You Tell Me: Overdraft Opt-In Rule

Yesterday the Federal Reserve enacted a rule, which would make it mandatory that banks allow customers opt-in to overdraft protection, rather than automatically enroll customers, as is the current practice. In other words, consumers would have a choice as to whether they get overdraft protection, rather than the banks choosing to enroll them without permission. In retrospect, I didn’t make the new rule clear originally. (Italiacs are an edit from the original version of the post).

This rule will go into effect July 1, 2010. As it stands right now (or at least a couple of months ago when I researched overdraft fees), most banks automatically enroll customers into overdraft protection.

When you’re enrolled in overdraft protection, if you make a debit card transaction and don’t have money in the bank, the transaction goes through, and you pay a fee..usually $30-$40.

If you don’t have overdraft protection, if you make a debit card transaction and don’t have enough money, the transaction is denied at the register. In essence, you can’t spend money that you don’t have.

The overdraft cycle, once started, can quickly sink someone who lives close to the edge financially. Especially in these economic times, there are lots of people living paycheck to paycheck. While I believe banks have the right to charge overdraft fees for covering overdrafts, I also believe consumers should have the option of paying for the “convenience” of having bad transactions covered or turning it down.

Don’t get me wrong. I think people should keep close track of their finances. If you don’t have the money, don’t spend it. Know how much money you have in the bank.

But the fact is that even the most careful people occasionally make mistakes. Occasionally companies make mistakes and wrongly debit accounts. Occasionally escrow refund checks bounce. I don’t think any of these reasons justify throwing a consumer into an unending cycle of overdraft after overdraft.

Understandably, the banks weren’t happy about these new regulations. Scott Talbot, chief lobbyist for the Financial Services Roundtable, said,

It radically changes and alters the overdraft services for consumers. The result will be confusion and embarrassment and frustration.

It’s true that a debit card transaction denied at the register might cause confusion, embarrassment, and frustration. However, I’d rather deal with the negative emotions and be alerted that my bank balance is lower than I thought, than pay a $40 fee and carry on, blissfully unaware.

What do you think? Is this new rule a good thing? Or is it too much regulation?



Author

By , on Nov 13, 2009
Lynnae McCoy I'm Lynnae, wife of one and stay-at-home mom of two. I'm committed to getting out of debt by being frugal with my choices in life.

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{25 Comments}

  1. Carol:

    What’s not being said here is that paying $30-$40 (USD)is not protection but parasitism. The banks do not care about working people’s “protection”. If they did they would pay the amount of the overdraft, notify you (there are numerous ways to do this now) and give you 5 business days to cover the overdrawn amount.

  2. Jack Smith:

    Before any of you start to think that this will be a great relief for the consumer, brace yourself for the bank counter attack. Overdraft fees have been the reason why checking has been “Free” for the last several decades. When that goes and consumers do not respond to the banks attempt to get them to “opt-in” for overdraft, you will start to see new and more nefarious fees on your accounts. There is no way that the banks will let billions in revenue go, just because the government intervenes. You will see new higher fees, higher loan rates, and less free stuff. Enjoy!

    • Texan:

      How right you are, this is happening now.

  3. donna:

    Elisabeth
    You are not going to win , with your husband. IF it is his paycheck paying the fees, let him be responsible for his actions (actions and consequences). I believe that debit cards were created NOT to make it easier on consumers, but to actually get us in the mind set of using “CREDIT”. Think about it. Easy to charge on a credit card unless you have a limit, easy to whip out the debit card (visa or mc logo) and swipe that also. CASH, you are limited to what you have on your person. Your idea of keeping your paycheck may appear devious, BUT it is a protection for yourself and your family if your husband doesn’t reign in his debit card use, and his attitude.
    I took my husbands debit card away from him (he is more compliant than your hubs). I take x amt of dollars out of the checking account for the week, give him his “allowance” and that is it. We are digging ourselves out of debt as i write, but we are also able to pay cash for any future purchases also, and i use my credit card first and write the check for the total when it comes due the next month.
    There is something underlying with your husbands use of the debit card this way. He is struggling with the reality of his income, and outgo ratio. Is he trying to impress his guy friends? That could be insecurity, but also the media likes to make us all feel that if we don’t have something, we are worthless? You need to find out why (truth) he gets so angry, really find out the truth…
    Mine knew that i had money hidden in the acct, and that any transactions would be covered, so he never paid attention and yes, he didn’t always give me all the receipts either…so that stopped when i took his card…. ;-)

