New Rules for Disclosure of Overdraft Fees
1. Disclosing Total Fees Charged
2. Required “Tabular” Format
3. What Fees are Included
4. Disclosure of Account Balances
5. Making Other Choices?
6. Other Pending Proposals
Helping a Customer to Avoid or Decrease Overdraft Charges
New Rules for Disclosure of Overdraft Fees
Since July 1, 2006, banks actively marketing “overdraft protection” plans have been required by Regulation DD to disclose on their monthly statements both the monthly total and year-to-date total for overdraft fees charged to the customer.
(Banks that decided to stop “advertising” overdraft accounts as of July 1, 2006 have been exempt from disclosing these totals on monthly statements. Many smaller banks—to avoid re-formatting their monthly statements—continued offering overdraft protection, but stopped promoting it, as the regulation allowed.)
Effective January 1, 2010, Regulation DD is amended in three main ways: (1) all banks will be required to disclose monthly totals and year-to-date totals for overdraft fees and returned-item fees (not just banks that actively “advertise” overdraft protection); (2) new formatting and proximity requirements will apply to this disclosure (in a table with columns, appearing “in close proximity” to where the fees themselves are posted on the statement); and (3) any “overdraft funds” cannot be included within the customer’s automated account balance that is provided (at an ATM, online, or by automated telephone balance), unless such balance is stated as including overdraft funds (or similar wording) and the balance available without such funds is also prominently disclosed.
I will discuss each of these changes below.
1. Disclosing Total Fees Charged
Most banks now use a system that automatically covers overdrafts up to a certain limit, for at least some customers—but some banks deliberately avoid providing information to customers at a level that Regulation DD would define as “advertising.” The main difference for a bank not advertising its overdraft services is that, although overdrafts are still being paid, (1) the customer is not receiving a brochure or other information describing the terms under which those services are provided, and (2) the customer is also not receiving (on his monthly statement) a cumulative total of the costs of those services to him, per month and year-to-date.
In issuing the revised regulation, the Federal Reserve decided that all consumers who use overdraft services will benefit by receiving information about the bank’s overdraft and returned item charges associated with their accounts. By requiring the same “total fee” disclosures for all banks, the Fed eliminates any reason to avoid providing more information to consumers about the terms on which overdraft protection is offered.
After January 1, 2010, when the issue of whether a bank is “advertising” these services (or not) will no longer impact what disclosures a bank makes, all banks that are offering overdraft services will probably go back to using appropriate brochures, statement stuffers, or newspaper and website advertisements describing the terms of overdraft services. For example, it will benefit all consumers to know that the payment of overdrafts is discretionary, and that the bank reserves the right to decline to pay any overdraft or to terminate a customer’s overdraft protection at any time.
Beginning January 1, 2010, amended Section 230.11(a) of Regulation DD will require disclosure of total overdraft fees paid, and total returned-item (NSF)fees paid, on each periodic statement—both for that statement period and year-to-date. Even if a bank has no automated overdraft protection plan, and pays overdrafts only “case by case,” but imposes an overdraft fee when it does so, the disclosure requirement will apply. In some cases a bank will not pay overdrafts on a particular customer’s account on any basis, but returns all NSF items unpaid, imposing a returned-check charge. If so, the disclosure requirement still applies. Every bank must comply with the regulation’s total-fee disclosure requirements for periodic statements, for all consumer accounts on which an overdraft or NSF fee is actually imposed even once during a particular year.
The amended Federal Reserve Commentary to Regulation DD, at Section 230.11(A)(3), paragraph 1, clarifies that the new requirement for disclosure on periodic statements becomes effective with a consumer’s first statement cycle beginning after January 1, 2010. As an example, some banks use a calendar month in preparing all checking account statements. If a statement period begins January 1, 2010, the new disclosure will not be required until the next statement cycle, which begins February 1, 2010.
However, many banks use statement periods that cycle at different points during the month for different groups of customers. The Commentary indicates that the disclosure will apply to any customer’s statement period beginning on or after January 2, 2010.
(Nothing prevents a bank from switching to the new disclosures earlier than required; but a change at the beginning of 2010 may be easiest for a bank not already making “total fee” disclosures. The regulation requires “year-to-date” total fee disclosures on a calendar-year basis. As provided in Section 230.11 of the Commentary, at paragraph 7, if a bank’s statement periods do not start at the beginning of a calendar month, a bank is permitted to make “year-to-date” disclosures by combining twelve consecutive statement cycles, always beginning with the statement cycle that starts at some time in the month of January.)
