Big banks to lighten overdraft rules

As Congress considers legislation to crack down on bank overdraft fees, the industry is starting to scale back some controversial practices.

Bank of America bac and Wells Fargowfc plan to stop charging consumers who overdraw by small dollar amounts — respectively by $10 and $5 — and lower the number of times, to four from 10 a day, that consumers can get hit with an overdraft fee. Wells Fargo is still deciding when to roll out its changes. Most of BofA's changes take effect in October, but the bank is also axing a policy in June of automatically paying overdrafts for new customers — and charging them $35 each time.

Meanwhile, Chase jpm said it will start clearing debit card and ATM transactions in the order they occur, rather than by largest dollar amount first, which empties consumers' bank accounts faster. TD Bank made a similar move earlier this year. Chase will also stop approving consumers' debit card overdrafts — and charging a fee — if they haven't signed up for the service. The new policy takes effect in the first quarter of 2010.

The banks say they're trying to help consumers struggling because of rising unemployment and stretched household budgets. "It was time to make this change to help customers," says Brian Moynihan, president of Bank of America's consumer and small-business banking business.

The moves, by the nation's largest banks, come amid growing consumer outcry about the industry's overdraft practices.

Rep. Carolyn Maloney, D-N.Y., has sponsored legislation to crack down on bank overdraft policies. Sen. Chris Dodd, D-Conn., plans to introduce his own bill to reform overdraft fees.

The new policies are likely to put pressure on other banks to review their overdraft fees. Richard Hunt, president of the Consumer Bankers Association, a trade group, says that banks are evaluating their policies "every hour of every day" in this downturn because they don't want customers to flee to competitors.

But critics question whether the changes are an attempt to stave off restrictions to a lucrative income stream. Amid the downturn, many banks have gotten more aggressive with overdraft fees. In 2009, financial institutions are expected to reap a record $38.5 billion from overdraft fees, according to Moebs Services, an economic research firm.

"Banks are feeling the heat," says James Sturdevant, a San Francisco attorney who has filed lawsuits against several major banks related to overdrafts. "They are trying to see what the lowest common denominator is that makes it acceptable for them to charge and collect these unconscionable fees."

Michael Moebs, the founder of Moebs Services, says banks' changes are a "positive" development. But he'd like to see banks lower their fees.