2010-10-08 / Columnists

Notes On Consumer Affairs

Overdraft protection
By Assemblywoman Audrey Pheffer

AUDREY PHEFFER AUDREY PHEFFER As part of the consumer reforms established by the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, the Federal Reserve Board recently adopted new rules governing overdraft protection plans. An overdraft occurs when a consumer uses his or her debit card, makes an ATM transaction, writes a check, or makes an automatic payment in an amount greater than the balance in the consumer’s checking account. Most banks provide overdraft protection, meaning that they will cover the amount of the overdraft for a fee. The new rules require banks to ask consumers to opt-in if they want overdraft protection on their account. You should be aware of what overdraft protection is and familiarize yourself with the protections afforded under the new rules

There are two main types of overdraft protections offered by banks. The first involves the bank covering the amount of the overdraft for a flat fee of about $20 to $40 each time you overdraw your account. For example, if you write a check for $200, but only have $100 in your account when the check is cashed, the bank will deduct the $100 from your account, cover the additional $100, and charge you a fee. If you then make a $10 purchase while the account is still overdrawn, the bank will charge you the fee a second time. If the fee is $35 for each transaction, you will owe your bank $70 in fees. If you have too many overdrafts, your bank may increase the fee. Some banks will also charge an additional fee for each day your account is overdrawn.

A second type of overdraft protection involves the bank linking your checking account to your savings account or a line of credit. If you overdraw your checking account, the bank will use your savings account or the line of credit to cover the amount of the overage. There are costs and fees associated with this type of overdraft protection, but they are typically less than the fees charged for the first type of overdraft protection.

For years, many banks automatically provided their customers with overdraft protection. However, under the new rules, banks must first obtain your permission before applying overdraft protection to everyday debit card and ATM transactions. For existing accounts, your bank should be sending you a notice explaining their overdraft policies if they have not done so already. Be sure to read the notice carefully, as it will require you to opt-in if you want to continue having either form of overdraft protection on your account. If you decline to respond, your bank will no longer provide you with overdraft protection. If you open a new account, your bank will not be able to charge you overdraft fees for everyday debit card and ATM transactions unless you opt-in.

If you do not sign up for overdraft protection, debit card and ATM transactions may be declined if you do not have enough money in your account. You will also have the flexibility to change your mind—if you do not optin, you can do so later; likewise, if you do choose overdraft protection, you may cancel at any time.

It is important to note that the new rules only cover everyday debit card and ATM transactions. They do not apply to transactions paid for by check or for automatic bill payments that you may have set up; banks may still automatically enroll you in an overdraft protection plan for these types of transactions. For more information about the new overdraft protection rules, you can contact the Federal Reserve Board by calling 202-452-3000 or visiting their website at http://www.federalreserve.gov. You can also contact the New York State Banking Department at 1-877- BANK-NYS or http://www.banking.state. ny.us. You may also contact your bank directly to inquire about their overdraft policies.

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