Pending Overdraft Rules Prompt Banks to Cut Fees

(MoneyWatch)  Bankers, still reeling from the smack-down they took earlier this year on credit card reform, are beginning to self-regulate their overdraft policies.

Yesterday, Bank of America said it plans to make sweeping changes to its overdraft rules, eliminating overdraft charges for small (less than $10) transgressions, restricting the total number of overdrafts you can ring up in a single day and allowing customers to opt-out of overdraft protection. JP Morgan Chase followed suit this morning, saying it will eliminate fees for tiny (less than $5) overdrafts, reduce the maximum number of fees charged in a day, and get rid of overdraft protection for debit cards unless the customer asks for it.

Chase will also stop a much reviled practice of "reordering" transactions, so your largest checks are cleared first. Consumers complain that reordering unjustly boosts overdrafts. (If you had $100 in your account, when you went out and bought a $5 coffee; a $10 lunch and $105 dinner, you ought to get hit with one overdraft for the dinner. Reordering would cause you to be hit with three overdrafts because the biggest charge, for dinner, would be subtracted from your account before the coffee and lunch that you charged earlier in the day.) Chase will now clear checks and debit card transactions as they come in.

Neither change is immediate, however. BofA will implement these changes on Oct. 19, and plans a few more for next year, including placing an annual cap on how many overdraft charges any one customer can pay. (After you hit the cap, overdrafts won't be free. They'll be rejected. The bank will just return your checks or decline your debit card transactions, but promises financial counseling.)

Chase says it will implement the changes early next year.

The announcements come in the wake of pending legislation. Congresswoman Carolyn Maloney (D-NY) introduced a bill earlier this year that would demand that consumers be warned if a debit card transaction is about to triger an overdraft fee and would bar reordering transactions. In a statement released this morning, Maloney praised the banks for making the moves, but said she'll still press ahead with her proposed legislation so that all bank customers can enjoy the same rules.

"What we need are consistent overdraft reforms for all Americans who have or open a bank account," Maloney said in her statement. "Consumers should have a right to decide what financial products they'll buy, and control over their own financial accounts.

"That's the principal behind my credit card reforms passed earlier this year, and we need to extend it to bank overdraft policies."