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overdraft fees
The Biden Administration Is Right to Curb Predatory Bank Fees
When banks hit people with an overdraft fee, they end up further in the hole—to the benefit of the bank.
Apr 07, 2024
Poverty is expensive in this country.
Few things illustrate that truism like overdraft charges and late fees, which are often little more than outrageous penalties for not having enough money. But there are plans in the works at the Consumer Financial Protection Bureau (CFPB) to rein in these abusive practices.
Overdraft fees occur when a customer attempts to withdraw more money from their account than is available, but the banking institution covers the transaction—for a fee. The CFPB is proposing rules to close loopholes in rules on overdraft fees by establishing a benchmark that banks cannot exceed.
Consumers will appreciate strong action on these issues. And consumers vote!
Over a quarter of Americans live in a household that was charged an overdraft fee in the past year, but especially harmed are those who have the least to begin with. These overdraft fees are structured to prey on consumers already in a financially precarious position. The impact skews toward low-income households and people of color. Young people are also more likely to be affected.
When banks hit people with an overdraft fee, they end up further in the hole—to the benefit of the bank. “Overdraft fees are not so much a useful service as they are a lucrative profit center underwritten by the most economically vulnerable consumers,” said Kimberly Fountain, consumer field manager at Americans for Financial Reform.
Overdraft fees affect credit scores and can even lead to account closures, leaving people without access to banking services altogether. More than any other group, Black Americans tend to be underbanked or unbanked.
As with overdraft fees, banks foist the burden of late fees on people living paycheck to paycheck, low to moderate income consumers, and people of color.
More than 80% of adults have at least one credit card—and these cards are full of junk fees. Late fees alone cost consumers $14 billion a year—and low-income earners pay about twice as much in fees as higher-income earners.
These late fees are not based on any sort of need for the bank. The CFPB found that banks take a fee almost five times greater than the cost to the bank of a late payment.
These practices also reinforce the racial wealth gap. Data shows that banks have often charged those living in neighborhoods with populations of color a higher interest rate. And places with a higher Black or Hispanic population are charged on average more than $25 in late fees, while in places where the Black population is nearly zero, people pay less than $20.
In a new consumer protection action, the CFPB is limiting the amount companies can charge for a late fee to a more reasonable $8.
Fee reforms work. In 2009, Congress passed the Credit CARD Act, which required banks to give consumers enough time to pay their bills, eliminated retroactive rate increases, and curbed excessive marketing to young adults. Careful study of the CARD Act found that the market became more transparent and many fees went away. By 2013, the law was saving Americans $20.8 billion a year.
Consumers will appreciate strong action on these issues. And consumers vote! About 82% of U.S. adults support lowering the maximum late fee, 68% support the 15-day grace period, and 84% support requiring companies to remind consumers of late fees.
The CFPB should keep at it. Making ends meet in this country is hard enough without being charged for coming up short.
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With Overdraft Fee Crackdown, 'CFPB Is Doing What It Was Designed to Do'
"The CFPB is proposing clear, enforceable rules that will reduce overdraft fees and save Americans billions, closing another lucrative regulatory loophole banks use to prey on consumers," said one advocate.
Jan 17, 2024
In a move cheered by progressive advocates, the U.S. Consumer Financial Protection Bureau on Wednesday proposed a new rule limiting how the nation's biggest banks can charge overdraft fees.
The CFPB said its proposal "would close an outdated loophole that exempts overdraft lending services from long-standing provisions of the Truth in Lending Act and other consumer financial protection laws."
"For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually," the agency explained. "Under the proposal, large banks would be free to extend overdraft loans if they complied with long-standing lending laws, including disclosing any applicable interest rate."
The Federal Reserve Board initially created an exemption from the Truth in Lending Act—which required lenders to clearly disclose the cost of credit to borrowers—half a century ago to allow banks to recover costs incurred when they honored checks from customers who inadvertently overdrew their accounts. This was deemed necessary at a time when most workers were paid by mailed checks with uncertain clearance periods.
However, as the CFPB noted:
In the 1990s and early 2000s, with the rise of debit cards, institutions began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions. Annual overdraft fee revenue in 2019 was an estimated $12.6 billion. And, in 2022, Wells Fargo and JPMorgan Chase led the way—accounting for one-third of overdraft revenue reported by banks over $1 billion.
According to a January report from the watchdog Accountable.US, the 10 largest U.S. banks raked in more than $2.3 billion in overdraft fees during just the first nine months of 2023.
"Today, we are proposing rules to close a long-standing loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine," CFPB Director Rohit Chopra said in a statement.
President Joe Biden touted the proposal in a statement noting that "for too long, some banks have charged exorbitant overdraft fees—sometimes $30 or more—that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines."
"Banks call it a service—I call it exploitation," the president added. "Today's proposal would cut the average overdraft fee by more than half, saving the typical American family that pays these fees $150 a year."
Groups including Accountable.US, the American Economic Liberties Project, Demand Progress, and the Revolving Door Project hailed the proposed rule.
"American consumers strongly support the Biden administration's crackdown on overdraft fees that will lower their costs by billions of dollars every year," said Liz Zelnick, director of the Economic Security & Corporate Power Program at Accountable.US. "While the administration is once again siding with consumers over greedy corporations, Republicans in Congress are lining up behind bank and credit union CEOs and lobbyists who gouge consumers to pad their massive profits."
"The last thing many families living paycheck to paycheck need is a surprise $35 overdraft charge on a gallon of milk or loaf of bread, yet many Republicans in Congress say Americans should be grateful for the hard lesson in corporate greed," added Zelnick.
Shahid Naeem, senior policy analyst at the American Economic Liberties Project, asserted that "while some banks have already responded to CFPB pressure and reduced or eliminated these fees, Americans shouldn't have to rely on the discretion of individual banks."
"The CFPB is proposing clear, enforceable rules that will reduce overdraft fees and save Americans billions, closing another lucrative regulatory loophole banks use to prey on consumers," he added.
Emily Peterson-Cassin, Demand Progress Education Fund director of Corporate Power, argued that "we must put an end to big banks stealing money directly from the pockets of the American people through their junk fees on bank account overdrafts."
"These fees add up to billions of dollars for banks—and most of that money comes from households struggling to make ends meet, where a few dollars could mean having to choose between paying rent on time, affording a critical prescription, or putting enough food on the table," she continued.
"We applaud the CFPB for taking a step toward restoring a more appropriate balance between customer and bank, where customers can trust their banks not to exploit them," Peterson-Cassin added.
Revolving Door Project executive director Jeff Hauser said that "the CFPB is doing what it was designed to do, and now the biggest threat is that America's most exploitative companies want payoff for decades of corrupt investment in our nation's courts by having the Supreme Court gut the bureau itself."
Along with noting the court's forthcoming CFPB decision, Hauser argued,"Civil society must plan to bring enormous pushback on Supreme Court justices and other judges corrupted by the likes of Charles Koch and Harlan Crow if any of the CFPB's commonsense consumer protections are overturned by our sadly activist judiciary."
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