Overdraft charges are an important source of revenue for banks — $31.3 billion in 2020. They are also a continuing source of confusion and consternation for bank customers (especially when — surprise — a $5 latte ends up costing $150).

By way of brief history, there once was a time when banks would pay an occasional overdraft for a well-established customer and an actual human being would call the customer and politely ask that a deposit be made to cover the overdraft. A modest one-time fee might or might not be charged for this courtesy. But then banks found they could automate the payment of overdrafts, market “overdraft protection” as a customer service and make a tidy profit charging fees.

Starting in 2007, in response to a tsunami of complaints, the Federal Reserve Board began developing rules for overdrafts. In 2009, those rules were bolted onto Regulation E, a lengthy regulation providing the fine print for an important federal consumer protection statute, the Electronic Fund Transfer Act.

When the Fed first started to develop rules governing overdrafts, the idea was to treat all overdrafts the same, regardless of what triggered the overdraft. But then the Fed concluded the problems weren’t with checks. Rather, they were with ATM and debit card transactions. With checks, the Fed found customers were generally appreciative when their bank paid an insufficient funds check, thereby keeping the mortgage current, the lights on, the car running, etc., and they didn’t mind paying a fee. On the other hand, with overdrafts caused by ATM withdrawals and debit card purchases, the Fed found many customers preferred that their bank not pay the overdraft, thereby avoiding a fee.

So, the Fed changed its regulatory proposal. Under the revised proposal, banks would only be able to charge a fee for an overdraft resulting from an ATM withdrawal or a debit card purchase if the bank’s customer had given consent. The proposal initially contained two alternatives for giving consent. The first had customers affirmatively opting into a bank’s overdraft payment program, after disclosure of its terms. The second had customers giving consent by not opting out of the program, after receiving notice of a right to do so. The “opt in” alternative won the day and continues to be the law. And a bank’s right to charge a fee if it pays, or returns, a check written against insufficient funds is still not covered by the regulation. There, banks set their own policies.

The Consumer Financial Protection Bureau, which took over responsibility for the overdraft rules from the Fed in 2010, began a review of those rules in 2019, in compliance with another federal law you’ve probably never heard of — the Regulatory Flexibility Act. This review has not yet led to changes. Consequently, as matters now stand, banks must have customer consent before they can charge a fee for paying an overdraft resulting from an ATM withdrawal or a debit card purchase. But they don’t need consent to charge a fee for paying (or returning) a check written against insufficient funds. Bottom line, banks now have all manner of different overdraft policies in place and customers need to ask their own bank what the bank is doing by way of overdraft fees and what overdraft avoidance tools it might offer.

A better alternative is to keep enough money in your account to avoid overdrafts altogether. Then, none of the rest of this will matter.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. Email him at [email protected].