Most banks automatically cover your transactions when you don’t have enough money in the bank, and charge you astronomical fees for this service. These overdraft programs are really just high-cost, short-term loans with quadruple digit APR rates. Consumers Union thinks that consumers should be able to sign up for these programs before being charged any fees, because there are often much cheaper options for covering overdrafts.

The Federal Reserve Board Overdraft Proposal

The Federal Reserve Board is considering a proposal that would limit the circumstances in which a bank can automatically charge overdraft fees to your bank account. The overdraft proposal presents two options, Opt-In and Opt-Out, but only Opt-In really protects you.

  • Opt-In requires you to affirmatively sign up before a bank can charge you a fee for covering an ATM or Debit transaction when you don’t have enough money in the bank.
  • Opt-Out allows the bank to cover your overdrawn transactions for a fee, unless you take action to cancel the service.

The Fed received thousands of comments on the proposal which they will review over the next few months. They hope to release the final rule this summer.

In the meantime…

Federal Overdraft Legislation

Representative Maloney has introduced legislation that would go even farther that the Fed proposal. HR 1456 would require consumer consent before charging a fee for covering an overdraft. The bill would apply to debit, ATM and check transactions and would prohibit banks from manipulating the order that transactions are processed to maximize overdraft fees.