Changes to Bank Overdraft Regulations

New regulations have been introduced for financial institutions across the country that will forever change the way they can provide overdraft protection to their customers. Overdraft protection has for years been automatically included in checking accounts at most all major banks across the country. When an account holder withdrew more from their account than they had as a balance, then the transaction would be approved and the remaining balance would be covered by the bank. This would allow customers to spend, sometimes unknowingly, more than they had available to them and leave their accounts with a negative balance. Each time that a customer would “overdraft” their account, a fee would be charged of the customer for the banks service in covering the transaction. These fees made $38 billion in additional revenue for financial institutions in 2009 alone and have been commonly associated with debit cards and ATM transactions. Offenders who were unaware of their overdraft were given no warning, leading some to rack up multiple fees totaling in the hundreds of dollars for several small everyday transactions. As overdraft protection was an included part of checking accounts, there was little customers could do about it aside from pay the fees and do their best to avoid any additional overdrafts.

Enacted by the Federal Reserve Bank, these regulations apply to virtually every bank nationwide. In order to do business with the Federal Reserve, as most all banks do, they must abide by these regulations regardless if they are chartered at the state or federal level. A handful of very small community banks that are not associated with the Federal Reserve and are chartered at state level may not need to abide by these regulations. Typically however it is reported that these types of banks receive little, if any revenue, from charging overdraft fees and given their very small size, it is unlikely that they will offer their own debit cards or have a large number of ATM machines. Chances are that any bank that you are doing business with will be among those impacted by these rules as they reach almost the entire industry with very few exceptions.

Although under the new regulations these programs will not be going away entirely, they will instead be optional which will provide much greater protection to consumers. Account holders will now need to opt-in to an overdraft protection plan in order to receive the protection from their bank, much like an insurance policy. If a customer does not choose to opt-in to an overdraft protection program, any ATM or debit card transaction that would cause an overdraft will be declined. These new regulations took effect last summer (July 1, 2010 for new accounts and August 15, 2010 for existing accounts) and so far have helped many from unknowingly overdrawing their account. It should be noted that transactions with checks, instant bill payments, and other transfers are not covered by these new regulations. With the exception of debit card and ATM transactions, most other transactions are still automatically included and therefore trigger overdraft fees. At any rate, the new regulations have made a difference and should provide some peace of mind to any consumer who has worried about overdrawing their account with either their debit card or at the ATM.

–Robert P. Reardon Jr

Legislative Intern; Office of State Representative William N. Brownsberger