Would-be customers of a few large banks and smaller credit unions need to be aware that it is illegal for financial institutions to levy an overdraft fee if the customer has not opted into enrollment in an overdraft protection program.

As an example, new clients of Capital One must ‘opt-in’ to Capital One Overdraft Protection by stating their preference for how they want the bank to handle a pending situation of insufficient account funds.

According to Capitalone.com, these options include Auto-Decline, Free Savings Transfer, Overdraft Line of Credit, and Next Day Grace. In detail:

• The Auto-Decline option means that the bank will automatically reject any transaction that would put the checking account ‘in the red’.
• The Free Savings Transfer Capital One Overdraft Protection option relies on funds available in a linked savings or money market account to keep the endangered account above zero by allowing a transfer of funds.
• The Overdraft Line of Credit Capital One Overdraft Protection option establishes a loan arrangement for any funds necessary to keep a checking account from entering a negative balance state. The account-holder must pay interest on this loan until it is paid in full.
• The Next Day Grace Capital One Overdraft Protection option gives the customer until close of business the following day to bring the account above zero before levying a $35 overdraft fee.

Opt-In Law

The change in the law preventing banks and credit unions from assessing overdraft fees without the opt-in documentation went into effect on August 15, 2010. This occurred because of alleged deceptive practices that financial institutions were engaging in to increase profits, such as failing to provide full disclosure of what fees would be assessed in what circumstances, allowing rampant overcharging of checking accounts for the purposes of collecting overdraft fees and/or line of credit interest, and out-of-order transaction processing.

Theoretically, transactions to an account through Automatic Teller Machines (ATMs), automatic debits, and hard-copy checks are processed by banking institutions in date and time order.

That processing, however, goes on behind the scenes where customers have to employ a certain amount of faith.  Several class action lawsuits have been filed that allege that this processing if often done out of order and consumer faith is misplaced.

With a checking balance of $100 and several transactions pending, it would not be difficult for a bank or credit union to process the largest of these first—regardless of date—with the aim of putting the account below zero and collecting an overdraft fee.

This practice could also work in the institution’s favor with an Overdraft Line of Credit, Capital One Overdraft Protection option or its equivalent. The bank is able to levy interest for as long as it takes the customer to pay back the loan.

If the customer is of modest means, this cycle of low balance, out-of-order transaction processing, and bank debt at interest could go on indefinitely.

These deceptive practices purportedly continue and are the subject of class action lawsuit investigations. If you are a Capital One or HSBC Bank customer and have been unfairly assessed overdraft fees, you might be able to participate in this investigation free of charge. Fill out our form for more information.

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