2. Required “Tabular” Format
For banks that currently promote their overdraft protection program, Section 230.11(a)(1) of Regulation DD already requires a disclosure of “total fees” (“for the period” and “year-to-date”) on each periodic statement. However (until now) the regulation has not dictated where this “total fee” information should be placed, nor how prominent it should be, or in what format.
A new subsection 230.11(a)(3) of the amended regulation will require all banks to make the “total fee” disclosures (1) “in close proximity” to where the transaction history is posted on the statement, and (2) “using a format substantially similar to Sample Form B-10 in Appendix A,” which is a new form added to the regulation. (Before, some banks were providing the disclosures at a location on the statement that was not highlighted or prominent enough to be easily noticeable.)
Sample Form B-10 is a table with three columns. The left column lists two line entries–“Total Overdraft Fees” and “Total Returned Item Fees.” (The bank may substitute “NSF fees” for “returned item fees” if it wants.) The middle column has a heading “Total for this period,” so that dollar amounts for the two categories just stated can be given under that heading. The right-hand column has a heading “Total year-to date,” to allow dollar amounts for each of the two categories to be provided in that column also.
Based on consumer testing, the Federal Reserve has determined that consumers are more likely to notice and understand a fee disclosure presented in the form of a table with columns and rows.
Banks need to determine “what it will take” to re-format and re-program their customer statements to provide these “total fee” disclosures (if they are not already providing them). The Fed estimates it will take an average of 16 hours to re-program and update a bank’s systems to provide these disclosures in the required format. I hope the estimate is accurate, but I have some concern that at least some of the banks will have difficulty making these changes under their existing systems.
Industry commenters responding to the earlier (proposed) version of this final regulation wanted clarification as to how to disclose overdraft fees that are posted to the account but later reversed. (For example, when a bank posts several separate overdraft fees to the consumer’s account at the same time because of some problem, that customer usually complains. The customer service desk then may agree to waive part of the charges.)
The revised Commentary to Section 230.11(a)(1) of Regulation DD, at paragraph 4, addresses this situation. It states, “If an institution assesses and then waives and credits a fee within the same cycle, the institution may, at its option, reflect the adjustment in the total disclosed for fees imposed during the current statement period and for the total for the calendar year-to-date.” This describes a situation where a fee is charged to the account, the consumer somehow learns of the fee, and the bank waives the fee, all within the same statement cycle, before the statement is prepared.
The Commentary gives a bank two options in this situation: (1) In the “total for this period” column the bank can “deduct” the amount that was waived from the amount that was charged, if both amounts were in the same statement cycle. For example, if the bank imposed a $25 charge in the January cycle and also waived it in the January cycle, the bank is allowed to disclose $0 in the “total for this period” column. As another example, if fees charged were $50, but $25 of that amount was waived, all in the same cycle, the bank can disclose $25 as the “total for this period.” (2) Alternatively, the bank can simply disclose the amount of fees charged during the statement cycle in the “total for this period” column, ignoring the amount of fees waived and credited during that cycle. (This second option—requiring no subtraction—“looks worse” but may be useful if there are software limitations.)
The same paragraph of the Commentary covers another (more typical) situation: Overdraft fees are imposed during the previous statement cycle; they then appear on the statement for that period; and next the customer complains. But when the fees (or part of them) are waived, it’s already during the following statement cycle. In other words, if $25 was reflected on the January statement under “total for this period,” and those fees were later reversed in February, the proper treatment would be for the February statement to reflect $0 of fees under “total for this period” (if there are no other overdraft charges), not “minus $25.”
In the example just given, the bank actually has two choices concerning what number to show in the “total year-to-date” column that appears on the statement for the February cycle. Because the “total year-to-date” column on the February statement is a cumulative total that includes the amount of fees that were posted in January (and later waived in February), the bank is permitted to “net” the amount waived in February against the total that would otherwise appear in the “total year-to-date” column. (For example, $25 in January plus $0 added in February makes $25, minus $25 waived in February makes $0 “year-to-date.”) But alternatively, the bank is also permitted to disclose “total year-to-date” based on amounts actually charged ($25 for January plus $0 for February, equals $25 “year-to-date”), without making any deduction for amounts waived and credited. Stating a lower dollar amount always looks better, but a bank’s system may not allow for subtraction of fees waived.
