Overdraft Law (6/30/2010)

In November 2009, a new law regulating overdrafts was passed that will take effect on July 1, 2010. The law indicates that banks and credit unions can no longer charge customers an overdraft fee for debit card or ATM transactions (Reg. E transactions) that will result in an overdraft.

There are positive and negative ramifications that will result from this new law. And while the law applies to all banks and credit unions, policy changes vary between institutions as they prepare for the change.

How did we get to this point?
Since the debit card revolution began in the mid 1990s and free checking became the norm, banks created a new revenue stream called overdraft fees. Sure there were overdraft fees prior to this period, but the figures have exploded in recent years. According to the FDIC and the National Credit Union Administration, banks and credit unions charged approximately $46.3 billion in overdraft fees in 2008 compared to $10.3 billion in 2004. According to the Bureau of Labor Statistics, the average household spends more on overdraft fees than on vegetables annually.

Congress has referred to this law as the $40 latte law since several consumers complained of being charged a $35 overdraft fee for a $5 latte purchase. Until now, banks have justified these fees by offering overdraft protection options.

How will this impact you?
If you never overdraw your account, this law won't impact you. If you have a tendency to overdraw your account, this law will have an impact on you. Because your bank will NOT be able to charge an overdraft fee for Reg. E transactions resulting in an overdraft, they will simply deny your transaction. In the last decade or so, banks have adopted a "courtesy" overdraft to many of their customers. This means that the bank processed your transaction to avoid a denial, but charged you an overdraft fee for this service. As of July 1, banks can no longer offer this "courtesy" unless you "Opt In".

What is Opt In?
The law allows for banks to obtain your permission to allow Reg. E transactions to clear and accept the overdraft fee. This permission is called Opt In. If you do not Opt In, the bank will deny any Reg. E transaction that will overdraw your account. Most banks will provide their customers with the opportunity to Opt In. While the law allows banks to offer this Opt In feature, not all banks are exercising this option. Be sure to check with your bank if you're interested in Opting In. Either way, as of July 1, everyone is automatically considered Opt Out unless they've otherwise communicated to their bank.

Positives
This will greatly reduce the amount of overdraft fees charges to the consumer. The FDIC indicates that over 60% of all overdraft charges come from debit card purchases. This law does not pertain to transactions other than Reg. E transactions. That means all automatic debits and checks will still be processed as they are now. Depending on your bank's individual overdraft policy, you won't have to worry about your mortgage or car payment bouncing as a result of the new legislation.

Negatives
If you have not Opted In, and you try to make a purchase using your debit card that can't be covered by funds in your account, the transaction will be denied. Most consumers don't want overdraft fees. At the same time, most consumers don't want their transaction denied, especially if they're buying medicine for a sick child at Walgreens at 2 a.m. Since you can't have it both ways, you need to choose carefully whether of not you want to Opt In or not, assuming your bank gives you the option.

Another negative aspect of the legislation is the lost revenue for banks. Banks will try to find alternative sources of revenue. Many industry analysts predict that this could be the beginning of the end of free checking accounts. Many banks have already begun adding minimum balance requirements to accounts that aren't considered profitable.

What should you do?
First, determine if this legislation will have an impact on your day-to-day banking. If it will, see if your bank gives you the option of Opting In. Then, determine if Opting In is something you want to do. Inquire about obtaining overdraft protection while you're at it.