Overdraft protection saves hassle, embarrassment

By Patrick S. Jury and John Sorensen

Consumers have faced a challenging economic climate this past year, and Congress is looking for ways to provide support in this time of need. One of the actions Congress is considering looks good on paper but, in reality, would not benefit consumers.

The issue at hand is overdraft protection. Today, most banks and credit unions have programs commonly referred to as “overdraft protection.” These programs are set up to cover transactions, such as checks or debit card payments, in which a consumer has insufficient funds in his/her account. For this service, the consumer pays a fee, while also being saved the embarrassment associated with a returned check.

Credit unions and banks began offering overdraft protection programs in an effort to protect consumers from the hassle and embarrassment of returned checks and help them avoid additional fees charged by merchants.

A recent survey conducted by Victory Enterprises showed that 93.8 percent of Iowans were “glad that their payment was covered” by their financial institution despite having insufficient funds in their account. Furthermore, nearly 70 percent felt that overdraft protection is a “very” or “somewhat beneficial” product provided by their institution, with only 7 percent seeing it as “detrimental.”

Proposed legislation currently in Congress would limit how Iowa banks and credit unions can help consumers with this service. Specifically, this legislation would limit the number of times consumers could use overdraft protection to once per month and no more than six times per year. Such legislation would restrict consumers from receiving the benefits of this service and increase the number of checks returned by merchants due to insufficient funds.

In addition, the Federal Reserve recently passed a rule (effective July 2010) that will require banks and credit unions to receive an affirmative “opt in” from members/customers before initiating overdraft protection fees related to ATM and one-time debit transactions.

Iowans appreciate their access to overdraft protection services and these legislative proposals will hinder Iowa's financial institutions from offering this beneficial and helpful service to consumers.

Patrick S. Jury is CEO, Iowa Credit Union League, and John Sorensen is CEO, Iowa Bankers Association.