The Checkout

Does Overdraft Protection Really Protect You?

Nancy Trejos

Last week, the Federal Reserve proposed new rules forbidding "unfair or deceptive" practices by credit card issuers, such as arbitrarily raising interest rates and applying finance charges to debt that has already been repaid.

That, not surprisingly, grabbed the average consumer's attention, judging by all the e-mails and phone calls this personal finance writer received.

But there was a part of the 510-page proposal that was largely overlooked. The Federal Reserve also proposed banning "unfair or deceptive" practices related to overdrafts in deposit accounts.

You may know it as overdraft protection. If you overdraw your account, many banking institutions will cover that payment, but they'll usually charge you a fee for it.

The Federal Reserve along with two other banking regulators, the National Credit Union Administration and the Office of Thrift Supervision, have taken issue with financial institutions that assess overdraft protection fees without giving consumers the right to opt out of such program.

If the rules are finalized, which the Federal Reserve is hoping will happen by the end of the year after the public has had 75 days to comment, all banks, credit unions, and other financial institutions would, among other things, have to give their customers the right to opt out. They would also have to disclose on periodic statements the total amount assessed in overdraft and returned item fees. At the moment, only those institutions that promote or advertise their overdraft protection programs have to do that.

And if they're providing account balances through some sort of automated system, they would have to disclose how much is available for the customer's immediate use, not what is available when the bank covers an overdraft.

"Historically, banks paid occasional overdrafts on an ad hoc basis, but today overdrafts are often paid routinely using automated programs," Federal Reserve Chairman Ben S. Bernanke said when announcing the proposal last week. "While some consumers prefer to have most of their transactions honored or approved, overdraft services can be expensive and other consumers may prefer not to exceed their account balance. The proposal seeks to give consumers greater control, by ensuring they have ample opportunity to opt out of overdrafts."

Consumer groups said the proposal does not go far enough. They argue that consumers should have to opt in to overdraft protection programs rather than opt out.

"The OTS and Fed proposal show that these agencies recognize that abusive overdraft loans are a significant problem," said Eric Halperin, DC director of the Center for Responsible Lending. "However, they would continue to allow banks to enroll customers, who never signed up for it, into the most expensive credit program the bank offers."

They also urged the agencies to consider banning overdraft fees caused by check holds resulting from a bank's policy to delay the availability of deposited funds. "These rules should also recognize that it is an unfair practice for a bank to charge an overdraft fee or a bounced check fee for a problem caused by the bank's decision to place a hold on the consumer's check deposit," said Gail Hillebrand, financial services campaign manager of Consumers Union.

It's now up to the public to weigh in. The proposed rules can be found at www.federalreserve.gov.


By Nancy Trejos |  May 9, 2008; 7:00 AM ET Nancy Trejos
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Comments

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From a financial security perspective, debit cards and overdraft "protection" should be avoided or disabled. Both leave consumers vulnerable if even one of their accounts is compromised. If a thief leverages a checking account number (from a check) and drains the account, overdraft can extend the thief's access into other accounts (i.e. savings, other savings vehicles).

Debit cards - it should be noted - takes money directly from your account as charges occur. As opposed to a credit card which allows the consumer to review the month's charges before paying the bill.

The U.S. tracked over ten million victims of identity theft in 2007. Folks need to be careful and understand that obsessive bank fees are terrible, but they are NOT the only way we can get gouged.

Americans should also be aware that laws applying to electronic crimes and identitiy theft are NOT international. The laws change in each country, making it EXTREMELY difficult for Law Enforcement to work cases once they involved overseas.

TGIF

Posted by: Donny | May 9, 2008 11:41 AM

Overdraft protection is a service that can certainly provide an economic benefit to the user if not abused. For example, a check drawn against insufficient funds given to a merchant would be subject to a return item fee by the bank, and a processing fee by the merchant. Some contracts such as lease agreements provide for a fee of $100 if a check is returned. By not having the item returned the second tier charges are avoided as well as the embarrasment of explaining that you cannot reconcile your checking account. It is not all bad.

Posted by: JP | May 9, 2008 12:13 PM

I have a line of credit for overdraft protection on my checking account which I've set up so my debit card cannot access it. The few times I've accidentally overdrawn my account, I've immediately paid it off, and the only charge incurred is a few cents interest. I would advise anyone with a checking account to use this (or use a savings account for similar protection) instead of the highway robbery that apparently constitutes standard overdraft protection. I've found credit unions to be more user-friendly in tailoring my account to best fit my needs than normal banks.

Posted by: TEL1 | May 9, 2008 12:48 PM

Banks are for-profit companies that have discovered that overdraft "protection" is yet another great way to nickel and dime consumers for profit. The concept is wonderful, but the execution is terrible. The whole idea of a debit account is to duplicate a cash account... if you don't have it, you can't spend it. To then allow overdrafting with a subsequent charge is horrendous. That's not a service, that's robbery. (Second only to ATM fees!)

Posted by: BofA hater | May 9, 2008 3:24 PM

I think all or almost all services - overdraft protection being at the top of the list - should be OPT IN only. The financial institutions know that the average consumer is not going to read multiple pages of fine print in a shiny brochure to discover, at the end, that they can opt out of over-draft protection, and opt out of having their bank share their personal information with business partners of the bank.

I have been getting insurance offers of various kinds from business partners of my bank, my mortgage company, and my homeowners and car insurance companies. I used to just throw them away. Now, if it comes with a prepaid return envelope, I write TAKE ME OFF THIS MAILING LIST on the offer and send it back at the solicitor's expense. That seems to work fairly well.

Posted by: vklip | May 9, 2008 3:30 PM

I'm one of those dummies that doesn't balance my bank account, so I don't even look at my statements, because I double check my math, I was fairly confident that there was no problem. I didn't even know I was signed up for overdraft protection (Reserve Line). Just happened to look at my latest statement, and noticed "service charges" in the reserve line. I went back through all my statements, and it looks like whatever caused the overdraft happened at the beginning of 2007, so because I was foolish enough not to be looking at my statements, interest kept accruing, and the amount kept getting higher, in $200 increments. What I owe is almost $1,000. Realize that I must take responsibility for not reviewing my statements, but am livid at this huge bill that I now owe. I know a lot of people that don't balance their accounts, so the bank could be benefiting in a huge way with this overdraft "protection"; I'm livid that I'll have to pay this huge amount on what was probably a very small initial overdraft. I told the bank that at the very least, a special notice or a phone call should go out to let their patrons know they are in an overdraft situation. Does anyone know if I have any recourse in such a situation?

Posted by: Brat | May 29, 2008 2:28 AM

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