Number: RS22874
Title: Overdraft/Bounced-Check Protection
Authors: Pauline Smale, Government and Finance Division 
Abstract: Overdraft protection programs are an option offered by financial institutions to consumers. These programs are often referred to as "bounced-check protection" or "courtesy overdraft protection" to distinguish them from the more traditional overdraft lines of credit. Participating institutions cover checks drawn on accounts with insufficient funds and charge a fee. Financial institution representatives state that these programs offer a beneficial service to their customers by covering checks that would otherwise be returned unpaid. Consumer advocates argue that these programs are highcost credit products that are marketed to vulnerable consumers, and that their main purpose is to increase fee income for banks. In February 2005, federal regulators of the banking industry issued guidance concerning bounced-check/overdraft protection services offered by insured depository institutions. In May 2005, the Federal Reserve issued a final rule amending its Regulation DD to address concerns about the adequacy and uniformity of consumer disclosures relating to overdraft services offered by depository institutions, including the advertising of these services. Legislation in the 110th Congress (H.R. 946) would define these overdrafts as short-term extensions of credit and would provide enhanced consumer protections. On May 2, 2008, ongoing concerns with and interest in overdraft services prompted federal banking regulators to issue additional proposed rules to enhance consumer protections.
Pages: 6
Date: May 13, 2008