Are more $38 cups of coffee on the horizon? The Consumer Financial Protection Bureau has opened a review of the decade-old federal “overdraft rule,” which regulates how banks charge fees when their customers spend more than what is in their checking accounts.

Under the rule, banks must get their customers’ express permission before charging a penalty for overspending, whether through most debit card purchases or ATM withdrawals.

If customers don’t accept overdraft coverage, banks simply decline transactions that would drop an account balance below zero. If customers do “opt in” to overdraft coverage, the bank approves the purchase or cash withdrawal and charges a fee — typically about $35. 

In fact, banks often charge an overdraft fee for each transaction that occurs while the account remains overdrawn. So the fees can add up quickly.

Before the rule, many banks automatically enrolled customers in overdraft coverage, sometimes without their knowledge. A small purchase — like a cup of coffee — could hit account holders with a penalty much higher than the price of the item.

Consumer advocates said they are watching carefully for any proposed changes in the rule, which they credit with helping people avoid excessive penalties. The consumer bureau’s own research found in 2014 that consumers who choose overdraft coverage pay seven times as many fees as those who forgo it. The Federal Reserve Board issued the rule in 2009, and it took effect in 2010.

The consumer bureau became responsible for the rule in 2011 and is now reviewing it under a federal law, the Regulatory Flexibility Act. The bureau said the law directed it to consider factors like the “continued need” for a rule. The rule may be kept as is, changed or rescinded.

It’s unclear whether the bureau would support changing or eliminating the overdraft rule. In an e-mailed statement, the bureau said that during the review, it must seek information to see whether it could “minimize the economic impact of the rule on small businesses” while achieving the rule’s objectives. The bureau expects to complete the review by November.

“It would definitely be a bad thing to roll back what minimal protection is in place already,” said Nick Bourke, director of consumer finance at the Pew Charitable Trusts, which has studied the effect of overdraft fees.

Chi Chi Wu, a lawyer with the National Consumer Law Center, said she would prefer to see overdrafts barred for all debit card and ATM transactions. And fees charged, she said, should be “reasonable and proportional” to the amount overspent.

Pew’s research found that even with the “opt in” rule, many people didn’t know they could limit fees by declining coverage — perhaps because the form that banks use to explain their policies to customers is confusing.

The consumer bureau tested new forms for banks to use, but the status of that effort is uncertain.

Viveca Ware, an official at the Independent Community Bankers of America, a group representing small and midsize banks, said the association is soliciting opinions from its members before submitting comments on the rule’s review.

One significant change over the past decade, she noted, is the growth in digital banking and smartphones, which allow consumers to easily check their bank balances to see if they have enough money to cover a purchase.

“We want a regulatory environment,” Ware said, “that does not impede our members’ ability to offer a variety of overdraft services.”

Here are some questions and answers about overdrafts:

Q: How can I limit bank overdraft fees?

A: Don’t opt in to overdraft coverage, the consumer bureau’s website recommends.

If you do choose coverage, the bureau notes, you can often link your checking account to a separate savings or credit card account. Then, if you overspend, money will be transferred from your backup account. You may be charged a transfer fee, but it is often much less than the bank’s usual penalty. You could also switch to an account that doesn’t allow any overdrafts so there would be no risk of a fee. Such accounts may have limitations, though. MagnifyMoney, a personal finance website, lists several online banks that offer no-overdraft accounts.

Q: Does the federal overdraft rule apply to paper checks?

A: No. Banks may charge fees without getting a customer’s prior approval, if the customer overspends using a check and for some electronic transactions.

Q: Can banks rearrange transactions to increase overdraft fees?

A: Some banks reorder debit transactions, processing them from the highest amount to the lowest, so that one small shortage can cause a cascade of overdrafts and hundreds of dollars in fees.


Ann Carrns writes for the New York Times.