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Law Safeguards Consumers against Overdraft “Protection”

Have you ever paid $38.15 for a grande, extra hot caramel macchiato with half 2% milk and half whole milk, one Splenda™, no whipped cream, but a drizzle of caramel on top?  I have.  $3.15 for the macchiato and $35 for an overdraft fee. 

Boy, was I steamed!  It did not help to know that I was not alone -- Americans paid some $38 billion in overdraft fees in 2009.  I called my bank and politely requested that, in the future, they decline any purchases I may make with my debit card when I did not have enough money in my account.  Luckily, I was able to do that.  A couple of years ago, the person on the other end of the phone could have just laughed and told me that legally, the bank could do whatever it wanted: decline all of my charges; pay all of my charges and charge me an insufficient funds (NSF) fee; decline all my charges with one vendor and pay all of my charges (and cha rge me a fee, of course) with another vendor; or any combination of the above upon a whim. 

Starting August 15, 2010 for existing accounts and July 1, 2010 for new accounts, however, federal rules require banks to decline a debit card purchase if the account lacks sufficient funds, unless the consumer chose to "opt in" to an overdraft protection practice or program. 

Today, you may choose to opt in to a bank's "standard overdraft practice," which means they will cover your purchase and charge you a fee.  Or, you could opt in to an "overdraft protection plan," which ties a line of credit or your savings account to your checking account so that any checking-account debit overdrafts are covered by the money in your line of credit or your savings. There are generally fees for the transfer, but they are usually less expensive than the standard overdraft practice charges.

The Federal Reserve Board rules, amendments to Regulation "E," which implements the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) (EFTA), do not cover checks or automatic bill payments that you may have set up for paying your mortgage, rent, or utilities. Your bank may still automatically enroll you in their standard overdraft practices for these types of transactions. If you do not want your bank's standard overdraft practices in these instances, talk to your bank; you may or maynot have the option to cancel.

Some major banks, such as Bank of America and Citibank, opted out of opting in.  Others, like Wells Fargo, simplified their complicated overdraft fee structure in order to encourage consumers to opt in.  However, opting into overdrafts doesn't guarantee protection:  Federal Reserve rules permit debit card overdraft coverage to be discretionary on the part of the bank, and bank opt-in forms make it clear that they can deny coverage of transactions and that consumers cannot count on having overdrafts paid.

Should you opt in for overdraft protection?  The Consumer Federation of America advises against it. A surveys have found that many people prefer to pay overdraft fees rather than suffer the embarrassment of being declined at the cash register, while other would prefer not to pay $38 for a cup of coffee.  The point is to contact your bank; you are the one in control. And you can change your mind: if you opt in, you can cancel at any time. If you do not opt in, you can do so later.

But with great power comes great responsibility.  The bottom line is that we should all monitor our account balances and not spend more money than we have. I know I'm never going to pay almost $40 for a cup of coffee again!

Kelly Browne, June 2013
updated 8/14 mpj

Links for "Law Safeguards Consumers against Overdraft 'Protection'"

Americans paid some $38 billion in overdraft fees in 2009

What You Need to Know: New Overdraft Rules for Debit and ATM Cards (Standard Overdraft Practice)

What You Need to Know about Overdrafts and Overdraft Fees (Overdraft Protection Plan)

Federal Reserve Board

Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) (EFTA) 

Bank of America


Wells Fargo 

The Consumer Federation of America advises against opting in