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A kinder, gentler overdraft policy? It's true

Could it be true? A major bank has actually instituted an overdraft fee policy that is more consumer friendly?

Hard as it may be to believe, Bank of America this week ended one its most notorious gotcha policies -- charging $35 overdraft fees when account holders' balances dip a few pennies into the red.  Now, customers who make small accounting errors will get a break.  As of June 5, the bank now charges only $10 when a consumer ends the day with a negative balance $5 or less. Let's call it an "overdraft mercy rule." 

"Recognizing that some accounts are overdrawn by relatively small amounts, we have reduced the overdraft fee," said bank spokesman James Pierpoint.  "This directly addresses one of the larger customer complaints about overdrafts, and allows us to help customers when they make small mistakes."

If you're among the one in five Americans who paid at least one overdraft fee in the last year, this is great news if you're a Bank of America customer.  And if you're not, you should demand that your bank follow suit. Bank of America is the first large bank to implement a formal leniency policy, though many banks will waive fees to accounts holders who suffer small slip-ups if they complain. If you've paid an overdraft fee recently to Bank of America for a tiny transgression, you should demand a refund.

Of course, this is not the end of all the "punishment doesn't fit the crime" fees that Bank of America charges. Consumers who overdraw by $5.01 will still pay at least $35 for the mistake, the equivalent of a short-term loan at 25,000 percent annual interest (assuming the money is repaid in 10 days). But at least the 128,000-percent-interest loans for $1 overdraft situations have been eliminated. 

It's not clear how many consumers will get a break each year under the new policy; Pierpoint wouldn't estimate how much revenue the bank would lose because of the overdraft changes.  

Nitpicking or fair punishment?

How often banks hit consumers with huge fees for tiny overdraft transgressions is a point of some controversy and political significance.  A recent study by banking regulator FDIC found that about half of all overdrafts are triggered by small ATM withdrawals or debit card purchases, suggesting the banks are making a killing by nickel and diming customers who make small errors. On the other hand, consumers who are hit with overdraft fees for routinely bouncing checks don't generate the same kind of consumer sympathy.

The point is important as federal regulators -- fresh off a high-profile effort to reign in abuses by credit card issuers -- train their attention on bank checking account policies.  The less fair that bank overdraft policies seem, the easier the political path towards new regulations. 

A steady stream of negative news about overdrafts driven by consumer-oriented agencies has already put banks on the defensive. Last year, the Center for Responsible Lending said that fees generated from overdrafts -- $17.5 billion – actually exceeded the total amount of money banks extended to cover overdrafts, which totaled around $16 billion. 

One proposed new rule would give consumers the right to opt out of overdraft protection; another would force banks to receive affirmative consent from consumers before enrolling them in overdraft programs.  Congress also is considering overdraft reform legislation.

Last year, in an effort to blunt legislative reforms, credit card issuers began dropping some of their least defensible behaviors, such as universal default -- raising a consumer's interest rate because they were late paying an unrelated bill.

The move by Bank of America might be considered in that same light. Reducing the number of extreme stories like this one, where a consumer says she was hit with $70 in overdraft fees for a 76-cent dip into the red, could be seem as politically astute.

On the other hand, the banking industry regularly argues that consumers like overdraft protection because it prevents them from bouncing rent or mortgage checks and missing other important payments  -- suggesting many overdrafts involve much more than $5.

It's clear the bank doesn't expect to suffer a dramatic loss of fee revenue by easing off the overdraft fee trigger. Bank of America borrowed $20 billion from the U.S. government in January, and still came up $34 billion short in the May "stress test" -- meaning it can't afford to give away any significant revenue source.

At any rate, if you read the fine print on Bank of America's new fee schedule, you'll see the bank can easily recover from any losses from the new overdraft largesse.  The bank used to limit the number of $35 overdraft fees to five per day. The bank has now given itself permission to charge 10 fees per day.  That means it's possible to suffer $350 in overdraft fees on a single day – if your negative balance is at least $5.01 and 10 more payments are posted to your account.

RED TAPE WRESTLING TIPS

If you're suffering from a bad bout of overdraft fees, don't feel helpless. A polite, well-targeted letter or e-mail to bank executives might do the trick.  Here's an example of a consumer who claims that Bank of America refunded $315 in overdraft fees.

And if polite communications don't work, small claims court is an option.  One consumer who got about $100 in refunds after filing a case in small claims made a documentary film about the issue that's pretty entertaining.