  4. Elizabeth:

    The problem with debits and overdraft can happen, no matter how careful you are, if the other spouse is debit card crazy. He literally hands me a stack of receipts a couple of inches high every couple of weeks, and often it isn’t all of them. He also seems to feel it is a point of honor or something to buy what he wants and I had better not “embarrass him.” That is how a very expensive gun was bought from a friend without discussion. If he says he wants something, I better not object if it is in front of someone else. He won’t give up or cut back on debit because he says it is safer than cash, but we keep getting hit by overdrafts. Unfortunately, he is the primary wage earner, too. He was really mad a few years ago when he found out I set up a little account that my paycheck would go into first in another bank, but right now that is almost all the money we have because of horrendous cascading overdraft fees. If he wants pizza and is out of cash, he debits it. Most things I have seen seem to assume the overspender is the wife and is not the primary wage earner. How do you put the brakes on in this case?

  5. Donna:

    Thanks Lynnae
    I round up any checks written as well as any debits made with debit card and deduct them all… * had over $3,000 hidden in the account when my husband was temporarily taken out of service.
    I also spend paper/save change to pay as extra towards the snowball debt reduction and now am able to stash $5 bills for more savings! It adds up quickly.
    You really do have to come to YOUR SENSES when it comes to your life AND your money. Some of us are wise when we are young, some of us have to learn the hard way, but we reap what we sow. I had a good example for work and obligations through my parents.

  6. 13lastedJuan:

    Hi everyone,
    It seems that there is one important thing being missed in all the posting. Banks are businesses. Banks operate to make money, not improve neighborhoods, build schools, help the homeless or keep kids away from drugs and out of gangs. (some kid came to my door today asking me to buy an $8 candy bar for that last reason, ?)
    Has anyone heard of a mechanic “fixing” a car to get the owner back into his shop? Some banks operate the same way. Most don’t, but there is a lot of pressure to make money, so some do.
    There are financial studies that have determined a customer will not leave a bank once they have more than 7-8 points of contact or relationships (DDA, SAV, COD, car loan, mortgage, safe deposit box, etc) no matter how bad the customer is treated. Care to spend a nickel and guess why? Only your first guess counts. Drum roll please. People are lazy and deem it too much work to switch financial institutions once that magic number of relationships is met.
    The increased Nanny state that most people publically abhor, but would accept if offered, is a direct response to American individuals, as a group, (ha) inability to demand better service. You should be a greedy with your money, as you are with you time, love of your life or whatever turns your crank. (mine is bourbon) And for goodness sake, if you think your bank is screwing you, call them and speak to a person. Chances are good you can get the fees-charges waived. If you, can’t get no satisfaction, find another bank or credit union. As of August 22, 2008 there were (some have failed) 8,430 FDIC-insured commercial banks (credit unions) in the United States.
    I bet that if everyone reading this post, bought a bad crunchy-soft-cheesy-spicy-mild taco at Uncle Juan’s House of Crabs and Gentleman’s Club, 75% would go back for the same nasty taco next weekend. After all, that kind of service is what you’re putting up with at your bank of choice. Maybe Uncle Joe’s needs a bailout as well. –The End.

  7. What really bothers me is that some banks will reorder the charges to get the most overdraft fees that they can. We had the situation recently where a company made an UNAUTHORIZED charge to our account (a small spending account that normally does not have much money). Rather than this charge alone incurring an overdraft fee, the bank reordered the charges and we ended up paying five or six fees! I think too for the customer’s own protection it would be good NOT to have overdraft protection on a debit card. What if someone got ahold of your card? With overdraft protection they can just keep charging and the charges and fees keep adding up. Good luck trying to prove you didn’t make the charges.

