NEW YORK (AP) — A dispute is escalating over the billions of dollars in overdraft fees Americans charge each year.
The Consumer Financial Protection Bureau is expected to propose rules this week that would curb banks' ability to charge customers fees when they withdraw from their bank accounts. Opponents of the fee often cite the example of a $3 cup of coffee costing a person $40.
The banking industry is preparing to respond with a multi-million dollar marketing and lobbying campaign. While banks have dramatically reduced overdraft fees in the past decade, the nation's largest banks still rack up nearly $8 billion in overdraft fees each year, according to data from the CFPB and public banking records.
The Biden administration has put overdraft fees at the center of a campaign against what it calls “junk fees” and has directed government regulators — the CFPB and the Federal Trade Commission — to do everything they can to further curb the practice.
“It's just taking advantage of people,” President Joe Biden said in October.
Banks charge a customer an overdraft fee if their bank account balance falls below zero. Overdrafts began as a courtesy offered to some customers, but the popularity of debit cards beginning in the 1990s led to Americans incurring tens of billions of dollars in overdraft fees.
Giving in to popular and political pressure, most major banks have added guarantees to customer accounts to allow them to get the balance back into positive territory before they incur fees, which in some banks can reach $39. Bank of America, once seen by industry critics as the biggest abuser of overdraft fees, cut its fees from $35 to $10 two years ago and says Revenue from overdraft fees Now it is less than 10% of what it was.
The largest banks have also reduced their collection of fees for insufficient funds. In this case, the bank charges the customer a fee for not having the funds to cover the fee but also rejects the transaction. These are commonly known as “bounced check fees.”
according to Bankrate research was conducted in August 2023, overdraft fees are still charged on 91% of accounts surveyed — and they can be as high as $39. The average overdraft fee in 2023 was $26.61.
Banking industry sources and consumer advocates expect CPFB regulations to focus on when an overdraft can be charged to a customer's account and the amount banks can charge compared to the amount of risk a bank takes on to cover a routine purchase. One criticism of overdraft fee practices is that the cost to the bank of covering routine purchases is low and that banks have safeguards in place to prevent customers from taking their accounts into the red.
A report published by the CFPB last month found that a quarter of households making less than $65,000 are frequently hit with overdraft fees, meaning households least able to afford the fees are often the ones who incur them most frequently. The report showed that black and Latino households are more likely to have an overdraft than white households.
“This is something that is increasingly difficult for banks to justify. Especially at the level of fees that are being charged,” said Greg McBride, an analyst at Bankrate.
While larger banks have reduced overdraft fees, smaller banks have not, and a number of them rely heavily on overdrafts to make a profit, industry analysts said.
“There are still a large number of small banks and many credit unions that have not changed their credit policies, including a handful who have become addicted to overdrafts,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution.
“When you see an entity like Armed Forces Bank making all of its revenue from overdrafts, from military enlisted members overseas, you either want to scream or cry,” Klein said.
CFPB Director Rohit Chopra has been a fierce critic of overdraft fees, both in his current position and previously when he was at the FTC. The office has issued several reports in recent months highlighting poor industry practices regarding overdrafts, clearly indicating that it is ready to fight.
“(The Bureau) has focused on creating more competition, which helps eliminate unwanted fees and prevent financial companies from charging new unwanted fees,” Chopra told reporters in October in prepared remarks.
The industry is unlikely to convince Chopra to postpone the overdraft rules, instead hoping to delay the office long enough to have any regulation shot down by a Republican Congress and the president after the 2024 election using the Congressional Review Act.
The law was used in the first months of the Trump administration to undo many of the policy gains made by President Barack Obama late in his term, most notably The CFPB has proposed banning what is known as “forced arbitration.”
“We urge you not to move forward with this rulemaking until the Bureau evaluates the economic impact of the rulemaking on community banks and credit unions, as the Bureau is required to do,” the American Bankers Association and other bank lobby groups wrote in a joint statement. Letter to the CFPB this month.
The banking lobby is also trying to be as vocal as possible in its opposition to preparing for an almost certain legal challenge to any rules the CFPB decides to implement. Any legal battle is likely to end up in the Supreme Court.
“The CFPB has done its homework here,” said Carter Dougherty, spokesman for the left-leaning group Americans for Financial Reform. “Some banks have done away with overdrafts altogether and the world is still spinning on its axis. If bankers can't run their businesses without relying on gotcha fees, they need to find a new line of work.
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