Changes to Regulation E
will change the way you bank
Late last year, the Federal Reserve Board announced new rules that modify the way banks charge overdraft fees. These new rules — changes to Regulation E — apply only to ATM and every day debit card transactions, typical transactions most people make in daily shopping. Regulation E, also known as the Electronic Funds Transfer Act, is a federal regulation that governs the electronic transfer of money.
Today, if a client has insufficient funds for an ATM or everyday debit card transaction, the bank may choose to pay the item into overdraft — even if there is not enough money in the account to cover the transaction — and charge the client a fee for the service.
But under Regulation E, consumer bank clients have to make a choice. ATM and everyday debit card transactions will be declined if there is not enough money in the client’s account, unless the client agrees or consents to have the bank authorize and pay these transactions if the account does not contain sufficient funds.
Changes to Regulation E require banks to give their clients detailed information concerning overdraft services so they can make educated decisions about their money. However, as the saying goes, the devil is in the details. And when it comes to Regulation E, the details will mean different things to different people.
Understanding changes to Regulation E
As of July 1, 2010, new consumer banking clients must decide how they would like their bank to handle overdraft situations related to ATM and everyday debit card transactions. Existing clients must decide by August 15. If a client prefers that the bank authorize and pay (at its discretion) ATM and everyday debit card transactions into overdraft, which most likely will result in an overdraft fee, they must provide the bank with their consent to do so. This is also referred to as “opting in.”
To the extent a client declines to opt in, that client will not be assessed overdrafts fees related to ATM and everyday debit card transactions. This means that consumers will no longer incur what many consider to be excessive overdraft fees related to these types of transactions. But it also means that unless they agree to the bank’s overdraft services, or have been approved for an overdraft protection account, they will no longer be able to have ATM or everyday debit card transactions authorized and paid into overdraft. In other words, if there is not enough money in the account, the transaction cannot be made.
The Regulation E changes for overdraft services do not apply to checks and other transactions, such as automatic bill payments, ACH, or recurring debit card transactions.
Here’s a way to look at how these changes could apply to your daily routine:
• You want to use your debit card to buy gas, but your checking account is overdrawn;
• You are at lunch with a friend or co-worker, but the bill is higher than you thought and more than the balance in your account.
In the past, the bank could decide whether or not to pay the transaction. If the transaction was paid, you were assessed an overdraft fee for that service. But in accordance with these changes, if you did not consent to the bank’s overdraft services, you could not purchase the gas or lunch using your debit card.
So, some sort of overdraft service could be valuable. While few people want to pay a high fee for an order of coffee and pastry, many people don’t want to be stranded at a gas station or embarrassed by a declined transaction in front of a colleague or friend.
How to weigh your options
By law, your bank must provide you a notice about overdrafts and overdraft fees in order to authorize and pay ATM and everyday debit card transactions into overdraft and charge you a fee. This notice explains what overdrafts are and what standard overdraft services are connected with your account. It also explains how to opt in to overdraft services for ATM and everyday debit card transactions.
This notice also should explain the various overdraft protection plans offered by your bank. If you do nothing, your bank will no longer provide you with overdraft services on your ATM and everyday debit card transactions. If you want to be protected from having these transactions declined, you will need to authorize your bank to do so.
Your financial needs and spending habits are unique. Do you overdraw your accounts often? Have you incurred many overdraft fees? Do you rarely, if ever, overdraw your account? It’s important to ask yourself: “Are overdraft services worth the fees because they give me a valuable safety net?
Take the time to fully understand the scope of the changes to Regulation E. Doing so should enable you to gauge if your bank is doing what it should be doing — helping you reach your financial goals. Understanding who you are and how you bank will help you decide what to do about your Regulation E choices.
Cheri Doak of Caribou is senior vice president and retail banking leader at Key Bank in Maine. She can be reached at (207) 764-9425 or cheri_doak@keybank.com.
