Guidelines that take effect next month will prohibit thousands of small banks from processing transactions in order of the highest dollar amount to lowest — a practice that empties customer accounts faster and triggers more overdrafts.
Banks for years have been accused — sometimes in consumer lawsuits — of manipulating transactions in a way that has generated billions of dollars in overdraft fees annually.
"Overdraft fees became the crack of banks. They got hooked on it," said Ed Mierzwinski, a program director for U.S. Public Interest Research Group in Washington.
It's been only in more recent times that regulators have tried to cure them of that addiction.
Regulators last summer, for example, began requiring banks to get your permission before enrolling you in overdraft protection programs for debit card transactions. So unless you sign up, you won't get hit with a $35 fee if you overdraw your account by buying, say, a $3 cup of coffee with a debit card. Instead, your transaction will be denied and you might have to pay with cash.
Now regulators are adopting additional guidelines on overdrafts.
The new guidance from the Federal Deposit Insurance Corp. will kick in Friday for the 4,640 small banks it regulates. (The guidelines apply to automated overdraft programs, not cases in which bank employees decide to cover a transaction because they know the customer.)
The FDIC wants banks to monitor the accounts of chronic check bouncers. Once someone pays more than six overdraft fees in a year, banks will have to reach out that customer with information on lower-cost alternatives to pricey overdraft programs.
For example, a customer can link a savings account to checking so the bank can transfer money from one to the other when the balance is low. Or, a consumer can apply for a line of credit to cover overdrafts. Both options cost money — but not as much as an overdraft fee.
The Office of the Comptroller of the Currency started accepting public comment this month on its guidance for overdraft programs at large national banks.
The federal regulator says it's concerned about banks' "excessive reliance" on overdraft fee income and their processing of payments to intentionally maximize overdrafts.
But consumer advocates say at this stage the OCC proposal is too vague.
"We're very concerned that this guidance won't have meaningful impact," says Rebecca Borne, senior policy counsel for the Center for Responsible Lending. She suggests consumers weigh in on the OCC proposal and demand greater protections.
At least one large bank isn't waiting for the OCC to act.
Citibank says consumer feedback has led to the decision to stop processing paper checks from the highest amount to lowest beginning late next month. It will process them from low to high.
"We think it's the right thing to do for our customers," Citi spokeswoman Natalie Marin says in an e-mail.
PNC and Bank of America, big players in the Baltimore market, say they will continue to process checks from high to low — because, they say, that's what customers prefer.
"Customers want their largest purchases processed first," says PNC spokesman Fred Solomon. "Those are the most important to them, including mortgages and car payments."
Bank of America spokeswoman Anne Pace says check order hasn't been a problem for customers. The bank saw complaints drop off after it eliminated overdraft fees on debit card transactions a year ago, she says.
M&T Bank, another major institution here, says it first processes debit card purchases, ATM withdrawals and online bill payments — which tend to be smaller — before checks.
The landscape on overdraft fees is better for consumers now than it was a year ago. But you still need to watch your account balance so you don't get hit by hefty fees.