In a case where a fee is charged in the February cycle and also waived in the February cycle (before that month’s statement is prepared), a bank has a choice whether (1) to include the fee charged in February in the “total year-to-date” column without any deduction for the amount later waived in the same cycle, or instead (2) to include no amounts in the “total year-to-date” column with respect to a fee that was both charged and waived in the February cycle.
As another issue, the amended regulation technically requires a bank to disclose total fees only “as applicable”– meaning that for so long as a customer has been charged $0 in fees, both for the current month and year-to-date, no table disclosing these fees is required on the statement. It might look better to delete the “total fees” table from all statements until the consumer has been charged at least one overdraft fee for the year—which makes disclosure mandatory. However, the “simplest” approach from a programming standpoint is probably just to include the disclosure table on all monthly account statements–even when $0 appears in both of the “total fee” columns. (In any event, disclosing $0 will not upset the customer.)
3. What Fees are Included
The Commentary to existing Section 230.11(a)(1), at paragraph 4, outlines what must be included in the disclosure of “total overdraft fees.” It states, “The total dollar amount includes per-item fees as well as interest charges, daily or other periodic fees, or fees charged for maintaining an account in overdraft status, whether the overdraft is by check or by other means.” Overdraft fees also include fees imposed during a period when the account technically has a balance but funds are not “available” to pay an item due to a hold. (This may occur (1) when the bank has received an IRS or DHS levy, or a garnishment or other court order, (2) when certain electronic transactions, such as point-of-sale items, have “memo-posted” but have not yet cleared, or (3) when a funds availability hold has not yet expired.)
In some cases banks allow customers to link a second account (such as a savings account) to the checking account, so that funds will automatically transfer to avoid an overdraft. The regulation’s requirement to disclose total “overdraft fees” does not include transaction fees charged to carry out balance transfers of this type. Other banks offer a formal “overdraft line of credit,” based on an application process, signed loan documents and Regulation Z disclosures. There typically is a “cash advance fee” each time this product is accessed (whenever an advance is made on the line of credit, resulting in transfer to checking to prevent an overdraft), but this fee, also, is not included in Reg DD’s required disclosure of total “overdraft fees.”
4. Disclosure of Account Balances
The third important change in the regulation concerns what balance a bank may disclose for an account through any type of automated system (automated telephone response system, ATM screen, ATM receipt, or balance available through the bank’s internet site).
The Federal Reserve’s analysis accompanying the amended regulation states, “[I]f an institution discloses balance information through an automated system, it must disclose an account balance that excludes funds that the institution may provide to cover an overdraft in its discretion [the bank’s internal “overdraft protection” limit], funds that will be paid by the institution under a service subject to . . . Regulation Z [a formal “overdraft line of credit” limit] or funds transferred from another account of the consumer.”
Assume that a consumer has a $500 “overdraft protection” limit. Certainly, this $500 “extra amount” is included within the maximum that a customer can withdraw without having a transaction rejected. Knowing how much is available can be useful, particularly when the consumer is considering whether to access the overdraft funds to make a purchase or pay a bill. But each time a customer’s items “dip into” the overdraft limit, overdraft fees are imposed. For this reason, the customer deserves to know, first of all, what is his balance of “actual” funds–before considering “overdraft” funds that would result in an additional charge.
Effective January 1, 2010, a bank that provides basic balance information to a consumer through any automated means (automated call-in system, ATM, online) must clearly state a balance that does not include any “overdraft” limit.
In response to comments from bankers, the amended regulation also allows (but does not require) a bank to disclose through its automated systems an additional balance (different from and in addition to the required disclosure of the “actual” balance), with this additional balance including overdraft funds. A bank cannot describe this larger total (including “overdraft funds”) as an “available balance,” but must clearly indicate somehow that the second balance includes overdraft funds.
In many cases, a bank’s automated balance systems (accessible at an ATM, online, or by phone) already include two balances—often called a “ledger balance” and “available balance.” If a bank wants to state a balance that includes “overdraft funds,” this might require a third balance, or elimination of one of the first two. However, when banks disclose an “available balance” without any “ledger balance,” this often worries consumers that part of their deposits are not there. Trying to state a balance that also includes overdraft funds may simply be too difficult.
