By Becky Yerak

December 23, 2010

Bank regulators are getting extra tough about what they believe are onerous overdraft policies, and that’s welcome news to Angela Castro.

The Newburyport, Mass., resident says she remembers when banks tried to cover as many small checks as possible before hitting depositors with overdraft fees. But she says financial institutions now seem hell-bent on cashing the biggest check first — a practice that can trigger a cascade of fees for insufficient funds when smaller ones processed afterward start bouncing.

“The story I’ve been told every time is that they assume the biggest check is the most ‘important,'” ” Castro recently told the Federal Deposit Insurance Corp.

Three months after Federal Reserve requirements kicked in for banks to get a customer’s approval to process debit- and ATM-card transactions that exceed available balances, the FDIC is asking financial services companies to institute even more consumer safeguards when depositors overdraw their accounts.

Last month, the FDIC issued overdraft guidance to the more than 4,700 banks it supervises. The guidelines include encouraging banks to contact habitual overdraft users — defined as customers who overdraw their accounts and incur fees at least six times in a rolling 12-month period — and tell them in person or by phone, for example, about less costly alternatives, including linking a checking account to a savings account. The FDIC said it also expects banks to limit their daily overdraft fees and to ensure that transactions aren’t processed in a manner designed to maximize a bank’s fees, such as covering checks from largest to smallest.

When the FDIC sought public comments in August on what were then proposed guidelines, it received more than 900 letters from consumers such as Castro as well as financial institutions, industry trade groups, and consumer advocacy groups, including Chicago-based nonprofit Woodstock Institute.

The FDIC expects banks to have their new efforts in place by July 1. It will review banks’ overdraft payment programs at each examination and factor them into the overall ratings that it gives each institution. Poorly rated banks come under additional regulatory scrutiny and might become subject to formal or informal action by the FDIC.

Some consumers like Kecia Lifton, of Finespaces Architecture LLC in Sherborn, Mass., said overdraft fees should be reduced.

“They’re paying me like .000001 percent interest to use my money, but if I write one check over my balance I have to pay them $39?” wrote Lifton. “That is ridiculous.”

Others worry that institutions will look for new ways to charge fees.

“If banks are prohibited from charging sufficient fees to irresponsible consumers who are chronically overdrawn, they’ll make up for it by increasing the fees they charge customers who use their accounts responsibly,” wrote Mary-Lynne Fisher, a family law specialist in La Crescenta, Calif.

As for bankers, some point out that they might have to quit accommodating consumers who overdraw their accounts. That, in turn, could have the unintended consequence of forcing consumers to rely on other products such as prepaid debit cards and check cashing services, which can also have high fees.

Indeed, a Chicago-area banker wrote to say that “now is not the time to introduce further regulation targeted at overdraft coverage products.”

“If our lawmakers and regulatory agencies continue to push detailed and onerous guidelines onto the industry, we will likely be forced to stop honoring overdrafts,” wrote Nathan Diepstra, who works in the Elmhurst branch of South Holland-based Providence Bank, whose Web site touts its founding “by a group of Christian businessmen and bankers.”

“The requirement that banks monitor programs for excessive use and then contact the customer to discuss less costly alternatives should be eliminated,” Diepstra wrote. “This mandate would be extremely burdensome for my bank and would result in an excessive number of calls, causing us to discontinue our overdraft coverage program, increase fees, or close the customer’s account.”

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