By definition, an overdraft is a deficit in a bank or credit union account caused by drawing more money than the account holds. Overdraft protection is an extension of credit from a credit union or bank that ensures that the account holder can continue to withdraw money even if the account is overdrawn.

Class action attorneys are investigating unlawful and deceptive overdraft practices by U.S. credit unions that may have misrepresented customers’ account balances, or posted transactions out of order to maximize the amount in overdraft fees the customer is charged.

Consumers who withdraw more money than is in their account, and who do not have overdraft protection, will bounce checks, a situation known in the credit union industry as non-sufficient funds – or NSF. The average bounced check fee is $30.47 per returned payment, according to Bankrate.com. Additionally, the consumer is also responsible for another fee to the company or person that deposited the bounced check.

Along Came Overdraft Protection

What is overdraft protection? Overdraft Protection automatically transfers available funds from your savings, checking account, or credit card, to your eligible checking account if you overdraw it.

Overdraft protection means an account holder can never write a “bad check.” The credit union covers the balance and the consumer pays the credit union an overdraft fee. But the check or debit payment clears and there is no fee required from the person or company to whom the check or payment was written.

Most Credit unions and financial institutions set overdraft fee guidelines. Overdraft protection guidelines are typically found on credit union websites or in literature a customer is given when they open an account. Overdraft settings may be different for checks and debit card transactions, depending on the financial institution.

Overdraft protection is set up in a variety of ways, but the most popular is to link two accounts, directing funds to automatically transfer from one account to another when the first is overdrawn.

Credit Unions Must Inform Consumers of Overdraft Fees

Effective July 1, 2010, the Federal Reserve Board changed its regulations and prohibited financial institutions from charging consumers fees for paying overdrafts unless a consumer consents to the overdraft protection.

Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices.

“To ensure that consumers have a meaningful choice, the final rules prohibit financial institutions from discriminating against consumers who do not opt in,” according to a Federal Reserve Board news release about the change. “The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.”

The change came about after countless consumer complaints that they weren’t properly informed about overdraft protection.

“This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs,” President and CEO of the American Bankers Association trade group Edward Yingling said in a statement at the time of the announced change. “Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently.”

Overdraft fee class action lawsuits accuse credit unions of engaging in deceptive practices such as processing transactions in the order of the highest amount to the lowest amount in order to maximize the number of overdraft fees, and processing deposits inconsistently, making it impossible for customers to knows when a deposit will be posted to their account.

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