The New Federal Reserve Rules Requiring Customer Opt-in for Debit Card Overdraft Services that Trigger Fees

The New Federal Reserve Rules Requiring Customer Opt-in for Debit Card Overdraft Services that Trigger Fees

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On November 17, 2009, the Federal Reserve Board issued new regulations prohibiting financial institutions from charging overdraft fees for debit card transactions. This new regulation became effective January 19, 2010, and has a compliance date of July 1, 2010 (as described below). This commentary summarizes some of what the regulation does and does not do.

Past bank practices with overdraft fees.

Before turning to the regulation, it is important first to understand the controversial bank practices that spawned it. One of the most controversial aspects of debit cards has been the overdraft protection offered by many banks and the fees those banks charged for such protection. A bank will often permit a debit card transaction to go through even if there are insufficient funds to cover the transaction in the customer's account. Banks then charged fees, sometimes significant amounts, for each transaction resulting in an overdraft. This fee structure may result in a customer incurring multiple fees that may surpass the amount of the debit card purchases that triggered the fees. Many banks automatically offered overdraft protection without affirmative consent (or even knowledge) of their customers. Some banks refused to turn off overdraft protection even at their customer's request.

Even though overdraft protection is extending credit, the financial institutions issuing debit cards, including banks and credit unions, carefully framed their contracts with, and disclosure to, customers to note that overdraft protection was offered as a "non-contractual courtesy" in order to avoid triggering the disclosure provisions of the Truth in Lending Act.  Many courts accepted this characterization by banks and ruled that overdraft protection (also called "bounce protection") fell outside the purview of that statute.

Some banks also adopted internal policies to process daily debit card transactions in batches with the largest dollar transactions processed first (regardless of when they occurred in chronological order). This practice can lead to customers triggering overdraft fees earlier and fees applying to more transactions, which significantly increased the cost to some customers. [footnotes omitted]

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