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Recently I spoke with a bank about opening an account. As usual, overdraft protection was mentioned. The banker informed me that the account has overdraft protection and it cannot be disabled. When I asked the banker to clarify, they informed me that when I attempt to spend more money than is present in my account, the bank would allow it to go into negative balance, charge me an overdraft fee, and charge interest on the overdrawn balance after some time. I inquired about disabling this feature, so that overdrafts become denied, and the banker informed me that this was not possible, and I was expected to check my balance before using my debit card to make sure I have enough funds.

This was very surprising to me. It used to be that accounts would have overdraft protection enabled by default, so the savvy customer would know to ask to disable them. In recent years, the regulators have taken note of the issue and decided to protect the non-savvy as well, by requiring the overdraft protection to be opt-in. But I have never heard of overdraft protection being forced on the customer.

In present day United States, are banks allowed to require customers to enable overdraft protection for personal accounts?

See also:

Jessica
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    Go to a different bank. I don’t know about others, but Chase definitely lets me tell them to decline debit card payments when it would drive my balance negative. – RonJohn May 24 '22 at 02:37
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    And @littleadv is right: it always is, and has been since the beginning of checking accounts, your responsibility to not go negative. Logging into the bank’s mobile app to check your balance makes that soooo much easier than even 20 years ago. – RonJohn May 24 '22 at 02:41
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    Related: Why do banks insist on allowing transactions without sufficient funds? – Ben Miller May 24 '22 at 21:30
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    @BenMiller-RememberMonica that explains why I never even heard of not being able to turn off overdraft: checks aren’t used in any significant way in Europe, and rightfully so. – Sebastiaan van den Broek May 25 '22 at 15:10
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    @RonJohn Why shouldn't I email their compliance officer and tell them about the non-compliant situation? Maybe it was just this banker who is confused about their own bank's policy. – Jessica May 25 '22 at 15:48
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    I am surprised there are no "pure debit" accounts in the US? The kind children would get where you cannot withdraw more than there is in the account? (here (France) they come with a debit card with compulsory verification o the account status) – WoJ May 25 '22 at 18:05
  • @WoJ I was pretty sure there are such accounts (until seeing some comments/answers on this question). For example, my Wells Fargo account forms came with a checkbox about enabling/disabling overdraft - although I haven't really tried to overdraw in many years. – Jessica May 26 '22 at 03:12

2 Answers2

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What you describe is not overdraft protection, it is overdraft. The term overdraft protection applies to actions that the bank would take if you are in a situation which would otherwise result in overdraft, like making a transfer from another account or credit, or declining a transaction.

As the banker has explained to you, overdraft protection is not offered in that bank. It is not required to be offered, but if it is - it cannot be forced. I.e.: the bank cannot transfer something from another account under your name to cover the overdraft (some banks used to do that), or charge your credit card, which would lead to cash-advance fees and interests (which some banks also used to do) without your prior approval and permission.

But in this case they're not offering you that option at all. If you end up with an overdraft you'll... end up with an overdraft.

The responsibility to avoid overdraft is yours, not theirs. They're not obligated to bounce your checks or refuse your payment orders because of insufficient balance, but they're also not forbidden from doing that. They can charge you a fee for either allowing overdraft or refusing a payment because of insufficient funds (or both). You should also remember that if your check bounces because of insufficient funds, it may be treated as a "bad check", and writing bad checks is usually a crime. What the banker told you is that they cannot guarantee that they will always bounce bad checks or refuse payments, but it doesn't mean that they never will.

TL;DR: the bank is not doing anything wrong, and it is indeed your responsibility to avoid overdrafts. They are not legally obligated to offer you overdraft protection.

As pointed out in the comments, the bank cannot charge you NSF fees for debit card transactions without your opt-in (I.e.: debit card purchases or ATM withdrawals). But it can for any other transaction. Even without charging a fee, the bank can allow you to go into overdraft via a debit card purchase and then charge NSF fees on the subsequent non-debit transactions.

See Rule 1005.17(b) here:

(b) Opt-in requirement.

(1) General. Except as provided under paragraph (c) of this section, a financial institution holding a consumer's account shall not assess a fee or charge on a consumer's account for paying an ATM or one-time debit card transaction pursuant to the institution's overdraft service, unless the institution...

The rule also says:

(2) Conditioning payment of other overdrafts on consumer's affirmative consent. A financial institution shall not:

(i) Condition the payment of any overdrafts for checks, ACH transactions, and other types of transactions on the consumer affirmatively consenting to the institution's payment of ATM and one-time debit card transactions pursuant to the institution's overdraft service; or

(ii) Decline to pay checks, ACH transactions, and other types of transactions that overdraw the consumer's account because the consumer has not affirmatively consented to the institution's overdraft service for ATM and one-time debit card transactions.

