Can a bank make overdraft protection mandatory?

Question

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?

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See also:

• https://money.stackexchange.com/a/1405/117262

Answer 1

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.

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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.

Answer 2

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.