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New Federal Rules on Overdraft Fees Affect DC Residents

Wednesday, July 14, 2010
Banks, savings and loans and credit unions can no longer charge overdraft fees on ATM and debit-card transactions unless customers give permission first.

Washington, DC — The DC Department of Insurance, Securities and Banking (DISB) today reminded District of Columbia residents of the new federal overdraft rules, and how they might affect their checking account transactions.

Starting July 1, 2010, banks, savings and loans and credit unions can no longer charge overdraft fees on ATM and debit-card transactions unless customers give permission first. If a customer overdraws on his or her account, the transaction can be rejected, unless the customer has elected for automatic overdraft protection. Existing checking account customers will have until Aug. 15 to opt-in and choose to get overdraft protection.

Overdraft protection is an agreement with the bank or financial institution to cover overdrafts on a checking account. An overdraft occurs when a checking account customer uses a debit card for an amount that exceeds his or her account balance or pays with a check that is written for an amount greater than the checking account balance. Typically, banks charge between $35 and $40 in fees to handle each overdraft.

“It is important for checking account customers to monitor their accounts and balances closely to avoid putting themselves in a position to need the overdraft protection and to incur additional fees,” said DISB Commissioner Gennet Purcell, Esq.

The Board of Governors of the Federal Reserve System amended Regulation E, which implements the Electronic Fund Transfer Act. The final rule limits the ability of a financial institution to assess an overdraft fee for ATM or debit card transactions that overdraw a customer’s account, unless the customer affirmatively consents for this protection. Automatic overdraft protection allows the bank to pay for all debit card transactions or ATM withdrawals, even when there is not enough money in the checking account. Account holders should note that each overdraft transaction triggers a fee. If three debit card purchases are made in a day, that results in overdrawing the checking account three times and paying the fees three times.

Banks may continue to cover overdrawn checks without any consent and charge a fee. Banks will also continue to cover automated debits from checking accounts, such as bill pay transactions, for a fee.

Most banks allow customers to check online or by phone, and some banks will send text messages to alert a customer when the account balance is getting low. Commissioner Purcell added, “Customers should also consider linking their checking account to a savings account, a line of credit, a credit card or other account that can be automatically drawn down if they overdraw their checking accounts.”