Which means that other transaction types are explicitly decoupled from the debit card opt-in requirement.

littleadv
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  • This disagrees with the following page: https://www.fdic.gov/resources/consumers/consumer-news/2021-12.html It, and many other pages online, claim that for debit card transactions, overdraft fees must be opt-in, and if you don't opt-in, you can't be charged a fee. – A. Rex May 24 '22 at 00:45
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    @A.Rex it doesn't say that you cannot end up with overdraft, it just says that for debit card transactions the bank cannot charge NSF fees. But it can for other transactions (e.g.: check or ACH). – littleadv May 24 '22 at 01:34
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    The question explicitly mentioned a debit card. But regarding "transfer something from another account under your name to cover the overdraft": that's explicitly exempted (ie, allowed) in Regulation E: https://www.fdic.gov/regulations/laws/rules/6500-500.html#fdic65001005.17 It appears that the prohibition is mostly on fees. – A. Rex May 24 '22 at 13:15
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    This answer is wrong. Debit cards are supposed to refuse to authorize a transaction without sufficient funds. That can have race conditions if you're using paper checks or ACH or other methods where the payment does not go through atomically, but then it's the check/ACH that's bounced, not the debit card transaction. However, many banks intentionally let debit card overdraft to "save you embarrassment at the the restaurant". If they do this, they're supposed to allow you to disable that. – R.. GitHub STOP HELPING ICE May 24 '22 at 15:05
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    I believe the requirement to allow you to disable it was a new consumer protection introduced sometime around 2009-2010, but I don't recall the details. – R.. GitHub STOP HELPING ICE May 24 '22 at 15:05
  • @R..GitHubSTOPHELPINGICE can you find a reference? I'll correct the answer. The only reference I saw (the FDIC link mentioned by A.Rex) doesn't say anything about disabling it, only fees. See 1005.17(b) here: https://www.fdic.gov/regulations/laws/rules/6500-500.html#fdic65001005.17 – littleadv May 24 '22 at 16:45
  • @A.Rex are you talking about 1005.17(a)(2)? I think you misread it. This says that the bank cannot charge fees for transferring money from the savings account to cover the overdraft, not that they can do it on their own without permission from the customer. – littleadv May 24 '22 at 16:47
  • @littleadv: I don't know if I feel up to digging, but I'll let you know if I do. It just sticks in my mind because I was burned by those things around 2008 or 2009 and remember being really excited about the regulatory change. – R.. GitHub STOP HELPING ICE May 24 '22 at 17:52
  • @R..GitHubSTOPHELPINGICE the FDIC rule linked specifically says that the opt-out/opt-in cut off date is in 2010, but it talks about fees. So I suspect that that is the change you're remembering. – littleadv May 24 '22 at 17:54
  • "shall not assess a fee or charge on a consumer's account". I read that as saying they can't let the transaction succeed and charge it as a debt to your account (negative balance) without satisfying the conditions that follow. But even if my reading is wrong, it would mean that any unwanted overdraft payment would have to be free to the consumer unless they explicitly opted in to it, which a bank would have to be crazy to do (giving you an interest-free loan you didn't ask for). – R.. GitHub STOP HELPING ICE May 24 '22 at 17:58
  • @R..GitHubSTOPHELPINGICE no, they cannot assess a fee or charge, the consumer can. So yes, if the bank allows the debit transaction to proceed, it would be free. The reason being the bank can block ATM or debit transactions before they happen. The bank cannot block ACH or checks before the customer uses them, or using debit card as a credit card (which is possible in some cases, and then the bank wouldn't be asked to preauthorize the transaction). – littleadv May 24 '22 at 17:59
  • Also note the one-time. If the consumer uses the debit card for recurring payments (like bill-pay), then it wouldn't be covered by this rule. – littleadv May 24 '22 at 18:02
  • @littleadv: Unless a merchant is doing the obsolete imprinting, there's a preauthorization step in credit card networks as well. – Ben Voigt May 25 '22 at 15:25
  • I believe that this question is wrong on several points. But to add some detail, this bank specifically claimed that debit transactions can go into overdraft, there will be a fee + interest charged, and there is no way to turn this off. I'm happy to edit the question if anyone else feel it's necessary. – Jessica May 25 '22 at 15:36
  • Also, the question asserts that I'm confusing overdraft with overdraft protection. The bank explicitly told me that this was an overdraft protection service that I could not opt out of. – Jessica May 25 '22 at 15:41
  • @Jessica then you can refer them to the FDIC rules linked. They are not allowed to do that. – littleadv May 25 '22 at 16:56
  • @BenVoigt not necessarily, depending on the business type and their agreement with the service provider the preauthorization is only required from certain amounts or for certain cards, not every transaction. – littleadv May 26 '22 at 05:12
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They can and it is "big biccies", a very lucrative product niche. Thirty or forty years ago there would be a report and a junior manager would manually make a decision on an account by account basis. The fee was supposed to cover the cost of the approval. It would appear on the statement as an "overdraft approval fee".

Of course now the approval is automated, and so is the fee. Up to a point. There will still be a hard limit, and also validation on transfers between accounts made online. You will not be able to overdraw in real time over the internet, say. These fees are far in excess of any credit charges (interest) you would pay. But also avoid all that dishonour ugliness. On the whole we are better off.

mckenzm
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    Just as a note, this question is tagged united-states and there are indeed regulations in the United States governing this particularly in regards to debit card purchases. They were added around the beginning of the Obama administration. – reirab May 26 '22 at 00:25