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Updated on Wednesday, May 22, 2019
The Consumer Financial Protection Bureau (CFPB) has announced plans to initiate a review of rules that protect customers from incurring overdraft fees for one-time debit card and ATM use. Depending on the outcome, this initiative sets the stage for a future where overdrawing your account for a $3 cup of coffee could cost you more than $30 in fees.
As part of the review, the CFBP will solicit comments from the public on the overdraft rule’s efficacy, and examine its own research into whether the rule places an undue burden on small businesses. The review will result in one of three possible scenarios: The rule remains unchanged, the rule is amended or the rule is done away with completely.
What is the overdraft rule and how does it protect you?
The overdraft rule was originally created as part of the Federal Reserve’s Regulation E, which governs how electronic financial transactions are handled between consumers and financial institutions.
In 2009, the Fed decided that banks and credit unions would no longer be allowed to charge their customers an overdraft fee for a one-time debit card use or ATM withdrawal unless the customer had given prior authorization, by opting into a bank’s overdraft protection program. Without prior authorization, the rule stated that any overdrafting transactions should be declined at the point of sale.
In 2011 the Dodd-Frank Act shifted the responsibility for the rule from the Federal Reserve to the CFBP, which is why the bureau is presently overseeing the review.
If you choose to enroll in your bank’s overdraft program, every time you debit an account via card or ATM for more money than is actually in your account, the bank “protects” you from having the transaction declined by covering the shortfall and charging you a fee for the service.
Note that even if you do not opt into an an overdraft protection program, certain types of transactions will allow the bank to overdraft your account anyway — most commonly by writing a paper check or paying a recurring charge from your account, like a monthly membership fee.
Scenarios when the overdraft rule protects you from an overdraft fee:
- You have not opted in to an overdraft protection plan for your checking account. You only have $25 in the account and try to use your debit card to pay a $50 restaurant bill. Your transaction would be declined at the point of sale.
- You have not opted in to an overdraft protection plan for your checking account. You only have $40 in your account and you try to withdrawal $100 from an ATM. Your transaction is declined at the point of sale.
Scenarios when the overdraft rule does not protect you from an overdraft fee
- You have not opted in to an overdraft protection plan for your checking account. You only have $10 in your account, and as a Netflix member, your account is charged a monthly fee of $13. Since this is a recurring charge you’ve given permission for, your bank may cover the $3 negative balance and charge you an overdraft fee.
- You have opted into your bank’s overdraft protection plan. You only have $70 in your checking account, and you try to withdrawal $100 from an ATM. The bank lets you withdraw the full $100, it covers the $30 missing from your account and then charges you an overdraft fee.
Why is this rule in danger of being changed?
The short answer: President Jimmy Carter.
The slightly longer answer: In 1980, President Carter signed into law the Regulatory Flexibility Act, Section 610, which requires any federal regulation that significantly impacts small businesses to be reviewed by the relevant federal agency within 10 years of that regulation’s passing to make sure it isn’t putting undue pressure on those businesses.
With the overdraft rule, it’s been about 10 years since the rule was incorporated into Regulation E, the relevant federal agency will now take a long, hard look at the rule. As stated by the CFPB in its press release, “Today’s notice seeks comment on the economic impact of the Overdraft Rule on small entities. The public will have 45 days to comment after publication of the notice in the Federal Register.”
In addition to comments from the general public, other factors will determine the CFPB’s final decision whether to leave the overdraft rule as is, change the rule or do away with it completely. Per the CFPB, these include:
- The complexity of the rule
- The extent to which the rule overlaps, duplicates, or conflicts with federal, state or other rule
- The time since the rule was evaluated or the degree to which technology, market
- conditions or other factors have changed the relevant market
The bottom line on the CFPB overdraft rule change
Banking regulations toe a fine line between protecting the consumer and making sure banks and credit unions can remain profitable and in business, a balance the nonprofit consumer advocacy group National Consumers League feels the current rule accomplishes.
“Big banks have complained about this regulation for years stating that it is overburdensome,” said Brain Young, public policy director at the NCL. “All this rule does is allow the free market to work as it should.”
The American Bankers Association, a trade group for those in the banking industry, also agrees that the current rule “is a strong one that ensures consumers are adequately informed about the cost of an overdraft and the alternatives available to them,” said Virginia O’Neill, senior consul and a regulatory compliance officer with the ABA.
While both groups see eye to eye on the current rule’s value, the ultimate fate of how overdrafts are processed is in the hands of the CFPB. If they were to withdraw the rule, the decision could have a big effect on how much damage one swipe could do to your wallet.