Not sure if you have overdraft service on your checking account? Now might be a good time to double-check, to avoid surprise fees.
When the pandemic hit, regulators encouraged banks to be flexible about removing overdraft fees, which they charge when customers overspend their checking accounts. And many people were able to obtain emergency relief from rent and utility payments.
“A lot of bills have not been coming due,” said Nick Bourke, director of the consumer finance project at the Pew Charitable Trusts.
But unemployment remains high while federal aid is dwindling, and it may be a while before many consumers see additional financial relief for pandemic-related economic turmoil. While many banks say they continue to work, case by case, with customers facing financial hardship, institutions are under no requirement to refund penalties indefinitely.
Since about a third of people who overdraft view it as a way to borrow money when they are short of cash, Mr. Bourke said, they may incur more fees if money gets tight. So it’s best to be prepared.
Here’s what you need to know.
A 10-year-old federal rule requires banks to get their customers’ express permission before charging a penalty for overspending, for most debit card purchases or A.T.M. withdrawals. (Banks don’t, however, need your consent to charge you a fee if you overdraw your account in other ways, like by bouncing a check.)
The “default” setting is no overdraft; the bank simply declines any transactions that would overdraw your account. This may prove embarrassing if you’re at a store, but you won’t owe a fee.
If you “opt in” to get overdraft coverage, however, the bank allows the purchase — in effect, it lends you the money — and charges a fee, typically about $35. If you keep spending after your balance drops below zero, the bank may charge an overdraft fee for each transaction, so the fees can add up quickly. Big banks earned more than $11 billion in overdraft revenue in 2019, according to the Center for Responsible Lending, a nonprofit advocacy group.
Customers often misunderstand their options, however, and banks contribute to the confusion. Last week, the federal Consumer Financial Protection Bureau reached a settlement with TD Bank over what the bureau said was the “illegal” enrollment of customers in its optional overdraft service.
The bureau found that the bank didn’t get customers’ consent before signing them up for the overdraft service, and sometimes printed out forms for them to sign with the “opt in” box already checked. Employees also verbally gave customers “misleading or incomplete” information, such as suggesting the service was free, the bureau found.
As part of the settlement, the bank agreed to pay about $97 million to more than 1.4 million customers who enrolled in the service from 2014 through 2018. It also agreed to pay a $25 million civil penalty. Based in Cherry Hill, N.J., the bank has about 1,250 branches throughout the Eastern United States.
In a statement, TD Bank said it did not admit any wrongdoing. The bank said it disagreed with the bureau’s conclusions, but had “cooperated fully” to resolve the matter and was “moving forward with a continued focus on meeting the needs of our customers.”
The bank continues to offer its optional overdraft service, Debit Card Advance, saying it is “valued by customers and helps them avoid declined transactions due to insufficient funds.”
The bureau had opened a review of the opt-in rule more than a year earlier. Dozens of banks and industry groups argued for keeping the rule unchanged, while consumer advocates urged stronger protections. In March, the bureau cited a “continued need” for the rule and said it would not change.
Here are some questions and answers about overdraft service:
Are banks waiving overdraft fees because of the pandemic?
Some banks automatically waived overdraft fees while the economy was shut down, partly to avoid having federal stimulus funds deducted from consumer accounts. (New York instructed banks to temporarily waive penalties.) As states have reopened, most banks are charging the fees and considering refunds on a case-by-case basis, after customers contact the bank.
“It’s definitely worth asking the bank to waive the fee,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.
Policies vary by bank and depend on a customer’s circumstances, a spokesman for the American Bankers Association said in an emailed statement. “The best advice for anyone feeling financial stress is to contact your bank and let them know what’s happening,” he added.
How can I avoid overdraft fees?
Consumer advocates recommend against choosing overdraft coverage, to avoid surprise fees. “Make sure you’re not opted in,” said Lauren Saunders, associate director of the National Consumer Law Center.
If you do choose the service, you can reduce fees by linking your checking account to a line of credit, savings account or credit card. If you overspend, money will be moved from your backup account, and you’ll be charged a fee that’s typically less than an overdraft charge. Ms. Saunders also suggested signing up for low-balance alerts by text or email, and using the bank’s mobile app so you can check your balance quickly on your phone.
Do banks offer accounts that don’t allow overdrafts at all?
Citibank, Bank of America and Chase all offer accounts that don’t permit overdrafts (even on checks, because the accounts don’t allow holders to write them). Wells Fargo said it would introduce accounts with limited or no overdrafts in 2021. Several start-up financial firms also offer no-overdraft accounts.