OVERDRAFT IN UNITED STATES

OVERDRAFT IN UNITED STATES

Consumer reporting and account denial

In the United States some consumer reporting agencies such as ChexSystems, Early Warning Services, and TeleCheck track how people manage their checking accounts. Banks use the agencies to screen checking account applicants. Those with low debit scores are denied checking accounts because a bank can not afford an account to be overdrawn.

Overdraft protection in the US

Overdraft protection is a financial service offered by banking institutions primarily in the United States. Overdraft or courtesy pay program protection pays items presented to a customer's account when sufficient funds are not present to cover the amount of the withdrawal. Overdraft protection can cover ATM withdrawals, purchases made with a debit card, electronic transfers, and checks. In the case of non-preauthorized items such as checks, or ACH withdrawals, overdraft protection allows for these items to be paid as opposed to being returned unpaid, or bouncing. However, ATM withdrawals and purchases made with a debit or check card are considered preauthorized and must be paid by the bank when presented, even if this causes an overdraft.

Ad hoc coverage

Traditionally, the manager of a bank would look at the bank's list of overdrafts each day. If the manager saw that a favored customer had incurred an overdraft, they had the discretion to pay the overdraft for the customer. Banks traditionally did not charge for this ad hoc coverage. However, it was fully discretionary, and so could not be depended on. With the advent of large-scale interstate branch banking, traditional ad hoc coverage has practically disappeared.

The one exception to this is so-called "force pay" lists. At the beginning of each business day, branch managers often still get a computerized list of items that are pending rejection, only for accounts held in their specific branch, city or state. Generally, if a customer is able to come into the branch with cash or make a transfer to cover the amount of the item pending rejection, the manager can "force pay" the item. In addition, if there are extenuating circumstances or the item in question is from an account held by a regular customer, the manager may take a risk by paying the item, but this is increasingly uncommon. Banks have a cut-off time when this action must take place by, as after that time, the item automatically switches from "pending rejection" to "rejected," and no further action may be taken.

Overdraft lines of credit

This form of overdraft protection is a contractual relationship in which the bank promises to pay overdrafts up to a certain dollar limit. A consumer who wants an overdraft line of credit must complete and sign an application, after which the bank checks the consumer's credit and approves or denies the application. These lines of credit are loans and must comply with the Truth in Lending Act. As with linked accounts, banks typically charge a nominal fee per overdraft, and also charge interest on the outstanding balance. Some banks charge a small monthly fee regardless of whether the line of credit is used. This form of overdraft protection is available to consumers who meet the creditworthiness criteria established by the bank for such accounts. Once the line of credit is established, the available credit may be visible as part of the customer's available balance.

Linked accounts

Also referred to as "Overdraft Transfer Protection", a checking account can be linked to another account, such as a savings account, credit card, or line of credit. Once the link is established, when an item is presented to the checking account that would result in an overdraft, funds are transferred from the linked account to cover the overdraft. A nominal fee is usually charged for each overdraft transfer, and if the linked account is a credit card or other line of credit, the consumer may be required to pay interest under the terms of that account.

The main difference between linked accounts and an overdraft line of credit is that an overdraft line of credit is typically only usable for overdraft protection. Separate accounts that are linked for overdraft protection are independent accounts in their own right.

Bounce protection plans

A more recent product being offered by some banks is called "bounce protection".

Smaller banks offer plans administered by third party companies which help the banks gain additional fee income. Larger banks tend not to offer bounce protection plans, but instead process overdrafts as disclosed in their account terms and conditions.

In either case, the bank may choose to cover overdrawn items at their discretion and charge an overdraft fee, the amount of which may or may not be disclosed. As opposed to traditional ad hoc coverage, this decision to pay or not pay overdrawn items is automated and based on objective criteria such as the customer's average balance, the overdraft history of the account, the number of accounts the customer holds with the bank, and the length of time those accounts have been open. However, the bank does not promise to pay the overdraft even if the automated criteria are met.

Bounce protection plans have some superficial similarities to overdraft lines of credit and ad hoc coverage of overdrafts, but tend to operate under different rules. Like an overdraft line of credit, the balance of the bounce protection plan may be viewable as part of the customer's available balance, yet the bank reserves the right to refuse payment of an overdrawn item, as with traditional ad hoc coverage. Banks typically charge a one-time fee for each overdraft paid. A bank may also charge a recurring daily fee for each day during which the account has a negative balance.

Critics argue that because funds are advanced to a consumer and repayment is expected, that bounce protection is a type of loan. Because banks are not contractually obligated to cover the overdrafts, "bounce protection" is not regulated by the Truth in Lending Act, which prohibits certain deceptive advertisements and requires disclosure of the terms of loans. Historically, bounce protection could be added to a consumer's account without his or her permission or knowledge.

Transaction processing order

An area of controversy with regards to overdraft fees is the order in which a bank posts transactions to a customer's account. This is controversial because largest to smallest processing tends to maximize overdraft occurrences on a customer's account. This situation can arise when the account holder makes a number of small debits for which there are sufficient funds in the account at the time of purchase. Later, the account holder makes a large debit that overdraws the account (either accidentally or intentionally). If all of the items present for payment to the account on the same day, and the bank processes the largest transaction first, multiple overdrafts can result. Another problem for the consumer can occur when a large deposit and a larger debit occur on the same day; for example, a customer with $700 in their account who deposits a $600 paycheck and later pays an $800 rent check on the same day will be charged an overdraft fee, despite having more than enough money in their account to cover the check.

The "biggest check first" policy is common among large U.S. banks. Banks argue that this is done to prevent a customer's most important transactions (such as a rent or mortgage check, or utility payment) from being returned unpaid, despite some such transactions being guaranteed. Consumers have attempted to litigate to prevent this practice, arguing that banks use "biggest check first" to manipulate the order of transactions to artificially trigger more overdraft fees to collect. Banks in the United States are mostly regulated by the Office of the Comptroller of Currency, a Federal agency, which has formally approved of the practice; the practice has recently been challenged, however, under numerous individual state deceptive practice laws. In class action, U.S. Bank Corporation entered into a $55 million settlement agreement on January 16, 2014 over the practice of reordering transactions (highest-lowest) in posting debit card transactions to customer accounts and the alleged effect the posting order had on the number of overdraft fees charged to account holders.

Bank deposit agreements usually provide that the bank may clear transactions in any order, at the bank's discretion.