BizLawBuz …. The Power of Know

You write a check, but, by the time it’s presented to your bank for payment, there’s not enough money in your account to cover it. You go to the ATM and make a withdrawal, or, use a debit card to make a purchase, but, unknown to you, there is not enough money in your account to cover the transaction. What happens? One would think that the check would be returned for nonsufficient funds and the ATM and debit card transactions would simply be denied. Not necessarily so. To the contrary, most banks will automatically advance the funds to cover the check, the ATM withdrawal and the debit card purchase. Then, the next time you make a deposit, they will pay themselves back, along with an overdraft fee.

With check writing going the way of the rotary dial telephone (industry sources estimate that 75% of financial transactions today are electronic), banks and credit unions are increasingly turning to overdraft fees on electronic transactions to bolster their bottom lines in these tough economic times. In fact, it is anticipated that the financial services industry will make $38 billion in income in 2009 from overdraft fees alone, which typically run about $35 per transaction.

While the idea that your bank will cover your overdraft transaction may sound like a good thing, the problem is that the $3 latte at your favorite coffee house that you paid for with your debit card may end up costing you as much as $40 once the overdraft fee is added. And, in many cases, due to the timing of transactions, you may have no idea that your account is overdrawn in the first place, which leads to even more fees. What began as a good idea for bank customers has led to consumer outrage, increasing government scrutiny and class action lawsuits across the country against the nation’s largest banks. While the US Congress considers legislation to reign in what it believes to be abusive and unfair practices involving overdraft fees, the Federal Reserve Board, on November 12, 2009, announced sweeping new rules regulating overdraft fees on ATM and one-time debit card transactions. Those rules, intended to enable consumers to limit their exposure to overdraft fees, include the following provisions:

1. Consumers must affirmatively consent to being enrolled in the institution’s overdraft protection service for ATM and one-time debit transactions (”opt-in”) before overdraft fees can be assessed. This is a marked change from the current policy of many institutions whereby the mere issuance of an ATM or debit card includes automatic enrollment in the institution’s overdraft protection program. The rule also affords the ongoing right to revoke such consent at any time;

2. The opt-in requirement applies to all consumers, including existing account holders;

3. The rules do not apply to overdraft protection for written checks and automatic on-line bill pay; banks may continue to enroll customers in those programs automatically. However, the new rules prohibit banks from tying overdraft protection for checks and automatic bill pay to a requirement that consumers also opt-in to overdraft protection for ATM and debit card transactions;

4. The rules require institutions to provide consumers who do not opt-in with the same account terms, conditions, features and prices, as those provided to consumers who do opt-in; and

5. Compliance by July 1, 2010 is mandatory.

Irrespective of this action by the Federal Reserve, Congress continues to draft and debate its own legislative response to this situation. Much can, and undoubtedly will, happen between now and July 1, 2010 as financial institutions react to these new mandates. (For more information, please visit the website for the Federal Reserve at: www.federalreserve.gov, or, simply keyword search “overdraft fees” using your internet browser.)

Duane L. Reynolds