San Diego, CA - If you have overdraft protection on your checking account, you may want to look at your account terms and determine if it is a loan or some convenience your bank has added without your express permission just to be able to collect fees. New regulations will require express permission from the customer and banks will not be able to market them as an "allowance" above and beyond the account-holders balance nor as a short-term loan. 

Bounced check and overdraft protection programs allow account-holders to temporarily go negative in their checking accounts. Instead of bouncing a check that is presented with insufficient funds in the depositor's account, the bank or credit union will cover the check "on faith" until the next deposit is received. Banks charge consumers a fee for this, typically $20 - $25. These programs can provide a valuable service for consumers, especially those who do not have access to other forms of overdraft protection, such as fund transfer or using a line of credit.  However, according to Moebs Services, an economics research firm based in Lake Bluff, IL., some consumer advocacy groups over the past several years have expressed concern that bounced check protection programs are not good for consumers and are predatory or thinly disguised payday lending schemes.

Fees originating from overdraft protection and non-sufficient funds transactions, have become a significant revenue source for depository institutions says a Moebs report. It says they totaled more than $33 billion dollars in 2003, the last full year records were available.

Surprisingly, credit unions got 60 percent of their net operating income from these fees, or $3.5 billion. Banks and thrifts collected $29.6 billion in fees. (see www.moebs.com).

Banks hooked consumers with aggressive marketing of "bounce protection" programs says a report titled: "Bounce protection: how banks turn rubber into gold by enticing consumers to write bad checks" from the Consumer Federation of America (CFA) and National Consumer Law Center (NCLC). The report concluded that banks are aggressively marketing a new form of high cost credit intended to boost their fee income at the expense of the most vulnerable consumers. These products are based on overdraft protection, but are not traditional overdraft lines of credit or the occasional ad hoc practice where a bank will cover a consumer's bounced check as a courtesy. Instead, these "bounce protection" programs are attempts to hook consumers onto overdrafts as a form of high cost credit. In many such programs, consumers do not affirmatively agree to coverage; but they must explicitly opt out. The bounce protection industry is deliberately encouraging consumers to overdraft and commit an irresponsible and sometimes arguably criminal act. The consequent increase in the number of overdrawn checks results in more fee income for the bank, the CFA/NCLC concluded.

In February of 2005, with the announcement of the joint guidelines, several regulatory agencies have granted their acceptance of the programs, but have set forth explicit instructions for financial institutions as to the administration and marketing of the programs. For some banks and credit unions, the new guidance will be perceived as burdensome. For others, it will be welcomed as a long overdue set of mandates on which they can establish a bounce protection service for their consumers. The Federal Reserve Bank will incorporate much of these guidelines in their overdraft regulations. This is according to economist Michael Moebs, the chairman of Moebs $ervices and the only independent financial services consultant invited to testify during the agencies, joint deliberations on overdrafts. He said "The new guidelines step in to curb abuses while leaving the valuable parts of bounced check protection in place."

As far back as February 2003, the New York Times (NYT) reported that at least 1,000 banks were encouraging customers with low balances to overdraw their checking accounts. This allowed the banks to skirt credit laws and collect billions of dollars in new fees. Some banks promoted their overdraft programs by promising to pay consumers' bounced checks, but the banks made no mention of accompanying fees in their advertising. The NYT article went on to say that depending on how quickly the overdrafts are repaid, the resulting fees could translate into an annual interest rate that would reach several thousand percent, far higher than the rates permitted by state usury laws. The banks were accused of promoting poor fiscal responsibility and taking advantage of unsuspecting customers who were automatically enrolled in overdraft protection programs.

Mr. Moebs also pointed out "Up to now there was nothing that defined the way overdraft programs should be structured or regulated. Actually, many of these programs have actually been based on having no agreement whatsoever with the consumer. By setting rules for critical issues such as nondiscriminatory eligibility and fair advertising practices, the federal regulators will make it more difficult for banks and credit unions to play between the lines on this."

A significant distinction made in the guidance is the basic definition of overdraft protection. "The guidelines make it clear that overdraft protection is not a loan, but it is an extension of credit," said Mr. Moebs. "While this may seem like splitting hairs, it dictates how banks and credit unions can characterize and administer their overdraft services."
According to the guidelines, overdraft protection is intended as a secure safeguard for consumers against the hardship of an unintentional bounced check. It is not to be used as a short-term loan or promoted as an ,allowance" above and beyond an accountholder's balance. The guidelines also recommend penalties for disclosing or marketing overdraft dollar limits in a way that leads consumers to believe they have a line of credit, which encourages intentional use. Consumers should also be informed of other less expensive alternatives to bounce protection plans.

If you are unsure about whether or not your bank or credit union has added overdraft protection to your checking or share draft accounts, contact them immediately and ask. If they have, ask how the costs are calculated and when they are taken from the accounts in question.