Under pressure from Congress and regulators, a growing number of banks are easing overdraft penalties on customers whenever their bank accounts are overdrawn - even if only by a penny.
Starting in November, TD Bank, the fourth-largest retail bank in Massachusetts, plans to change the way it handles payments, which will probably result in customers being hit fewer times by overdraft charges.
Yesterday, Wells Fargo said it will eliminate charges when the account deficit is below $5 and will charge no more than four overdraft fees in a single day.
On Tuesday, Bank of America and JPMorgan Chase announced a host of changes, including waiving the fees when the overdraft is under $10 at Bank of America and $5 at Chase.
Eastern Bank said it is considering several changes, such as letting customers get text alerts when their balances are low.
Citizens Bank said it is always reviewing its policies, but declined to give details, while Sovereign Bank would not say if it is considering changes.
“Everyone in the industry should be looking at their overdraft policies in light of the comments from Washington, D.C.,’’ said Eastern Bank spokesman Joe Bartolotta.
“We’ve always viewed ourselves as being customer-friendly. And in light of Washington’s reaction to the industry’s policies, we’re revisiting our own policies to make them even better.’’
The fees have become a particular issue during the recession. Fewer people have extra money in their accounts and are vulnerable to overdrafts. A study by the Federal Deposit Insurance Corp., released in November, found the charges are more common in low-income areas.
Representative Carolyn Maloney, Democrat of New York, introduced a measure that would require banks to ask consumers before enrolling them in overdraft protection programs and to notify consumers when a transaction would incur an overdraft fee.
And Chris Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, last week said he would introduce his own bill to crack down on overdraft charges.
Additionally, the Federal Reserve has been weighing various new regulations, such as giving customers the option of opting out of overdraft service.
The fees are a large, growing source of funds for banks, especially in the last few years, when so many other parts of their business have been struggling.
According to the financial research firm Moebs Services, banks will collect $38.5 billion in overdraft-related fees this year, more than double the tally of 10 years ago. The median overdraft charge is $26. Some banks tack on interest and additional charges when accounts carry a negative balance.
Historically, customers signed up for overdraft protection because they were worried about bouncing a check when their accounts were short a few dollars. But the use of debit cards has left customers more open to overdrawing accounts and incurring the charges. Customers are often able to withdraw funds from automated teller machines or charge purchases at retailers when their account balances are insufficient.
The FDIC study found nearly half of all cases of insufficient funds were related to debit or ATM cards - even though consumer watchdogs say most customers would prefer that the bank simply reject the ATM or debit transaction if the account does not have enough money.
Many banks automatically sign up customers for the service, whether they want it or not.
Consumer advocates complain of other practices. For instance, when customers make multiple transactions, many banks process the biggest payment first - rather than in the order they are received. Banks say they do that because customers typically care most about big transactions, such as mortgage payments.
But this often results in higher overdraft charges, as the initial big payment puts the customer immediately in the red, and each subsequent payment made that day triggers another overdraft charge.
TD Bank said it will soon process transactions in the order they are received, as will Chase with ATM and debit card transactions.
Some consumer advocates said banks haven’t done enough. Leslie Parrish, a senior researcher with Center for Responsible Lending in Durham, N.C., said Congress needs to crack down on overdraft fees.
“We think banks are starting to take steps in the right direction, but bank overdraft protection remains badly in need of reform,’’ Parrish said.
But Jon Skarin, federal policy director for the Massachusetts Bankers Association, said most Massachusetts banks have sound and transparent overdraft policies, and there’s no need for new laws. “Most banks are willing to work with customers,’’ Skarin said. “Banks are risk-adverse. They want to offer a product that doesn’t bring undue scrutiny and complaints.’’
In a survey last year, the American Bankers Association found that fewer than one-fifth of customers said they had paid an overdraft fee.
The changes coming from Bank of America include reducing the number of times customers can be hit with an overdraft fee. Currently, customers are charged for the first 10 items that are over the account balance - potentially producing $350 in fees. Soon, accounts will be charged for just the first four overdrawn items.
Bank of America spokesman TJ Crawford denied the changes were motivated by complaints.
“These enhancements are part of a larger effort to provide customers with more choice,’’ Crawford said. “We are confident that customers will be pleased with the changes.’’
Among Chase’s changes are reducing the maximum number of overdraft fees to three per day.
Barbara Anthony, undersecretary for the Massachusetts Office of Consumer Affairs and Business Regulation, said that while the recent bank moves are a “step in the right direction,’’ her office is considering doing more.
“We’ve been following it,’’ Anthony said, “and we are talking about it internally.’’