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.
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