New Overdraft Law: Is It Good?

This past Sunday, August 15th, is the effective date for existing bank customers to opt-in overdraft protection plans (new customers have to enroll in the program starting July 1st if they want the *protection*) in case their bank accounts are overdrawn. This is a requirement set by the new overdraft law which went into effective on July 1, 2010. Under the new rules, banks need to obtain permission from their customers before enrolling them into any type of overdraft protection plans. For current customers, if no action was taken by August 15th, then, by default, the transaction will simply be declined if there isn’t sufficient fund in the bank account when the account holder tries to withdraw cash from an ATM or using check or debit card to make a purchase. In the past, bank customers are automatically enrolled into overdraft protection plans.

ATM

What Is Overdraft Protection?

Overdraft protection is a service offered by banks to *protect* your bank accounts from being overdrawn when you want to withdraw cash or make a purchase but don’t have enough fund in your account. For example, let’s say that you have $100 in your bank account. If you try to withdraw $105 from your account at an ATM or use your bank’s debit card to purchase a $105 item, the bank will instead *pay* for the balance for your temporarily so the transaction can go through, but will charge you a overdraft fee for using the overdraft protection. The overdraft fee is usually somewhere around $30 at most banks.

Is Overdraft Protection Bad?

Since enrollment into overdraft protection was by default before, I assume that I must had that protection in the past. Fortunately, I never used the protection because 1) I never used debit card to make any purchase; 2) I always maintain a good level of funds in my checking account. Though I didn’t have any first hand experience, I do feel what banks do under the protection plan when the customer tries to draft more than what’s in the account doesn’t make any sense. I mean, I probably wouldn’t mind if my bank lends me $3,500 and charges me $35 for the short-term loan, but $35 fee for only $5 (as in the above example)? If I don’t have enough money in my account, then the bank should just reject the request. I can’t imagine any store would lend me $5 and let me buy the $105 product when I only have $100 in my pocket. The bank should do exactly the same.  But when the bank can collect $35 fee by lending me only $5, I don’t see any reason why they don’t want to do that either. That’s a huge profit with little or no risk.

Is The New Law Any Good?

Well, if the new overdraft rules stop banks from automatically enrolling their customers into overdraft protection plans, which they do now, so they can’t charge overdraft fees when there are not sufficient funds in the account, then yes, it’s a good law. But I have my doubt. My doubt isn’t about whether the new law protects those who pay overdraft fees or not. It’s about how it will affect those who never paid such fees.

I didn’t really pay attention to this new law, the same as I didn’t pay much attention to the credit card bill passed last year, because it has no impact on me. However, what I feel about this law is that people who watch their spendings carefully and know how much they can spend will eventually pay the price. Think about it: Overdraft fees generate billions of dollars every year for banks. Now that part of their revenues is gone, banks will need to find other ways to make up the lost income by, for example, introducing fees into what are now free checking accounts, unless a minimum daily balance is maintained, or direct deposit is set up, or a number of debit card purchase has to be made, or whatever. If you can meet these requirements, then sorry, you will have to pay a monthly fee of whatever amount, even though you never overdraft your account.

According to a FoxNews story early this year, “93 percent of overdraft fees are generated by just 14 percent of customers”, those who most likely just don’t care. And they may just be among those 26% who say they will opt-in for overdraft protection in a survey.

With the new law, many, many good customers may be negatively affected at the end. So is this really a good law?

Photo credit: thinkpanama

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8 Responses to “New Overdraft Law: Is It Good?”

  1. David |  Aug 18, 2010 at 7:42 pm

    Yes, the law is good. What the banks were doing before was essentially preying off of the sloppy and unsavvy customers. They were stealing from them in the guise of being helpful.
    Sure, this takes away some of their revenue and that will impact people like us that are responsible with our money. So is it personally good for you and I? Probably not. Is it the right thing to do and is it a good law? Absolutely.

  2. txtrader |  Aug 26, 2010 at 7:32 pm

    Exactly! Thanks to the new Credit Card protection laws, we had to close three cards to avoid paying a new $65 annual fee. These cards had been dormat for years and were only there in case of emergency. The bank was happy and we were happy with this arrangement. Then along came the government to protect the 14%. Guess who pays with a hit to credit worthiness.

    Those responsible individuals who only make purchases using their own money, did not lie about their income while obtaining a mortgage, and know the value of trust, are already paying the price. These “evil bankers” did not one day decide to open a business to loan people money and give them a safe place to store valuables just to later rip them off. No, they trusted these people. They did not expect to have to babysit someone smart enough not to hide their money under a mattress or bury it in the backyard.

    This mess we are in is the responsibility of the person whose mommy goes on national TV and complains that her little adult boy was charged 35 bucks because he was’nt smart enough to know he did not have money in his account when he whipped out his debit card. Government solves nothing. Someday down the road we will see government hearings about why finance and credit card reform has failed our great nation.

    Late newsflash, over 50% of the government mortgage rework applicants have been disqualified because…

    wait for it…

    THEY LIED ABOUT THEIR INCOME on the application.

    Nothing has changed except us honest hard working people will be paying the price.

