge of $2 or $3.
Again, STRS, I hear ya, but I don't know of any banks that haven't adopted these practices, do you? So there is no option.

feeble 9 years, 2 months ago

STRS, which area banks offer debit or check cards and do not automatically enroll users for overdraft protection? Which of these banks clearly and directly present new accounts with the option to opt out? The burden is on you to identify these banks. Name names or go home.

routinely keep 10x or more in my checking accounts than needed for monthly bills and incidental purchases, but have in the past, like most Americans, been the victim of a billing error by vendor I do business with (perhaps an Amazon book gets charged twice for two separate months, or a magazine is double billed). The vendor won't cover any overdraft fee their erroneous billing produces.

Of course, the overdraft scam is only the tip off the iceberg. Consider that lenders and banks offering credit cards can change your rate, dramatically, for any reason at all. You can miss a 12 dollar utility payment by one day, and even though you have a top of the line FICO score and a 10 year perfect history on credit, your rate will jump from 12% to 29%.

There is a reason why Usury is considered a sin.

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