Jan. 8, 2010 at 9:00 AM ET
What some call America's most notorious hidden fee is about to be dealt a serious blow, as new rules kick in that will eliminate many of the booby traps that lead to bank account overdraft fees.
Already, in advance of the Federal Reserve regulations coming in July, many banks are allowing consumers to opt out of the "courtesy" overdraft coverage and associated, cascading $35 fees.
But it should come as no surprise that there's a catch. In fact, there are lots of them. Topping the list: Consumers who opt out of overdraft protection now may find themselves in the worst of both worlds. Their transactions will be denied and they will face a $35 insufficient funds fee anyway.
"My card is being denied and checks are being returned, but the fee remains, " wrote Ginnie Logan, who banks at Elevations Credit Union in Colorado and recently opted out of what the organization calls courtesy pay. "Essentially the issue hasn't gotten any better. In fact, it has gotten worse."
Logan's sentiment would sting consumer advocate groups who spent years fighting high bank overdraft fees. Expect a new round of consumer frustration this year as insufficient funds fees make a comeback and consumers try to understand why. We'll try to explain.
Much of the frustration with overdraft fees came from the element of surprise. While most consumers understood the danger of writing a check that might send their account balance into the red, few realized that they could overspend their balance by swiping debit cards or withdrawing cash at ATMs. The new regulations are designed to end those surprises: Beginning in July, banks will not be able to honor the last two kinds of transactions charges and assess the overdraft fee unless those consumers have opted in to a overdraft protection program.
Bank of America, JP Morgan Chase and a number of other institutions already have announced that consumers may call and opt out of overdraft coverage now. Most consumer advocates, including Consumers Union staff attorney Lauren Bowne, recommend that account holders immediately do so.
That, however, can lead to an unnerving conversation with your bank. During a recent call to Bank of America, an msnbc.com reporter was told, "You may still incur overdraft charges in some cases," even after opting out. That's because lags between credit and debit transactions and the time they are posted to your account can still cause headaches.
It's possible, for example, that an online bill payment could be sent when a checking account balance is above zero, but not debited until later, after a series of other withdrawals have sent the balance to zero. That would still result in an overdraft fee, because the bank could not have known the "true" balance of the account would dip below zero when it initiated the e-payment.
In addition, there are numerous circumstances under which opting out would cause transactions to be denied, triggering an insufficient funds fee.
Wire transfers or checks would bounce the old fashioned way, for example. At Bank of America, the insufficient funds fee is $35 – same as the overdraft fee.
Still, the Bank of America operator gave assurances that opting out would eliminate the possibility of debit card purchases leading to overdraft fees.
That should reassure consumers who aren't so sure. Several have e-mailed msnbc.com recently suggesting they are still seeing overdraft fees related to debit card swipes after opting out. The confusion is understandable, given the complexity of the systems involved. It doesn't help that Bank of America operators won't provide paper documentation of the procedure, its terms and conditions, or confirmation of the account change. The only way to confirm overdraft protection had been removed is to call after five days and ask another customer service representative to check, she said.
An operator at Logan's credit union gave a less black-and-white answer to the debit purchase/overdraft question.
"From what I've seen that's not happening," he said. "But it is possible."
He described some potentially thorny time-lag situations. Not all merchants immediately process transactions -- many transmit transactions in batches every hour or two, for example -- so it would be possible for a consumer to swipe their debit card four or five times in different stores during a day before the bank realizes the account holder's balance had gone south of zero.
Consumers who use ATMs outside their own banks' network could also face this problem, as some ATMs perform what are called "stand-in" authorizations, and don't transmit transaction information until later in the day. That could also result in an overdrawn account.
Still, he said such situations were extremely rare.
The American Bankers Association offered several warnings about this kind of confusion last year while arguing against overdraft reform. But Nessa Feddis, spokeswoman for the trade group, said much of the confusion should be cleared up by the time the new Fed rules kick in this summer.
"The rule is very consumer-oriented," she said. "... The Fed did a lot of testing and the rule forces banks to do things the way consumers would want them in each situation." After July, she said, banks will not be able to charge a fee because of a lag in batch transactions, for example, because the Fed decided that consumers could not be expected to know about merchant transmission procedures.
The new rules aren't perfect, however. Many consumers would want small debit card transactions or ATM withdrawals denied when their balance is at zero (saving a overdraft $35 fee), but prefer that checks be honored (since they would result in an insufficient funds fee anyway, and they would also lead to additional fees from the jilted merchant). But many banks' systems can't handle such a split decision, Feddis said. Overdraft protection must either be on or off.
Consumers who misunderstand their overdraft protection has been removed may wind up bouncing a lot of checks.
"There are a lot of operational issues that still have to be solved," Feddis said. "Some of these things will be resolved, but it might be through a different kind of product." One possibility: banks will offer incentives to customers to keep larger minimum balances in their accounts to avoid overdraft situations, she said.
Despite the confusion, and the "worst of both worlds" possibility, the Consumer Union's Bowne said she's sticking by her initial advice.
"Overall, I still think it is sound advice to opt-out of overdraft, when possible, as we wait for the rule to go into effect," she said. "I cannot envision a scenario where a bank would charge a consumer for 'attempting' a debit or ATM transaction in which the consumer never completes the transaction. ... That being said, nothing much surprises me with respect to these bank practices and without seeing the actual terms and conditions from the different banks it is hard to be certain."
Red Tape Wrestling Tips
You should opt out of overdraft protection now if your bank allows it. The end goal here is to avoid overdrawing your checking account through debit purchases or ATM withdrawals. You never want to pay $40 for a $5 hamburger, as has happened to many people in recent years. But there are hazards.
If you have overdrawn your account in the past year, think before you opt out. A bounced check can have more far-reaching consequences than an overdraft fee. You might end up in the ChexSystems database and lose check-writing privileges, for example. So don't opt-out until you are ready to stay out of the red.
Consumers who live near a zero balance will find that so-called "account holds" placed on debit purchases by gas stations and some other businesses can cause headaches in a post-overdraft-fee world. Holds, which exceed the transaction price, can freeze funds for days and cause confusing time lags. Be cautious using your debit card for purchases at firms that place holds. One tip: If you must use debit, use a PIN instead of a signature. PIN-debit transactions generally are processed faster than signature-debits, so that will help you keep your account balance up to date.
When July comes, look for a mandatory notice from the bank about the new procedures. Don't fall for comes-ons advertising "courtesy" protection. If you do nothing, you won't have it. And that's probably your best choice.
After you opt out, and the fed rule kicks in, when might you be hit with a fee? When the bank has to "return" an attempted payment to you – a bounced check, for example, or an e-payment that can't be honored.
The safe way to protect yourself from overdrawing your checking account is to link it to other accounts – your savings account, a credit card, or even a line of credit. Everyone makes mistakes. Yours will be less costly if you borrow your own money through linked accounts than if you borrow the bank's money through a "courtesy."