New restrictions have banks altering overdraft policies

For people living paycheck to paycheck, it can happen all too easily: overdraft.

Spend more than your checking account holds and your bank covers it and hits you with a fee.

Maybe not anymore.

Restrictions on the application of overdraft fees for debit-card and teller-machine transactions are here. To make up for the loss of that fee income, some banks are expected to increase other checking-account fees.

Under rules recently imposed by the Federal Reserve, banks and credit unions must get advance approval from checking-account customers before providing overdraft coverage for routine debit-card and ATM transactions.

Customers who opt for the service get automatic coverage when they lack sufficient funds in their accounts. They also must pay some hefty fees, often $22 to $38, for each overdraft transaction. By not notifying their bank,

customers risk having a debit-card transaction denied when their account doesn't have the needed funds. However, they avoid having to pay an overdraft fee.

The new requirements, which don't apply to checks or to automatic debit-card transactions, prompted many financial institutions to tweak their overdraft programs.

Some, including SunTrust Bank, abolished fees on overdrafts of less than $5 and limited the number of overdraft fees that can be applied in a single day.

A handful of institutions, including Bank of America, attracted attention by scrapping overdraft coverage for everyday debit-card transactions.

"We heard from customers, who said, 'Don't let us spend money we don't have,'" said Don Vecchiarello, a spokesman for Charlotte, N.C.-based Bank of America.

But the expected loss of fee income from overdraft services already has prompted Bank of America and others to investigate ways for generating fee income from other sources. That's likely to mean fees or restrictions on services that had been free.

The bank consulting firm Bretton Woods Inc. estimated in March that banks and credit unions took in $38 billion of overdraft and non-sufficient funds fees last year. That's up 10 percent from 2008, according to the firm, based on St. Simons Island, Ga.

During a discussion of Bank of America's first-quarter results in April, a top executive told analysts that the bank's service charges were expected to drop from $2.6 billion in the January-through-March quarter to $2 billion in the fourth quarter, partly because of changes in overdraft charges.

"Obviously, we will look to mitigate this impact," said Neil Cotty, the bank's interim chief financial officer and chief accounting officer. "While we are not prepared to detail the mitigation today, you should expect that customers will have a choice of banking more efficiently, bringing more relationships to us, or paying a maintenance fee."

TowneBank, too, will be looking for additional sources of revenue because of changes in its overdraft coverage.

Towne, the largest bank based in Hampton Roads, said 55 percent of its checking customers chose to have overdraft coverage for debit-card and ATM transactions, said Starr Oliver, executive vice president for marketing and retail.

However, the Portsmouth-based bank reduced its overdraft fee for a debit-card transaction to $10 from the regular fee of $38, as part of the change in overdraft services, she said.

A handful of other banks operating in Hampton Roads declined to say what percentage of their checking customers opted for continued overdraft coverage.

Kristy Marshall, a spokeswoman for Wachovia Bank, said the bank was "very pleased with the responses we've gotten" but considered the data proprietary.

Wachovia, acquired two years ago by San Francisco-based Wells Fargo & Co., is in the process of being folded into Wells Fargo Bank. The consolidation of its Virginia branches and systems is scheduled to occur next year. Those Wachovia customers with free checking accounts will be grandfathered into the Wells Fargo system as part of the consolidation, Marshall said.

The National Foundation for Credit Counseling, which polled consumers in July about whether they would accept overdraft services for debit-card transactions, said only 26 percent of the 2,089 participants planned to do so.

What prompted the Fed's requirement that banks get customer approval for overdraft coverage was the increased acceptance of debit cards for routine purchases and customer complaints about the overdraft fees that banks imposed.

Consumer-advocacy groups criticized the steady rise in overdraft fees, arguing that they bore no relation to the risks involved.

"It's an arbitrarily high rate for what is a very short-term loan," said Kathleen Day, a spokeswoman for the Center for Responsible Lending, which has attacked the fees.

Day lauded Bank of America and others for doing away with overdraft coverage for debit-card transactions. However, she called the Fed's rules allowing consumers to avoid overdraft fees a bad move. "It legitimizes the product itself," she said.

Consumer advocates and the American Bankers Association urge consumers to avoid paying overdraft fees by monitoring their checking accounts more closely, maintaining a cushion in their accounts or tying their checking account to a savings account, credit-card account or bank line of credit. While most banks impose a transfer fee for this service, it's less costly than paying for an overdraft.

However, the bulk of overdraft charges come from a small fraction of checking-account customers.

Between 12 and 18 percent of those hit with overdraft charges account for 80 percent of overdrafts, estimated G. Michael Flores, CEO of the Bretton Woods consulting firm. Some of these consumers fall back on overdrafts because "they don't have huge savings and may have hit the limits on their credit cards," he said.

That's one of the issues that the Federal Deposit Insurance Corp. addressed in a study of banks' overdraft activity. Earlier this month, the FDIC disclosed several proposals for reining in overdraft activity at the banks it regulates.

One would require banks to obtain customer approval before providing overdraft services for checks. Another would require banks to monitor their customers' accounts for chronic use of overdrafts and suggest less-costly alternatives to those customers.

"Overdraft programs are not intended to be used as a regular source of credit," said Sandra L. Thompson, director of the FDIC's Division of Supervision and Consumer Protection, when announcing the proposals earlier this month. "There are cheaper alternatives. Relying on overdrafts can lead consumers to incur substantial and unnecessary costs."

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com