Research and Statistics

Fed invites comments on automatic overdraft programs


The Federal Reserve Board is asking consumers to comment on potential changes to regulations governing banks’ controversial automatic overdraft protection programs.

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See updated story:Consumers voice dislike of overdraft fees to Fed

Paying an extra $27 for a $1 bottle of water is an example of what can happen to debit cardholders who are enrolled in overdraft protection programs. And as financial institution practices are reviewed in the wake of a devastated economy, U.S. citizens now have the opportunity to tell the government their opinions about this practice.

Through Monday, March 30, the Federal Reserve Board is inviting public comments about debit card overdraft protection and the opportunity to review two proposed changes to current federal regulations. The board will then review the comments and decide which route to take.

Here’s the issue: Many banks, credit unions and other financial institutions automatically enroll debit cardholders in overdraft programs — many times without the cardholders’ knowledge or understanding. If an enrolled customer makes a debit card purchase without sufficient funds, the transaction is still approved, but the account is charged a fee, which according to a study by the Federal Deposit Insurance Corp., is a median of $27.

The same FDIC study found that more than 75 percent of banks automatically enroll their customers in overdraft accounts. It also found that only a small fraction of banks inform consumers that funds were insufficient before the transactions were completed. Just 24 percent of ATMs and 8 percent of debit transactions at point of sale gave customers a chance to cancel the transaction and avoid the overdraft fee. 

In response, the Federal Reserve Board is proposing two alternatives to the current overdraft rules, which are governed by the Electronic Fund Transfer Act (Regulation E). The first will ban institutions from automatically enrolling customers in overdraft protection programs and will require them to give customers notification and a chance to opt out of the program. The second is to require institutions to ask permission before they enroll customers in an overdraft program.

According to a survey by the Center for Responsible Lending, people want the option to choose the service. The survey sampled 1,005 people and revealed that 83 percent of respondents want the option to enroll and that 80 percent of consumers want their bank to ask permission before enrolling them.

Here’s a sampling of a few of the 1,815 comments submitted so far to the Fed:

  • “This practice is a short-term moneymaker for the banks at the expense of our nation’s long-term economic health, as measured by the finances of middle- and working-class Americans. It is part of a deregulated consumer finance system that has been a loser for the American working public.” — Heather McGhee, San Francisco
  • “The fees banks charge for overdrafts and similar items is tantamount to robbery. In fact, I dare say, I cannot understand how the banks are in any trouble with the billions they must be collecting in fees like these.” — Janarde Lepore, Katy, Texas
  • “Banks lost my trust many years ago and as a result, I personally only do business with credit unions. Charging someone for a service that they did not authorize is not the proper way to conduct financial affairs. Please offer adequate consumer protection to account holders.” — David Cole, Fairport, N.Y.


Separately, U.S. lawmakers are considering a bill, the Consumer Overdraft Protection Fair Practices Act of 2009, that would put into law similar restrictions to those contained in the regulations. The bill would:

  • Require prior consent from consumers before enrollment into overdraft protection services.
  • Provide consumers greater notice when they use debit cards at ATMs if a cash withdrawal would trigger an overdraft, similar to the way consumers are notified about ATM fees.

A first hearing on the bill was held March 19.

See related: House again weighs Credit Cardholders’ Bill of Rights, Debit cards pushing older adults into overdraft trouble, 5 secrets to smart debit card use

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