Overdraft/Bounced-Check Protection (CRS Report for Congress)
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| Release Date |
Revised Dec. 17, 2009 |
| Report Number |
RS22874 |
| Report Type |
Report |
| Authors |
Pauline Smale, Analyst in Financial Economics |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
Overdraft protection programs are an optional service offered by financial institutions to consumers. These programs are often referred to as "bounced-check protection" or "courtesy overdraft protection" to distinguish them from the more traditional overdraft lines of credit. Participating institutions cover checks drawn on accounts with insufficient funds and charge a fee. Financial institution representatives state that these programs offer a beneficial service to their customers by covering checks that would otherwise be returned unpaid. Consumer advocates argue that these programs are high-cost credit products that are marketed to vulnerable consumers, and that their main purpose is to increase fee income for banks.
Federal regulators have monitored the development of overdraft protection programs to ensure that adequate consumer disclosure is being provided and to measure the risk exposure for financial institutions. Several actions have been taken. In February 2005, federal regulators of the banking industry issued guidance concerning bounced-check/overdraft protection services offered by insured depository institutions. The Federal Reserve amended its Regulation DD (Truth in Savings) in May 2005 to address concerns about the adequacy and uniformity of consumer disclosures relating to overdraft services offered by depository institutions, including the advertising of these services. On December 18, 2008, the Federal Reserve announced additional amendments to Regulation DD. The changes aim to facilitate consumer understanding of how overdraft services operate and the costs associated with these programs. On November 12, 2009, the Federal Reserve announced amendments to Regulation E (Electronic Fund Transfers) that provide consumers a choice regarding their institution's payment of overdrafts for automated teller machines (ATMs) and one-time debit transactions. Such payments would be prohibited unless the consumer affirmatively "opts in" or agrees to this type of overdraft protection.
Legislation in the 111th Congress (H.R. 1487, H.R. 3904, and S. 1799) would provide enhanced consumer protections for overdraft protection programs. This report will be updated as events and legislation warrant.
