Overdraft Fee Protection Laws

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 What Is an Overdraft?

Overdrafts occur when a bank receives a check worth more than the amount of cash in the account. If a bank pays the check that is presented against the account before the checks deposited are collected, it results in an overdraft.

Banks are not required to honor checks that exceed the current collected balance in the account of the depositor. Overdrafts are essentially extensions of credit from banks that are granted then an account reaches zero.

An overdraft allows an account holder to continue withdrawing money even if the account has no funds or does not have sufficient funds to cover the withdrawal amount. Overdrafts allow customers to borrow a certain amount of money from the bank.

Interest is charged on overdrafts and there are also typically fees for each overdraft. At many banks, this overdraft fee may cost $35 or more.

When an account overdrafts, the bank covers the payments that the customer has made that would otherwise be rejected. In the case of a physical check, that check would bounce and be returned without payment.

Similar to other types of loans, a borrower pays interest on the outstanding balance of the overdraft loan. Typically, the interest on an overdraft is lower than the interest on a credit card, which makes an overdraft a better short-term option in an emergency situation.

Additional fees for using overdraft protection reduce the amount available to cover an individual’s checks.

Overdraft Fee Protection Laws

Federal laws now provide new protections that prohibit banks from charging overdraft fees without an individual’s consent. Under overdraft protection laws, banks are no longer permitted to charge overdraft fees unless they agree to participate in overdraft service.

As an alternative, banks should provide an individual an opportunity to choose an overdraft protection service in order to avoid overdraft fees.

What Is an Overdraft Service?

An overdraft service allows an individual to spend more funds than they have in their account. They will typically be charged an overdraft fee for this type of service.

Are There Any Special Considerations?

An individual’s bank can use its own funds to cover an overdraft. An individual can also link the overdraft to a credit card.

If an individual’s bank uses its own funds to cover an overdraft, it typically does not affect the individual’s credit score. When a credit card is used for overdraft protection, it is possible that an individual can increase their debt to a point where it could lower their credit score.

If an individual does not pay their overdrafts back, their bank can turn over their account to a collections agency. This collection may affect the individual’s credit score and get reported to the three main credit agencies:

  • Equifax;
  • Experian; and
  • TransUnion.

What Is an Overdraft Protection Service?

There are some banks that pay overdrafts automatically as a courtesy to account holders while charging fees. Overdraft protections give an account holder an option to prevent embarrassing shortfalls that reflect poorly on their ability to pay.

Overdraft protection works by linking an individual’s checking account to:

  • A savings account;
  • Another checking account; or
  • A line of credit.

If an individual’s account overdrafts, their other account is drafted for funds, ensuring that they will not have a check returned or a transaction will not be declined. Overdraft protections also trigger a non-sufficient funds charge.

The amount of overdraft protection provided depends on the account as well as the bank. Frequently, the customer will have to specifically request it. It is important for individuals to rely on overdraft protections only sparingly or in an emergency.

Under bank overdraft fees laws, if overdraft protections are used excessively, a bank may remove the protection from the account. In order for an individual to opt-in to the overdraft service, the bank must:

  • Provide the individual with notice of the overdraft service;
  • Give the individual a reasonable opportunity to consent to the service; and
  • Provide express written consent to opt-in to the overdraft service.

An individual can validly consent to a fee-charging overdraft service:

  • Through mail;
  • In person; or
  • By checking off a box online.

What Are the Pros and Cons of Overdrafting?

There are pros and cons of overdrafting a bank account. The pros include providing coverage when an individual’s account unexpectedly has insufficient funds.

They can avoid embarrassment and there will not be any returned check charges from merchants or creditors. It is important, however, to examine the costs of overdrafting.

Overdrafting may come with significant fees and interest. If these are not paid off promptly, an account holder may be subject to additional financial burdens.

A customer who has an overdraft protection may pay more in fees than one who does not.

What Happens When I Don’t Have Overdraft Protection?

If an individual does not have overdraft protection, in certain cases, the transaction will be processed even if their account has opted-out of overdraft protection and they do not have the funds available. When that occurs, they will still incur an overdraft charge and they will be required to come up with the money to bring their account balance back to zero.

In other cases, a bank will reject the transaction but the individual will still be charged a non-sufficient funds (NSF) fee for insufficient funds. These fees are comparable to overdraft fees.

In other cases, if an individual makes a debit card purchase and does not have enough money available in their account, the transaction will be declined and they will not be charged any fees. If an individual has had an issue with overdraft fees or non-sufficient funds fees, it may be helpful to consult with an overdraft fee attorney.

What Types of Transactions Does the New Federal Law Protect?

Federal laws prohibit banks from charging overdraft fees for ATM withdrawals and one-time debit charges without an individual’s consent. It is important to note that federal laws do not protect an individual from fees for overdrafting their account on:

  • Automatic bill payments;
  • Money transfers; or
  • Check payments.

The Overdraft Protection Act of 2021 prohibits financial institutions from engaging in deceptive or unfair acts related to overdraft coverage. Among other things, each institution that offers overdraft coverage must disclose overdraft fees.

In addition, the institution must disclose that the transaction may be declined if there are insufficient funds in the account and the consumer will not be charged a fee if the transaction is declined.

What Must the Notice of the Overdraft Service Include?

The notice of the overdraft service from the bank is required to include:

  • A description of the overdraft service, including the types of transactions it covers;
  • The amount of the overdraft fee;
  • The maximum number of fees that can be charged per day;
  • An explanation of the right to consent to the overdraft service; and
  • Whether an overdraft protection service is available as an alternative.

This information must be separate from the individual’s other agreements with the bank. Therefore, the bank is not allowed to hide the overdraft consent language with other information related to the banking agreement.

What if I Did not Consent to the Overdraft Service?

If an individual was charged an overdraft fee and they do not remember getting a notice or consenting to the overdraft service, they can always contact a banking representative and contest the fee. In this age of the internet, however, individuals have become accustomed to checking boxes saying they agree without reading what they were agreeing to.

This means that there is always a possibility that the bank did validly obtain their consent at some point. If an individual wants to protect themselves from future fees, they can enroll in overdraft protection services that automatically link their checking and savings account to be used for any overdrawn amounts.

Seeking Legal Help

If you believe you have been unfairly charged an overdraft fee, it may be helpful to contact your bank first and attempt to resolve the issue.

If your bank is not cooperative and you have lost a large amount of funds because of unlawful charges, you should consult with a financial attorney who can help you resolve the issue.

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