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Second round of overdraft help on the way

By Claes Bell ·
Thursday, October 7, 2010
Posted: 4 pm ET
Keeping track of your finances is the best way to avoid overdraft fees

Keeping close track of your checking account is the best way to avoid overdrafts

Still worried about overdrafts on your checking account, despite recent Federal Reserve rules that require you to opt in to your bank's overdraft program for debit card purchases and ATM transactions before you can be charged?

If so, you'll be happy to know the Federal Deposit Insurance Corp is planning to further restrict checking account overdraft programs and the fees associated with them beyond the Federal Reserve rules that took effect Aug. 15. Those rules conspicuously left out paper checks and automated clearing house transactions, known as ACH, the kind often used for automatic bill pay.

The FDIC rules aim to tame overdrafts in those two areas primarily by extending the overdraft opt-in requirement to all types of checking account transactions, including paper checks, ACH bill pay transactions and others.

The FDIC rules would also require banks to stop clearing checks from largest to smallest, the current industry norm, instead requiring them to go by chronological order or check number. That's because clearing checks from largest to smallest can often result in higher bounced-check fees: The largest checks quickly deplete the customer's account, leaving each small check to trigger a fee.

For example, if you had $100 in your checking account, and wrote checks for $20, $40, $30 and $200 throughout the day, cashing them from largest to smallest would mean all four checks would trigger nonsufficient funds, or NSF, fees, because the $200 check would deplete the entire checking account before any of the smaller checks had a chance to clear. In contrast, cashing them in chronological order would mean only the final $200 check would trigger an NSF fee.

Some other proposed FDIC rules would require banks to:

  • Institute daily limits on overdraft fees.
  • Educate chronic overdrafters on overdraft alternatives.
  • Make it easy for customers who've opted in to overdraft programs to back out.

Seeing as how overdraft fees have long been a big revenue stream for banks, they're unsurprisingly pretty miffed by the proposed FDIC restrictions. American Banker has a story this week on the pushback from community banks:

"Banks used to be considered 'For Profit' businesses but we are starting to wonder," said Clark A. Hervert, a vice president at First National Bank in Ord, an $85 million-asset institution in Ord, Neb., in a comment letter to the agency.

J. Eric T. Sandberg Jr., the president and chief executive officer of the Texas Bankers Association, said overdraft fees are not meant to "willfully and deliberately" take "advantage of their customers."

"I am very concerned with the notion that a bank, a for-profit enterprise with whom its customers have a contractual relationship, must limit the amount of fees that a customer could incur as a result of violating their depository contract -- i.e. the depository agreement setting out the customer's duty with regard to maintaining a positive account balance," Sandberg said in a Sept. 15 comment letter.

What do you think about the FDIC proposals? Will these new restrictions help consumers? Would they help you?

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November 27, 2010 at 9:43 am

Debra James, I would like for you to offer proof of your claims that "there are banks that also do immediate postings of ACH transactions".

The banking industry are in it for the bottom line (PROFIT), and have proven themselves to make profit by any means possible. I have a checking account, a savings account and a cd with my bank. My savings account has ample funds to cover any debit/check that would hit my checking account. I had received a NSF fee for a check that came in, my bank charges a transaction fee for transferring money from checking to savings, they also claimed that my accounts were not set up to automatically transfer the funds over in case of non-sufficient funds in the checking account.

The banking industry knows exactly what they're doing! Yes, the consumer should be aware of what's outstanding but then again the banking industry should be governed against gouging customers, especially those with the funds in any account with their bank.

Debra James, I take it that you're with the banking industry. Shame on you and those corporate execs that that get their millions of dollars in perks and bonuses from their loyal customers!!! You would think that the banking industy would have learned from the housing collapse (poor business ethics/practices) but yet Uncle Sam bailed them out, real nice!!! Wish that I could get a 1/4 percent home loan, banks get this percentage rate from Uncle Sam, why can't we, the consumer???

Debra James
October 08, 2010 at 4:16 pm

Just to be clear, the chronological check processing pertains only to the checks that are received on a particular day, right? If that is the case, then I think it would be only somewhat helpful to the consumer, because checks don't always come through in the same order that they are written, and the customer should know the money will already be in the account when the payment request comes through. I think a better customer benefit would be to make banks credit cash and automated deposits and credits before any ACH debits or checks on the same business day.

I beg to differ with Mr. Sandberg in that some banks willfully manipulate transaction processing to generate more fees. In addition to the practice of processing checks largest to smallest, there are banks that also do immediate postings of ACH transactions, but apply most deposits at the end of the day even if the deposit arrived before the ACH transaction. For example, payroll direct deposits are usually sent to the bank effective 12 a.m. of a payday, but the bank won't credit the account until EOD. However, if an autopay comes through at 10 a.m. on the same day, that amount is immediately withdrawn from the account. This could trigger overdrafts, and the transaction type is not covered under the existing CARD Act rules.

Bank customers should understand the counter implications of some of these rules, and start to clean up the poor banking practices. Banks will be more apt to close their accounts if they habitually have non-sufficient funds in the account than before the new rules because these accounts will cease to be lucrative.