Illinois Banks: Strongest and Weakest

NEW YORK (TheStreet) -- While the pace of bank failures has subsided, there are still plenty of reasons for the smallest and weakest of the nearly 600 Illinois banks and thrifts to consolidate.

Key profit centers for community banks have been hit hard, including the "opt-in" requirement for costly ATM and debit card overdraft protection that went into effect in August 2010, and the Federal Reserve's final rule based on the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which in October of last year placed a cap on the interchange fees larger banks could charge merchants to process debit card purchases.

While the Durbin rule was only applied to larger banks, the effect has been to lower interchange fee revenue for most banks.

Community banks could soon feel another blow to their overdraft fee revenue, with the Consumer Financial Protection Bureau announcing on Wednesday that it had "launched an inquiry into checking account overdraft programs to determine how these practices are impacting consumers," with Director Richard Cordray saying that "overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it."

The CFPB is also focusing on the order in which banks process checks and other transactions, saying that it is concerned with the practice of "commingling of all checks, bill payments, debit card transactions, and ATM withdrawals each day and processing the largest transactions first," which "maximizes the number of transactions that will trigger an overdraft fee."

Despite a high profile $420 million settlement by Bank of America in November of a class action lawsuit over the maximizing of checking account overdrafts by processing the largest transactions first on a given day, the issue is still not settled.

According to Frank A. Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP, in the firm's Philadelphia office -- the Bureau has released "short-term small-dollar lending examination procedures," as a compliment to a "major initiative going on between the Federal Trade Commission, the Justice Department and the Federal Deposit Insurance Corp.," to address overdraft processing, since many smaller community banks use third-party processors, which are at times "operating in a fraudulent manner, without clear authority from the consumer" to process transactions in a way that maximizes overdraft fees.

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