  8. Another reason to try and only spend cash. You can’t overspend with cash.

    Also when ever you deposit a check, wait the full 7 days to assure it is clear, even though the bank makes the funds available the next day. I had a problem when someone gave me a check, the bank made it available to me the next day, but like 10 days later it was returned. I should have waited the full amount of days or taken the check to that person’s bank and cashed it out.

    I think overall the bank fees are getting ridiculous, as they are trying to recoup cost anywhere they can. I was charged $15 recently for going under $100 in my checking account. That was crazy. I cancelled the account.

    Thanks for the article.

    • Texan:

      This will soon be the norm. CHASE is already doing this and come February will do it with former Washington Mutual Free Checking accounts as well. Once this goes into effect I will no longer be their customer. I already pay cash for most things, so I will just go back to sending money orders for bills that I can’t pay in person.

  9. Christine:

    I think it’s a fantastic change and I’m shocked it happened despite the enormous lobbying power of banks. Score one for consumers!

  10. Denise:

    Note that the “opt-in” provision applies to debit card transactions, but NOT to checks. (I don’t know where electronic funds transfers, like the automatic payment to your cell phone fit in.) The thinking was that checks, these days, are very likely to be for something like your utilities or your mortgage/rent, something that it would be worth it for you to pay a fee on, so the payment isn’t delayed. I also don’t think that this prevents the bank from charging you $30 to transfer money from your savings account to cover a transaction.

    I mayself got in the vicious cycle several years ago when I was young and stupid and at the end of a vacation. I didn’t keep track of my balance, just called the bank. The phone system said I still had money, but it was only because some previous debits hadn’t cleared. So I spent the money twice. Several hundred dollars in fees ensued of course. I don’t know if this law would have helped my young and stupid self. Always, when I was at the counter, I had the money, I just didn’t really always have it. Overall though, I’m in favor.

  11. Jenny:

    This isn’t over regulation, it should have always been this way. Personally, I love my credit union. We were given the choice on overdraft protection. We chose to turn it on for checks but off for ATM/debits. If it’s on the card chances are it can wait a day, where as a check is most definitely a bill. It’s hooked to our savings-$10 if the overdraft comes from savings, $20 if the account goes negative because savings doesn’t have enough.

  12. tabatha:

    i think its a good thing, i didn’t even know there was a way to cancel the over draft protection. i thought it was only considered overdraft protection of they took the money out of a savings account. at a bank i was previously at i went over my balance and didn’t find out for six days and it cost me close to 400 with all the fees and transferring the money from one bank to the other to cover everything i was really pissed and closed my account at that bank ASAP.

  13. 2horseygirls:

    Because our accounts are set up with paychecks direct deposited into the “bills” account, and then I have to transfer funds into the “ATM/Debit Card” account, I get declined at the register at least once a week. It takes me about 2 minutes to call the bank, work through the system and make the transfer, then go and complete the transaction.

    My fiance has a fit every time it happens (we don’t have credit
    cards ourselves; he has a joint card with his widowed mom) but I really don’t think in the grand scheme of things, it is all that embarrassing. Everyone seems to be going through tight times, and the cashiers have always been gracious, and suspended the transaction until I’ve made the transfer. A few times, the ATM/DC account was short by $.27 or $.63 and we all have a laugh about it.

    I would be furious if the bank arbitrarily decided to take money out of another account to cover that. Because of the way my accounts are set up, I feel like I have a very good handle on how much money, and where it goes.

  14. Marj M.:

    I would not opt in. It would be too easy for some to count on that cushion…….thankfully, I am not one of them.

  15. David Y:

    I don’t think I would opt in for overdraft protection. Would rather have the card rejected than pay a huge fee because I was overdrawn by .19 cents because the bank was a little slow processing a deposit.

    While I agree this is a bit of nanny statism, it should have been optional to begin with.

  16. Julie D:

    The thing is, most people are going to be charged one way or the other. Either you pay for the overdraft, you pay for an insufficient funds charge, or you pay the unavailable funds fee (which exists in the bank I used to work for). The unavailable funds fee was so difficult to explain (because the purchases should have been declined when attempted due to insufficient funds available at the time of purchase not covered and then the customer charged a fee) I quit working for the bank.

