Overdraft Protection: Give the New Rules an Opportunity To Work
Credit unions have long been involved in providing some form of overdraft or bounced check protection to their members. For credit unions, this is fully consistent with their philosophy and mission to serve members’ financial needs and to help them resolve short-term financial problems. While the terms and features of these overdraft privilege programs may vary, most are consistent in offering to pay, rather than return, non-sufficient funds transactions on checking accounts in exchange for fees that are similar to those typically charged for returned items. All these programs are intended to spare members the embarrassment of returned checks as well as avoid additional fees charged by merchants.
Generally, overdraft protection programs offered by credit unions refrain from:
- Deceptive advertising that leads consumers to expect all overdrafts to be paid when other documents indicate payment of overdrafts is discretionary;
- Promoting overdraft protection in a manner that encourages consumers to frequently or regularly overdraw their account;
- Enticing consumers to overdraw their accounts by including the amount of overdraft coverage as part of “available funds” in ATM messages, online statements and telephone balance statements; and
- Failing to inform frequent users of overdraft protection services of available alternatives that could be more appropriate and less expensive.
On November 12, 2009, the Federal Reserve issued a final rule reforming the regulation of overdraft programs. The new rule, which becomes effective on July 1, 2010, significantly improves consumer protections with respect to these programs by:
- Requiring that consumers opt-in to the payment of overdrafts for ATM and one-time debit card transactions before fees may be assessed;
- Requiring consumers receive disclosures explaining the overdraft services, the fees, and the consumer’s right to opt-in – prior to the consumer opting-in. The rule provides a model notice;
- Giving consumers an ongoing right to revoke this consent.
- Prohibiting financial institutions from requiring that a consumer opt-in to ATM and one-time debit card overdrafts in exchange for having overdrafts paid on checks.
- Requiring financial institutions to provide consumers who do not opt-in with the same account terms, conditions, and features that are provided to those who do opt-in.
Credit unions are making changes to their programs to comply with the new rules. We believe the new Fed Rules should be given a chance to work before Congress further considers overdraft protection legislation.
We have grave concerns regarding the impact pending legislation (S. 1799 / H.R. 3904) would have on credit union members who use and value the overdraft protection services their credit union provides. The provisions of these bills that would limit the number of overdraft fees that could be charged per month and per year would simply end overdraft programs to the detriment of many consumers who truly value these programs. If these bills were law, credit union members would incur more non-sufficient fund (NSF) fees with none of the benefits of having many transactions honored. Merchants would deal with more bounced checks and have more bills that are currently paid under automated bill-paying services rejected. Inevitably, other adjustments would be made in checking account services and maintenance fees that would impact a wide range of accountholders.
Credit union members lose if S. 1799 or H.R. 3904 becomes law; therefore, we strongly oppose this legislation.