The Commentary, at Section 230.11(c), paragraph 1, does not specify what kind of “actual” balance a bank will disclose (“ledger balance,” “available balance,” or both), nor does it place any restriction on how the bank calculates that balance. Instead, what the Commentary requires is that the balance as stated must exclude three specific types of funds that are not actually part of that account: (1) overdraft funds, (2) funds in a linked deposit account, or (3) funds available through a formal overdraft line of credit.
The regulation acknowledges that most banks’ automated account-balance systems cannot disclose a “real-time” account balance. Because of a bank’s internal technology limitations, most ATM and debit transactions are approved based on a balance as of the end of the previous business day. If, for example, the consumer makes a cash withdrawal or cash deposit at a teller on the current day, these amounts will change the real-time balance but may not change the “available” balance shown on the bank’s automated account-balance system until the end of that business day.
If a customer relied on an “available” balance as stated at an ATM, and drew out nearly that entire amount, or spent almost all of that amount through debit card transactions, under the wrong set of circumstances the customer could still incur overdraft fees due to the existence of other transactions pending on that day’s business (automatic debits, cash transactions at a teller, charge-back of deposited items that are NSF, etc.).
However, there is an important distinction to be made: In providing an “available” balance that the customer relies on in making ATM and debit transactions, the bank does not know in advance that the customer’s transaction might result in an overdraft fee. But the bank does know in advance that if the customer dips into “overdraft funds,” overdraft fees will be applied. From a disclosure perspective, the Federal Reserve focuses here on making the consumer aware of the point after which he will certainly be using overdraft funds and paying overdraft fees.
Banks often have the capability to disclose more than one balance on “owned” ATMs, but some non-owned ATMs (anywhere that funds can be accessed) may lack the ability to display two balances. Assuming this is to be true, the single balance disclosed through a non-proprietary ATM (if any balance is disclosed at all) must exclude overdraft funds.
5. Making Other Choices?
The Fed’s enhanced overdraft-fee disclosure requirement is designed to make customers more aware of what they are actually paying for overdraft protection, both for each statement period and over the course of a year. The Fed believes that showing customers these totals “may encourage them to explore alternatives that might be less costly.” The Fed also notes, “A small segment of consumers incur the majority of overdraft fees.”
With more information some consumers indeed may choose a different type of product (1) if they are sufficiently sensitive to the difference in costs, (2) if they get around to “looking for something else,” and (3) if they qualify for another product that may be available. (The Fed’s required disclosures will give customers better information to compare their current arrangement with other choices.) However, (1) some customers value the ability to write overdrafts more than they care about the costs, (2) many will not get around to exploring other banking options, and (3) some (because of bad credit or inadequate income) cannot qualify for the alternatives.
In many cases, “overdraft protection” may still be simpler and easier, and maybe cheaper, than the other alternative in a particular situation–going to a payday lender or finance company, paying returned-check charges at a merchant (and still being required to pay cash for the NSF check), having an important payment (mortgage or car) returned unpaid, being charged a late fee (and possibly even a bump-up in interest rate) if some payment is not made on time, or having no source of funds at all to deal with unanticipated “immediate” (overnight or weekend) problems such as emergency room visits, prescription refills, or emergency auto repairs.
There is another group of customers who tend to incur overdraft fees because of their own problematic behavior–not because they lack enough fee disclosures or need better awareness of other choices. (“They’re doing it to themselves,” in one way or another, and the best way to cut down their fees would be to change what they are doing, not their account features.) In many cases the real reason a customer has so many overdraft charges is (1) his own mismanagement of the account, reflecting poor budgeting or impulsive spending habits, or even (2) chronic lack of adequate income. A different product will not necessarily help. Also, some consumers simply refuse to balance a checkbook, keep a record of transactions, or “do math” of any kind—and they eventually pay for it with resulting fees, unless they plan to maintain a fairly large balance at all times.
It’s certainly true that some people who incur large overdraft fees cannot easily afford these fees. In many cases the fees should not be viewed so much as the cause of the customer’s problems, but a result of them: The underlying reality may be that the customer is “broke” and isn’t getting his life together financially—or he just won’t focus on what it takes to maintain his bank account in good standing. Finding “the right financial product” is often not what is needed to cure problems of this kind. The regulators encourage banks to make customers aware of alternatives to overdraft protection—and I discuss some of those options later. When a customer asks the bank to help him understand what is going on with overdrafts—in other words, when he is receptive to something different–it’s appropriate to analyze his pattern of transactions and inform him concerning (1)other products that are available (if he qualifies), and also (2) changes he could make in his account activity to reduce his bank fees (as I also discuss, below).