    We have a savings account linked to our checking for overdraft protection, but the bank will also cover us, for a fee if we go over that amount. Since the alternative is a fee in the same amount from the bank, in addition to having to straighten out the mess with whichever company I would have written an insufficient check to I am glad they offer this service, but we work hard to keep up with our balances to make sure we don’t need to use it.

  17. Lynnae:

    I’m sorry, guys. After reading the first couple of comments and the first paragraph of my post, I realized I wasn’t clear in what the new rule means. I’ve edited the first paragraph to make it a bit more clear, hopefully.

    Donna, I think rounding up to create a buffer is a great idea!

  18. donna:

    It results in our taking responsibility for our choices.
    I have dealt with both sides of the coin and my bank chooses to do the debits before the credits (paycheck gets entered lastly) which causes overdrafts also?
    I have learned to create my own overdraft protection (i round up to the next dollar in my checkbook and have accumulated a tidy sum, that tided us over while my husband was unemployed from a well paying job for several weeks). We never had to charge anything! Now i must begin to rebuild that hidden treasure again, but i have had plenty of practice at it. I learned the hard way when i transfered a $1,000 from one account to another or so i thought (double check the tellers works) . She moved it from the same account back into the same account, which cause me to overdraft the other account (my bust for not checking her work). I paid the fees, and paid the bank back, but did leave the money in the checkbook and hid it in there afterwards! My cushion….i decided to fight back against “Chase” .
    Today, we spend paper save change, in our effort to find extra funds to pay down the lowest debt in our own snowball…and we are well on our way to getting the debts paid OFF. So, boo to the financial industry. I took back charge of my finances…

  19. I think overdraft protection should have been optional to begin with. I wouldn’t call this over-regulation.

  20. chris:

    Too much! I just caught my bank ( a few months ago) charging me for overdraft protection without my “OK.” I went in and had them reverse the transaction, credit back my money and cancel the protection. I never overdraw my account. Although, I must say it perpetuates the agenda of the current government, which is nanny-ing us to death and it is bound and determined to make paupers out of everyone in this nation. So…..I’m not surprised. Again, thank the people who voted for the obamamaniac.

    • Lonnie:

      Chris please turn of Glenn Beck and Rush, how is this an Obama issue. Its the banks charging you not the president, REALLY CHRIS!!

      • Texan:

        Lonnie, it IS an Obama issue. With the most recent banking regulations nearly every one of the major banks are raising fees to their customers in direct response to the government’s action. I just received a letter from CHASE that new fees will be added to my account as of February 8th, 2011. Basically waht CHASE is doing is imposing a $12 monthly maintenance fee on the former free WaMu accounts which were promised to remain unchanged as they were grandfathered in when CHASE aquired WaMu back in April of 2009. There are ways to keep it a free account but of course there are certain requirements that most people, like myself, won’t be able to meet. I will be changing my direct deposits to another bank and once I have pulled all my money out I will close my account with CHASE.

        The new law is hurting the very people it was intended to help. Thanks alot Obama!

  21. Jenn:

    Wait… am I reading this correctly? Isn’t this exactly the opposite of the regulations being enforced for credit cards?? I know from experience that overdrafting my bank account is far more disastrous for my finances than potentially going over the limit on my credit card. I would far rather have my debit card declined than pay a $30 overdraft fee… and that’s assuming it’s only one transaction!

    I was short NINETEEN CENTS once, and it resulted in $90 in fees. Because the bank was holding funds back for a couple of debit as credit purchases, they overdrew my account by .19 for a check. But then, before they processed the pending payments, they released the funds back into my bank account. And applied that money to the overdraft fee they’d charged me because that money was pending. Which triggered two more fees since I no longer had the money for those charges! Which is me going off on a long tangent (I’m still mad LOL) to say I’d have much rather had my debit card declined than to deal with the nightmare of sorting that out. With so many people living paycheck to paycheck, that can start an ugly cycle that would take ages to fix.

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