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) -- The

Federal Deposit Insurance Corp.

on Friday announced final rules for banks in managing their overdraft services.

The final guidance from the FDIC is meant to "address the risks associated with overdraft payment programs," both to customers and to the banks themselves. "When banks spot a pattern of excessive use of an automated overdraft program, they should contact their customers about a more appropriate and lower-cost alternative that better suits their needs," said FDIC chairman Sheila Bair.

The agency expects "any additional efforts to mitigate risks" to be put in place by July 1, 2011. The FDIC is especially concerned about automated overdraft programs, and wants banks to explain alternatives to customers that could limit fees, monitor excessive overdraft use by customers and "take effective follow-up action" with customers who overdraw accounts "on more than six occasions where a fee is charged in a rolling twelve month period."

The banks will then be expected to contact the customer and offer alternatives, including opting-out of overdraft coverage.

Banks will also be expected to institute daily limits on overdraft fees that can be charged, and "consider eliminating fees" for transactions that overdraw a minimal amount, and consider technology that could alert customers who are in danger of over-drawing their accounts.

The rule is part of the continuing regulatory moves to implement the Dodd-Frank banking reform legislation and the implementation of changes to Regulation E.

That legislation required banks to ask their customers to opt-in for expensive

overdraft protection

on ATM and debit card transactions. At that time,



10 banks relying heavily on overdraft fee revenue

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that were expected to feel the pain as a result of the new restrictions.

Bank holding companies with the highest percentage of operating revenue coming from service charges on deposit accounts during the second quarter, before the opt-in rule was implemented, included

TCF Financial


, which later sued the Federal Reserve over the

Durbin amendment

, which limits fees banks can charge merchants who accept debit card payments. TCF's operating revenue for the third quarter was $300.9 million, declining by $10.4 million from the second quarter. According to regulatory data provided by SNL Financial, the company's service charges on deposit accounts declined 11% from the second quarter to $69.9 million during the third quarter, even though the opt-in rules had only been in effect for half of the quarter.

Other large bank holding companies sorely affected by the opt-in rule during the third quarter included

Associated Banc-Corp



M&T Bank Corporation


, both of which saw their third-quarter services charges on deposit accounts decline 10% from the previous quarter.


FDIC: U.S. Banks Earned $14.5 Billion in Q3>>

Three Banks Fail; Tally Up to 149 >>

Most Large Banks Ready for Stress Tests, Dividends >>

FDIC Revises Insurance Premiums >>


Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.