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New Overdraft Rules Give Consumers a Choice

In response to consumer complaints about ballooning overdraft fees, the Federal Reserve will soon pass new rules aimed at stopping banks’ misleading overdraft tactics. According to the Los Angeles Times, banks will no longer be allowed to automatically enroll customers in overdraft protection plans for their bank accounts.

At first glance, this seems silly—why wouldn’t consumers want overdraft protection? Well, such “protection” means that banks will allow you to make purchases with a debit card beyond your checking account’s limits, thus allowing your balance to go negative. The bank then charges an overdraft fee, which reportedly can reach as high as $39 per overdraft.

Since many consumers assume that using a debit card prevents them from going over their account limits, this often comes as a surprise. In addition, many consumers would prefer their purchases to be turned down for lack of funds, rather than face overdraft fees. However, automatic overdraft plans do not allow consumers this option.

In defense to such criticism, banks argue that overdraft protection saves consumers the embarrassment of having their cards turned down. Further, it allows consumers to make emergency purchases even if their balance is negative. While some consumers may appreciate these benefits, many account holders are upset with the current rules that automatically enroll consumers in overdraft protection plans.

New Rules

Starting August 1, banks will not be able to automatically enroll customers in overdraft plans. Instead, account holders will be asked to “opt-in” to overdraft protection if they want to avoid having purchases denied due to insufficient funds.

As Nessa Faddis, a spokeswoman for the American Bankers Association explains, “It’s a general opt-in. If you don’t do it, you could have a debit purchase denied.”

While it comes as no surprise that bankers enjoy the fees collected through their overdraft plans, some consumers may prefer to have their debit purchases denied, rather than be charged high fees. The new Federal Reserve rule intends to give consumers this choice.

Exceptions

As with many banking regulations, there are exceptions to the new overdraft rules:

• Banks can still allow “regular” payments and debits to be made, even if they push you past your account balance. Such payments might include automatic withdrawals for services like a gym membership. In addition, banks can still automatically charge fees for these “automatic” overdrafts.
• Banks can also continue their practice of “reordering” your purchases, so that the largest purchases are tallied first. By depleting your account with big purchases first, banks increase the odds that subsequent smaller purchases may trigger several overdraft fees. Remember, each purchase you make while in the red triggers a separate overdraft fee.

Additional Resources

To learn more about the new overdraft rules, visit the Federal Reserve's website.