New to compliance, but I believe at my last bank they reclassified accounts 'behind the scenes' and never affected the customer at all--never touched the account. At my new bank, the system will do the reclass, but we are being told by our core provider that we still have to do the letters, change the accounts, etc. Can someone maybe help me understand why the redundancy?

You can reclassify accounts to be transaction accounts but that increases your reserve requirements. The regulation says:

In order to ensure that no more than the permitted number of withdrawals or transfers are made, for an account to come within the definition of “savings deposit,” a depository institution must either:

(a) Prevent withdrawals or transfers of funds from this account that are in excess of the limits established by paragraph (d)(2) of this section, or

(b) Adopt procedures to monitor those transfers on an ex post basis and contact customers who exceed the established limits on more than an occasional basis.

For customers who continue to violate those limits after they have been contacted by the depository institution, the depository institution must either close the account and place the funds in another account that the depositor is eligible to maintain, or take away the transfer and draft capacities of the account.

It does not state you have to send letters but for customer service you may want to send at least one letter telling them you will convert the account to a checking if the excess activity continues. We do this and a 2nd telling them in 10 days their account will be converted to a checking.

Is the OP talking about a re-class to reduce reserve requirements????

http://www.federalreserve.gov/BOARDDOCS/LegalInt/FederalReserveAct/2007/20070501/20070501.pdf