Meanwhile, the vast majority of checking account customers who have overdraft protection seem to manage their funds well, and rarely (if ever) incur overdraft fees. (Having overdraft funds available provides “peace of mind” if the unexpected happens: Infrequently they might make a mistake in balancing their checkbook; an automatic deposit could be delayed by some “glitch,” throwing off their expected balance; a deposited check may be returned unexpectedly; or the customer may misgauge how “funds availability” affects a particular deposit.)
For consumers wanting to cover only “emergency” or unexpected situations, overdraft protection works fine, the cost over time is not unreasonable, and a linked-account arrangement or more formal overdraft line of credit is probably more than they need and more than they will seek out. For individuals in this category, a required disclosure of total fees “for this period” and “year-to-date” (a small amount, or $0) will probably not motivate them to do anything differently.
6. Other Pending Proposals
Larger changes in overdraft protection (more important than the disclosure issue) are also currently under consideration, in the form of (1) proposed Federal Reserve regulations, and (2) legislative proposals in Congress. There is debate concerning whether customers should be required to “opt in” before they receive overdraft protection, or whether instead they can be automatically covered (as currently exists), but with the right to “opt out.”
One bill pending in Congress would prohibit a bank from imposing an overdraft fee with respect to an ATM or point-of-sale transaction unless (1) the customer has “opted in” for overdraft protection on those specific types of transactions and (2) the customer is warned at the time of the transaction that an overdraft fee will be imposed (and how much that fee will be) if the transaction goes forward. If the particular system being used is not capable of warning the customer that a fee will be incurred (for example, in a point-of-sale transaction or at certain ATM machines), the bank would simply not be able to charge an overdraft fee for the transaction.
An issue often raised in discussing overdraft fees is the fact that the basic fee is imposed “per item”–not calculated, for example, based on the total dollar amount of overdrafts, nor as a “once for the whole day” fee charged on days when overdraft items are posted. Of course, in the wrong circumstances the current structure can sometimes lead to a large accumulation of fees in connection with a single event that caused a shortage of funds. (A bank usually deals with this situation case-by-case, often waiving some of the posted fees.)
Particularly with younger customers there is an increasing trend to carry no cash, and to use a debit card for everything—even to buy a $1.19 soft drink. This pattern of debit-card use sometimes results in a lot of small overdrafts, each involving an overdraft fee that is larger than the item itself. One argument often made is that a customer would want to stop making these small debit purchases if he knew that the items would overdraw his account—or he might even prefer that all of his debit transactions (but not his other transactions) would be automatically declined if his account were already overdrawn, or would become overdrawn by the items.
Realistically, “what the customer would want” will vary between customers, and from one situation to another. For example, a person carrying no cash and trying to pay for a meal might be seriously embarrassed if his account is slightly overdrawn and his debit transaction is automatically declined. A computer system pre-approving or declining debit transactions lacks a “crystal ball” that can understand why that situation is different from another situation.
As an additional issue, customers who use debit cards frequently are also inclined to use “online bill-pay” in a many situations (to pay utility bills, mortgage payments, etc.). However, debit-transaction-approval technology apparently makes no distinction between debit items authorized at an ATM or POS location, versus debit items authorized through online bill-pay. If a customer exercised a right to “opt out” of overdraft protection with respect to ATM and POS transactions, the necessary outcome would apparently be to cut off overdraft protection for online bill-pay also. Yet online bill-pay is the type of transaction some customers most want to have available as a method of accessing overdraft funds if necessary.
I suspect that if banks are eventually required to allow a customer to “opt out” of overdraft protection with regard to debit transactions as a category, many banks will simply remove overdraft protection altogether for customers making that choice. In that case, the customer would certainly have protection from incurring fees with regard to debit transactions, but checks that are written could be returned as NSF (with no overdraft protection in place) and returned-check charges would still apply. Fees incurred for returned checks are usually in the same amount as overdraft fees for paying checks into overdraft—and if fees get charged one way or the other for checks, isn’t overdraft protection better?
It’s hard to predict exactly how these pending issues will come out–but it’s likely we will see changes more significant than the disclosure provisions contained in the recently amended regulation.
