According to a Consumer Affairs report, many consumers are not benefiting from their bank’s overdraft protection service nor do they realize that they are not required to accept the bank’s overdraft protection program. Prior to 2010 when new overdraft protection rules were passed, financial institutions automatically enrolled consumers into their overdraft protection service.

Overdraft protection services allow a transaction to be paid and go through even if a consumer possesses insufficient funds to pay for the transaction. If a transaction was processed for a consumer with insufficient funds, the consumer might have to pay an overdraft fee of around $35.

Another type of overdraft protection service links a checking account with a savings account, second checking account, or line of credit, offering consumers added flexibility when they do not have enough funds to cover a transaction.

Overdraft Protection Law

However, in 2010, the rules changed. In July 2010, the Federal Reserve prohibited financial institutions from automatically enrolling customers in an overdraft protection program. According to overdraft protection laws, the default setting for an account with insufficient funds would be the rejection of a transaction. This is unless a customer actively opted-in for the overdraft protection service.

The overdraft protection rules also allow customers to opt-in or opt-out of the overdraft protection service at any time. Since the law changed, financial institutions cannot automatically enroll customers into an overdraft protection service. However, according to The Pew Charitable Trust study, consumers often do not understand their overdraft protection service and do not even know that it’s not required. The study also showed that it may be costly and unnecessary.

Consumers who do not have overdraft protection have the option of having their debit cards or credit cards declined in the event of having insufficient funds. This way, they cannot overdraw their accounts, nor do they pay a fee.

The study also surveyed consumers who overdrew their accounts at least once within the past year. The study found that nearly three out of four consumers do not understand that they can allow transactions to be declined and not have any charges added to their accounts. The study also showed financial institutions ineffectively communicate to consumers about overdraft protection policies and that consumer understanding of about overdraft protection is low, even with those who have had conversations about the service.

The study also showed that one in three consumers treat overdraft protection as a kind of short-term loan, and that most consumers that have over-drafted their accounts have significant financial stress.

Overdraft Protection Criticisms and Class Action Investigations

There has been significant criticism regarding overdraft protection services claiming the programs target consumers who live paycheck-to-paycheck. A study conducted by The Pew Charitable Trusts showed that consumers who make less than $30,000 per year are twice as likely to incur fees from overdraft charges than customers who earn more. It would make sense that consumers who believe that they might be found in tight money situations would incur the most fees from an overdraft protection service.

A current class action investigation has been opened looking into possible unfair overdraft practices by two financial institutions, Capital One and HSBC Bank. Customers of those banks who believe they have been harmed by unfair overdraft practices may qualify to join this free class action investigation.

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