The check would be returned unpaid to the merchant or other third party. Financial institutions have offered overdraft lines of credit for protection against account overdrafts. Participating institutions offer this type of overdraft protection as a feature of their accounts, and customers do not have to apply and qualify for the service. Legislation and Ongoing Concerns

		Bounced-Check/Overdraft Protection Legislation

Currently, three bills address overdraft protection programs in the 111 th Congress: H.R. The bills would enhance consumer protection by increasing consumer knowledge and awareness of overdraft programs and facilitating the ability of consumers to accept or decline overdraft services. Fees associated with these programs would be considered finance charges. H.R. This legislation would require financial institutions offering overdraft protection services for ATM, point-of-sale, online, telephone initiated, and in person transactions to provide a warning notification when an overdraft fee will be imposed and to include the amount of the fee. Consumer Advocate Issues

Consumer advocates have been supportive of overdraft protection legislation. Guidance Issued by Federal Regulators

In February 2005, federal regulators issued guidance addressing the risks presented by bounced-check or courtesy overdraft protection services. Both documents stated that clear disclosures and explanations to consumers of the operation, costs, and limitations of an institution's overdraft program are essential. On May 19, 2005, the Federal Reserve issued a final rule amending its Regulation DD to provide consumers with uniform and adequate disclosure information concerning bounced-check or courtesy overdraft protection services. Communications that are defined as advertisements, as well as those that are excluded from the definition, are described in detail. 2008 Amendments to Regulation DD

On December 18, 2008, the Board of Governors of the Federal Reserve System adopted additional amendments to Regulation DD due to continued concerns with overdraft services despite the issuance of the 2005 guidance and Regulation DD amendments. The intent of these provisions is to ensure that consumers are provided with an accurate idea of their account balance. On November 12, 2009, the Board of Governors issued final rules under Regulation E. These rules require financial institutions to provide consumers the choice of opting in or affirmatively consenting to the institution's overdraft program for ATM and one-time debit card transactions.
Overdraft protection programs are an optional service 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 high-cost credit products that are marketed to vulnerable consumers, and that their main purpose is to increase fee income for banks.
Federal regulators have monitored the development of overdraft protection programs to ensure that adequate consumer disclosure is being provided and to measure the risk exposure for financial institutions. Several actions have been taken. In February 2005, federal regulators of the banking industry issued guidance concerning bounced-check/overdraft protection services offered by insured depository institutions. The Federal Reserve amended its Regulation DD (Truth in Savings) in May 2005 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. On December 18, 2008, the Federal Reserve announced additional amendments to Regulation DD. The changes aim to facilitate consumer understanding of how overdraft services operate and the costs associated with these programs. On November 12, 2009, the Federal Reserve announced amendments to Regulation E (Electronic Fund Transfers) that provide consumers a choice regarding their institution's payment of overdrafts for automated teller machines (ATMs) and one-time debit transactions. Such payments would be prohibited unless the consumer affirmatively "opts in" or agrees to this type of overdraft protection.
Legislation in the 111th Congress (H.R. 1487, H.R. 3904, and S. 1799) would provide enhanced consumer protections for overdraft protection programs. This report will be updated as events and legislation warrant.