Helping a Customer to Avoid or Decrease Overdraft Charges
If a customer continually incurs overdraft charges, and complains about them, the bank has a “customer service” issue and should try to offer alternatives that may work in the circumstances. (Or maybe a customer simply inquires about what his options are, in response to the new “total fee” disclosures.) Various solutions might be outlined, but finding a good answer may require an understanding of the underlying situation causing the overdrafts:
First, a “linked account” program may be a good choice if the customer already has more than one account, or if funds are available to set up a second account (such as a small savings account). When a customer has both a checking and a savings account, the two can be linked. If a transaction otherwise would overdraw the checking account, funds instead will automatically transfer from the savings account to pay that item. There will be a fee (several dollars) for each automatic transfer between accounts, but this is always much less than an overdraft fee, and a good deal for the customer. (A bank should not promise to allow more transfers from a savings account than will fit within the allowed number of withdrawals per month under Regulation D.)
Some customers have occasional problems with overdrafts because they are forgetful, or they become preoccupied with other concerns (business details, or care of other family members). The “linked account” can be very useful in this situation. However, if the customer’s main problem is a continual lack of money, a “linked account” may not fit.
When a consumer receives automatic payroll deposits, it’s usually very easy for the employer’s payroll processor to split the deposit into two amounts (for example, $25 per month to savings, with the rest to checking). With an automatic savings plan, the customer never has the money in hand, and avoids the temptation to spend the entire paycheck or not to make a transfer to savings. Then, with “backup” money in savings, a source exists for paying accidental or emergency overdrafts.
Second, as another alternative to overdraft charges a bank can offer a traditional “overdraft line of credit.” (This is the original overdraft product, and has existed for at least 40 years.) Like any loan, it includes a loan application, credit approval and a promissory note. The advances under this arrangement are usually in round dollar multiples of $50 or $100. There is a transaction fee each time funds are transferred to checking to prevent an overdraft (but it’s a much lower fee than a normal overdraft fee). There is also a more “relaxed” repayment schedule (with no requirement, as common with “overdraft checking,” to reduce the overdrawn balance to $0 every thirty days).
However, from the bank’s standpoint this product is often uneconomical. Signing up customers for formal overdraft lines of credit (one by one) requires time and overhead expense. (Giving large categories of customers overdraft protection is faster and cheaper.) With an overdraft line the bank must take a loan application, approve it, document the loan, book it, send monthly statements, process the loan payments, and report credit. (With overdraft protection there is no application, loan agreement, or separate monthly statement. A deposit to the overdrawn deposit account automatically repays what’s owed.)
Overdraft lines of credit do raise some issues that apply to any type of loan below a certain minimum dollar amount. It may be impossible for a bank to charge a high enough interest rate to break even on a very small loan (such as $300); but disclosing the maximum legal interest rate (still not enough to compensate the bank for all of its costs) will put customers off and tend to create a bad image for the bank.
And the situation can actually be worse than that: A line of credit is not automatically an outstanding loan balance. The bank incurs the cost of origination, but doesn’t necessarily have any balance owed on which interest can be collected. Further, any line of credit (even with no balance outstanding) must be included in risk-weighted assets, resulting in at least a small capital requirement for the bank.
However, some consumers need and request an overdraft limit substantially higher than the bank’s normal “overdraft protection” limit. When this occurs the bank should do individual underwriting anyway. At least in situations where the customer wants and qualifies for a substantially higher limit, such as $1,000 or $1,500, it could be a better fit for both the bank and the individual to put the customer into a formal “overdraft line of credit.” This gives the bank a more formalized “promise to pay” (where larger dollars are involved), allows for more flexible repayment, cuts the customer’s total costs, and might avoid the loss of a good customer when an accumulation of overdraft charges occurs. The bank certainly has some customers with good income (but seasonal or irregular income) who need a larger amount of overdraft coverage, and more at certain times of the year, and who also need a more relaxed repayment schedule. An overdraft line of credit may be ideal—but maybe an ordinary credit card, or even a secured installment loan, will work almost as well.
If a customer only qualifies for a lower amount of overdraft protection, the regulators are correct that an overdraft line of credit would be cheaper and a better choice if available, but that doesn’t mean it works economically for the bank.
Third, as already suggested, some customers should simply use a credit card, to avoid overdraft charges. Of course, they can use the card instead of writing checks. And most people recognize that they can deposit “cash advance” checks to their checking account to cover expected shortfalls in funds. However, in many cases “cash advance” checks are written on a “non-local” bank, and the depository bank imposes a maximum funds availability hold to make sure these items will pay. Some customers cannot meet the underwriting standards for a credit card (or additional credit card)–which returns us to the reality that overdraft protection may still be the person’s best way to obtain short-term funds.
