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There are some overdraft credit plans agreed to in writing and covered by Regulation Z . A checking account can be linked to an overdraft line of credit , from which funds are transferred automatically to pay transactions when the checking account balance is insufficient to pay them . An overdraft protection transfer fee is often charged . Although since late 2021 , many financial institutions have eliminated this fee . An interest rate is applied to the outstanding balance in the line of credit .
Financial institutions may also pay overdrafts through currently non-covered overdraft credit . This is where the institution typically pays overdrafts up to certain limits , but does not agree in advance to pay the overdrawn transactions , reserving discretion to decline any given overdraft transaction . This type of overdraft credit is currently not subject to Regulation Z . The financial institution typically assesses a flat fee for each overdraft transaction paid .
Financial institutions typically provide non-covered overdraft credit for certain transaction types , including :
• Checks / share drafts
• Automated clearing house ( ACH ) transactions
• Recurring debit card transactions , up to certain coverage limits
For one-time ( non-recurring ) debit card and ATM transactions , financial institutions may not assess overdraft fees for paying such transactions without first obtaining the consumer ’ s optin required by Regulation E .
Non-covered overdraft credits started as a courtesy financial institutions provided when they would decide on an ad hoc basis to pay particular check transactions via overdraft rather than returning those checks unpaid . Over time , non-covered overdraft credits became more ubiquitous as institutions shifted to a system involving heavy reliance on automated programs to process transactions and to make overdraft decisions . Even as transaction processing and overdraft decisioning became more automated and overdraft transactions increased in frequency and decreased in size , financial institutions upped the size of overdraft fees . Fee revenue from non-covered overdraft credits began to significantly influence the overall business model for many asset accounts . According to the CFPB , financial institutions became less likely to charge consumers upfront monthly checking account fees , which consumers could more easily compare across the market , and instead began to rely heavily on overdraft fees .
Beginning in late 2021 , under pressure from the CFPB , a number of large banks began announcing and implementing changes to their overdraft policies , eliminating overdraft fees altogether or reducing them to $ 10 or $ 15 per transaction . At the same time , most very large financial institutions eliminated nonsufficient funds ( NSF ) fees . Despite these changes , the agency believes the vast majority of banks and credit unions with over $ 10 billion in assets continue to charge between $ 30 and $ 37 per overdraft fee , and more than half charge $ 35 . The CFPB thinks financial institutions continue charging these high fees even though the fees far exceed institutions ’ costs and losses associated with providing non-covered overdraft credit .
CFPB research found 79 % of combined overdraft and NSF fees were paid by 9 % of consumers who paid more than 10 such fees per year , incurring a median of $ 380 in these fees in a year . According to the agency , consumers whose accounts are frequently overdrawn are typically more financially insecure than those who do not overdraw or who do so infrequently . It is documented , black and Latino households are more likely to incur overdraft fees than white households .
The CFPB estimates the proposed rule , when finalized , may save consumers $ 3.5 billion or more in fees per year .
Changes to the Regulatory Structure
As it currently stands , due to an exception in Regulation Z , overdraft programs are primarily regulated under Truth in Savings and Regulation E . Over the years , federal banking agencies have strongly suggested the regulatory structure around overdrafts should be changed . Dating back to 2005 , the agencies issued joint guidance on non-covered overdraft credit noting the existing regulatory exceptions ( i . e ., exceptions in Regulation Z such that it does not apply ) were created for the occasional payment of overdrafts , and as such , could be reevaluated in the future . More recently , in October 2022 , the CFPB issued a policy statement stating the assessment of overdraft fees that consumers would not
02 | VIEWPOINTS : REGULATORY COMPLIANCE EDITION