New Bank Overdraft Rules

Federal banking regulators recently changed the rules on how financial institutions market overdraft protection. Sometimes called “bounced-check protection,” overdraft protection is a service in which banks often automatically enroll their customers. When a customer exceeds an account balance, the bank will “loan” the customer the difference at, unbeknownst to the customer, an enormous interest rate.

The Federal Reserve Board’s changes in regulation DD, which implements the Truth in Savings Act, mandate that financial institutions advertising overdraft protection must disclose the costs associated with the program on periodic statements and on their advertisements. The new rules are effective July 1, 2005; however, banks that do not currently advertise their overdraft protection programs are required to disclose such costs only on account service agreements. Because most large banks do not advertise overdraft protection, even with the rule changes such banks would have to disclose the costs of overdraft protection only on the account service agreement.

While these changes are a step in the right direction, they will do little to curb the underhanded and excessive overdraft protection programs. A new report from the Center for Responsible Lending and the Consumer Federation of America estimates that customers pay between $10.3 billion and $22.7 billion annually in fees for overdraft protection. (The report is available at www.responsiblelending.org/pdfs/ip009-High_Cost_Overdraft-0505.pdf.)