Fourth, when it’s not possible to set up a “linked account” arrangement or to qualify the customer for an “overdraft line of credit” or credit card, a bank might try setting the customer up with an account that has an ATM/debit card, no checks and no overdraft funds available. This arrangement makes it harder for the person to overspend, and when the money’s gone, electronic transactions will be declined—but without overdraft charges. (The same arrangement might work for a college student who won’t keep track of his account balance, but likes to use a debit card.)
Fifth, for the customer on a fixed income who has no other options, the bank might offer to analyze the monthly statements, to figure out why overdrafts are occurring. One explanation may be that the customer does not understand the bank’s funds availability policy—and a better explanation of that policy may help him to avoid overdraft fees.
In other cases, an elderly customer may have automatic debits hitting the account that are poorly timed in relation to when deposits occur and the funds become available. The customer may not understand what is going wrong and what to do. A well-intentioned family member or friend may have set up several of the person’s regular bills to pay by automatic debit (utility bills, rent, mortgage, car payment, insurance, credit card, etc.), to make sure they will be paid on time. However, this can sometimes backfire.
For example, if this person receives at least some of his income by check, occasionally a check does not arrive when normally expected, or the weather is bad when the check arrives, or a friend who provides transportation is not immediately available. A delay occurs in making the deposit, followed by an availability hold. One solution could be to assist (or to get a family member to help) in setting up the income checks for direct-deposit (Social Security, pension, mineral royalties, etc.) so that funds will more quickly be available before automatic debits occur.
A different problem may be that certain bills “cycle” at a slightly different time each month. Utility bills and credit card bills may have a due date that changes somewhat each month because of weekends and holidays. If the particular bill is set up for payment by electronic debit, the transaction date will float with the bill’s due date each month. However, the consumer’s income may still be direct-deposited on a fixed date each month that does not float. One solution for this problem, where the automatic debit may be scheduled too close to the direct deposit, is simply to take the utility bill off automatic debit and to let the customer (or someone else) pay it by check a few days later in the month.
With certain types of revolving loan accounts (credit cards, HELOCs), over the course of several years the “typical” monthly due date can slowly move forward. In such case it might help the customer if the lender will reset the required monthly due date to a regular date falling several days later in the month.
Additionally, if the customer has a loan payment due on a certain date every month (such as the first of the month) and an automatic debit is established to pay it, the bank can simply change the date on which an automatic debit hits the account (changing it, for example, to the fifth of the month—not so late that a late charge is due, even if the due date remains on the first of the month). Such a change may greatly benefit a customer who, for example, receives a direct deposit of income on the third of the month, rather than on the first (when the payment is due).
In some cases, an elderly customer’s account becomes overdrawn in months when there are much larger utility bills (and those amounts are paid by automatic debit). The consumer may not expect, or may not remember, the seasonal pattern in which such bills increase. Perhaps the customer needs to remove all bills with variable payments from automatic debit. This might allow him time to gather funds to pay the particular bill–by check. Or maybe the customer’s overdraft problem needs a non-banking solution: If utility bills are too high, someone may need to help the customer enroll in the utility’s bill-averaging program, or work out a “catch-up” payment plan; or perhaps the customer should apply for energy-assistance funds from state or non-profit sources.
Sixth, the customer may simply be spending money that he does not have, without fully realizing it. Caregivers or relatives may be exerting undue influence over his spending (or gaining access to his debit card). He could be buying goods or services that he does not need and cannot afford. If the customer is becoming somewhat incapacitated, there are a variety of reasons why he may need someone to assist him in paying bills. Perhaps an authorized signer should be added (family member or friend), or someone holding a power of attorney should take over, or a representative payee should be appointed, to avoid overdrafts and overdraft charges.
Seventh, there are adults of all ages with inadequate skills in budgeting and financial management—sometimes causing poor checking account practices and high overdraft fees. Their problem could be bad math skills, or a complete misunderstanding of how bank accounts work.
Some non-profit organizations (and banks) teach free “financial literacy” courses for adults. If a customer is interested in solutions, the bank might mention such a program. Some churches sponsor workshops or seminars on budgeting and debt-management, which may help someone to break the cycle of repeated overdraft fees.