  3. supporter |  Sep 20, 2010 at 9:20 am

    It is absolutely a good law. I have always been one with the perfect credit and plenty of money, but I did have some investments cost me more than I could afford. My account at National city, now PNC, went over without me noticing. By the time I got the letter from them, I had over $600 in fines! It backfired on them because I stopped paying on all my accounts with them, and settled them at %30. Don’t let banks kick you when you are down.

  4. atay |  Nov 05, 2010 at 1:45 am

    is it cover business account to?

  5. JD |  Aug 04, 2011 at 3:59 pm

    Here is something most people miss about Overdraft Protection. With ODP the bank pays the transaction for a fee of around $30. Some banks even give you a break by charging less to pay the item than what they charge to return. Which brings me to my main point. Without ODP that same transaction gets returned and the bank charges you a NSF fee, the vendor you initiated the transaction charges you a returned item fee. That is 2 fees of around $30 each for a $60 total. And that might not be the end of it. The vendor has the right to run it through again as soon as they get it back without notifing you it didn’t clear the first time. So unless you deposited money with in those 3 or 4 days you get charged all those fees once again. Does it entice people to overdraw their account? Sure, but it’s just another example of the deterioration of personal responsiblilty.

  6. TB |  Sep 07, 2011 at 2:52 pm

    It is a good law in cases like mine especially. I fought my bank for over 6 months 5 years ago to remove this from my accounts because I was being hit for fees on charges that DID NOT overdraft. I even had money left in the account AFTER the fees were removed. My family lives paycheck to paycheck… we do not spend frivulously nor do I intentionally overdraft anything. Many people with money and good credit do not understand this concept because they do not have to live it day in and day out. Let me explain to those of you who have never HAD this problem what ODP really does.

    It targets the banks lowest income customers who are the most likely to have an overdraft. Not because they spend on what they cannot afford or because they do not watch their money. ODP pays out any overdrafted amount and puts your account into the negatives. THEN they add their fees on top of that, putting you farther in debt and calling it a “favor” to you. So the next time your paycheck drops into your account they automatically take the money you “owe” them for their supposed “courtesy”. I have had them do this to my account so much when times have been tight that they have taken entire paychecks that my family depends on to survive and still leave me with a negative account balance because of all their rediculous fees.

    I feel I should have the right to say “Hey! If I make a mistake on my account, or if I happen to be short one week and something bounces, DON’T pay it. I would gladly pay a $32 dollar fee instead of see an entire paycheck disappear into the bank’s pocket because then I only have to make arrangements with the vendor I ACTUALLY owe that money to. This leaves the rest of my money useable.” Let ME be responsible for my mistakes if I make them and let ME deal with the vendor I made a mistake with.

    Just recently, even AFTER having this feature forcibly removed by me(under threat of lawsuit to the bank) and them admitting guilt by returning all those fees that they took, they put this feature BACK ON MY ACCOUNT. AFTER this law went into effect. Did I want it there…. no… did the bank get my permission to put it back on my account… NO. But they have done it anyway. Banks DO prey on their customers… they prey on the ones who can afford it the least, which is where those billions of dollars are generated. Those billions of dollars make it so people who have “good credit and keep positive balances, etc etc” are treated better and don’t have to pay for things that the lowest income ranges DO. WE support keeping your checking free of charges and such because WE get hit with all the fines and fees. And the banks do it ILLEGALLY… THANK GOD this law was put into effect because NOW i can go back to my bank and get satisfaction again for them abusing my account AGAIN and have a legal leg to stand on.

    I say if you don’t know what you are talking about because you have never been through anything like this… you shouldn’t post an opinion on it. Research what is actually going on before you make ignorant comments and assumptions about people who may not have things as well off as you.

  7. KB |  Apr 17, 2012 at 10:49 am

    I agree with TB^^. These fees don’t happen to people who boast about their great credit scores and perfectly balanced bank accounts because those people DON’T live paycheck to paycheck and are able to have a fat “cushion” in their account and never have to worry about it. When you have unexpected expenses and little money in the first place it’s easy to make a mistake which, in a just world, should simply be a declined transaction for insufficient funds. Trust me, I’d much rather deal with the “embarrassment” at the checkout line! It’s ludicrous that the bank should charge $35 to cover a purchase that you were, say a few cents short on and then if you’re late to pay for the overdraft fee (as I often was due to waiting for that next paycheck), could end up a couple hundred dollars in debt to the bank because they start charging a fee every day you are overdrawn. I now owe $1000 to PNC bank thanks to this awful practice, all based on one transaction that was a few dollars short and which I was unable to pay after losing my job and watching the fees start to skyrocket. Banks are NOT your friend unless you consistently have thousands of dollars in a checking/savings account or a CD and a high credit score. TB is right, it’s the poor people who pay the fees to keep your checking accounts free so get off your high horses, suck it up and stop your whining. You can afford it.

  8. Wes |  Jul 02, 2012 at 8:27 am

    I think it’s an excellent law. The best thing I’ve seen come out of our government since, since, god knows when. It’s unfortunate that Banks are allowed to present the law in such a misleading way. It makes me laugh every time, but it may make others not opt out. “Would you like to opt out of your overdraft priviledge (PENALTY!!) ” Yes sir, I believe I would.