The Federal Reserve Board, Office of Thrift Supervision and National Credit Union Association are at it again, and payday loans are looking better than ever when compared with having to deal with overdraft charges on your checking account.

To recap for those of you who aren’t familiar with the service, “overdraft protection” is when a bank or credit union charges a fee to a customer’s account when they have insufficient or unavailable funds in the account to cover a pending transaction. Not only can this service be very expensive, but frequently customers don’t have the clear option to opt-in or opt-out of the service.

Regarding overdraft services, the Board is proposing two alternative approaches - an opt-out and an opt-in - where the bank must give consumers notice of fees associated with paying overdrafts that occur at ATMs or point of sale debit transactions. Thankfully, there is no such difficulty or near deception with payday loans.

Here’s the opt-out the Fed would like to see

This plan would prohibit banks from charging a consumer’s account for overdraft if the customer is given notice and reasonable opportunity to opt out and does so. This doesn’t free a bank  from paying overdraft, but it does limit or completely eliminate their ability to charge customers for it.

Per the Board, examples of “reasonable opportunity” may include:

• A 30-day period after receiving notice of the right to opt out for the consumer to call or otherwise contact the financial institution;
• A notice signed as a necessary step in account opening of the choice to opt out;

And their opt-in approach

Here, banks are prohibited from charging overdraft fees unless the consumer is provided with notice explaining the institutions overdraft service for such transactions and is given a reasonable opportunity to affirmatively consent or opt-in to the service.  If the consumer opts-in, the financial institution must provide written confirmation of this consent.

Model Forms

As seen in the above links, the Board has produced model forms that financial institutions may provide to consumers in order to attempt to obtain consent regarding overdraft services. These forms reflect a fee for the overdraft service but do not disclose that fee as an annualized percentage rate.

Why is the Board not requiring that APR be listed in bank literature about overdraft services? Perhaps because it would be too embarrassing for banks? Organizations that represent the payday loans industry like the Online Lenders’ Alliance (OLA) attempt to convince the board that if APRs must be published for payday loans per the Truth in Lending Act, banks must follow suit with what amounts to overdraft loans.

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An overdraft primer

Historically, if a consumer attempted a transaction that would overdraw his or her checking account, their bank used its discretion to determine whether to pay the overdraft. If paid, the bank charged a significant fee for the service. In recent years, many banks and credit unions have automated the overdraft process. Coverage varies by institution; consumers who meet criteria are automatically enrolled.

In the past, overdrafts generally covered only check transactions. Today, ATM withdrawals, automated clearinghouse (ACH) transactions, point-of-sale debit card transactions, preauthorized automatic debits, telephone fund transfers and online banking transactions are also covered. Institutions typically charge a flat fee for each overdraft, regardless of the amount of the overdraft. A daily fee also may apply for each day the account remains overdrawn. This simply isn’t the case with an entirely straightforward payday loans.

Federal Reserve Board, OTS and NCUA say “no”

In a May 2008 proposal, the Board, Office of Thrift Supervision and National Credit Union Association proposed to adopt rules prohibiting unfair overdraft practices. One provision would prohibit consumers from being charged for overdraft protection unless they’re given notice and a reasonable opportunity to opt out of the service, and the consumer does not opt out.

The agencies also proposed to prohibit assessing an overdraft fee where the overdraft would not have occurred but for a hold placed on funds that exceeds the actual purchase or transaction amount.

New rules aren’t in place yet, but give it time

All banks will eventually be required to provide its customers with the right to opt out of the overdraft protection as incurred from ATM withdrawals and one-time debit card transactions. The Board is also proposing that banks obtain a consumer’s consent (opt-in) before overdraft protection could go into effect for ATM withdrawals in the first place.

Balance disclosure and transaction clearing

The fashion in which banks and credit unions disclose balance is also under investigation by the agencies. They noted that consumers could be misled by balance disclosures that include additional funds that a bank may provide to cover an overdraft.

Transaction clearing practices will also have to be made entirely more clear to consumers, as financial institutions often processed transactions not in the order that they occur, but “stack” them so that larger ones will hit first, even if they occur much later than smaller deductions. This creates a situation where customers are paying overdraft fees for even the smallest transactions.

If you’re short, DON’T overdraft

No fax payday loans are easy to understand, upfront about terms and fees and less expensive than overdraft protection. During a busy holiday shopping season, using overdraft protection like a safety net can be dangerous for your budget indeed. Be smart, know your budget and look to payday loans to fill your budget holes with just enough to get you through until your next payday.

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Ever needed a payday loan to cover overdraft fees or ATM fees that your bank has charged you? If you haven’t, you just might be looking for one sooner than you think. Because of economic turmoil, banks are forecasting that overdraft fees and ATM fees will continue to rise above the average of $34.65 and $1.98, to try and cover losses over bad mortgage loans and poor investments. So what does this mean for you? Hopefully better budgeting and planning.

Paying Interest to Access Your Money

As convenient as an ATM machine is, you should really pick and choose which ones you use. Most banks charge a fee for using competitors’ ATM machines and sometimes that fee can be up to $2.50. If you only take out $20, you’re paying 12.5% interest on your own money. It’s kind of ridiculous, huh?  A payday loan that is paid back on the very next payday has less interest then that. The best way to avoid these fees is to use your bank’s ATM machine or find out which ATM machines are in your bank’s network. Planning ahead can make a world of difference on your bank statement.

Pesky Overdraft Fees

We have all over drafted our accounts for extra money for something at one point or another; it happens. My personal favorite though is when I purchase something at the grocery store after my paycheck has been deposited into my account and because deposits get posted after debits for the day, I get charged an overdraft fee even though the money was in my account before I made the purchase. Banks look for any way possible to charge you a fee to help boost their bottom dollar. What’s even worse is some banks charge an overdraft fee for every purchase over your limit, no matter how small, and then charge you for every day that your account is in the negative.

Where Does It End?

It doesn’t end, plain and simple. Banks will keep raising fees no matter what. The real question is, how much will they rise? Even if your bank is not raising its overdraft fees, you should really look into what fees they are raising. Banks are tacking on fees to savings accounts for too much activity in the account or if you keep a balance over a certain amount. It kind of defeats the purpose of saving emergency funds if you’re going to get charged to do so. Other fees rising include service fees, overdraft protection fees, and bounced check fees for those accounts that do not have overdraft protection. The best thing you can do is get a list of all the fees your bank charges and then ask how each of the fees applies to your account.

Knowing Is Half the Battle

Being responsible about your checking and savings account is the best advice I can give you. Make a budget and pay attention to accounts by balancing your checkbook and watching activity online. Knowing what’s going on with your money at all times is half of the battle with bank fees. Times do get rough though and accidents are bound to happen. If you find yourself in a crunch with the bank, there is always a payday loan around to bail you out.