 Dear
Dr. Don,
How could a bank allow a customer to withdraw $1,000 out of his checking account if the customer was already in overdraft? Please note that the customer didn't even have overdraft protection.
I would also like to know how a bank could pay an automatic withdrawal from an account when the account has a negative balance.
-- Dee Debits
 Dear
Dee,
There's a lot of controversy in the banking community over your two questions. Bank fees for a "courtesy overdraft" are steep and are comparable to the charge for an insufficient funds, or NSF, fee. The difference is that you don't have check-return issues with the payee or on your ChexSystems consumer banking report. Instances of NSF reported to ChexSystems stay on the consumer's banking report for five years.
Banks typically will approve $100 to $200 in
overdrafts with no formal overdraft policy in
place but will charge the overdraft fee on the
account for each transaction that clears. Allowing
a $1,000 courtesy overdraft is unusual. The Bankrate
feature "5
overdraft programs facing review" describes
how the FDIC is reviewing these practices.
Your second question concerning an automatic
debit on an account raises similar issues. When
an account is set up for an automatic debit, the
account holder takes on the responsibility of
making sure that money is available for the payment.
The lender often gives a financial incentive in
the form of a lower interest rate to provide the
borrower an incentive to set up the automatic
debit.
I'm on the banks' side on this one. It's the account holder's responsibility to make sure that good funds are available when they write a check or a direct debit is scheduled to post against the account. A checking account is a demand-deposit account, meaning funds are available on demand. It's the account holder's responsibility to have the funds available when a check or debit is presented for payment.
The bank should allow the account holder to decline the courtesy overdraft protection, but that change will mean that payments that have been clearing will now be returned as insufficient funds, including the automatic payment. The fees are similar, if not the same, and the account holder jeopardizes his or her banking relationship.
The Federal Reserve Board publication "Protecting
Yourself from Overdraft and Bounced-Check Fees"
is a nice primer on the topic.
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