Banks collected more than $11.68 billion in 2019 through abusive overdraft practices that drain consumers’ checking accounts
Congress, Regulators, and Banks all have the responsibility and power to ease burden on consumers
WASHINGTON, D.C. – A new report released today by the Center for Responsible Lending (CRL) finds that in 2019 banks collected more than $11.68 billion in overdraft-related fees through abusive practices that drain massive sums from consumers’ checking accounts. Now, in the midst of a global pandemic and unprecedented economic turmoil, CRL is calling on Congress to adopt legislation prohibiting overdraft fees for the duration of the crisis. CRL also calls on regulators to require banks to relieve consumers of overdraft fees during this time, and for banks to voluntarily cease charging these fees until they are legally required to stop.
Specifically, CRL is advocating for legislation proposed by Senators Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio), which would prohibit financial institutions from assessing overdraft fees or non-sufficient fund fees on any transaction during the crisis.
"Bank overdraft practices cause many families severe financial distress in the best of times. During the economic crisis caused by COVID-19, the devastating impact of overdraft fees are only more pronounced,” said CRL Senior Researcher Peter Smith, who co-authored the report. “Overdraft fees are especially outrageous as banks are borrowing from the Federal Reserve at zero percent. Banks should not experience an unprecedented windfall as the direct result of their customers’ unprecedented distress. Congress, regulators and banks must ensure overdraft fees are suspended during the crisis. Without action, overdraft fees could balloon–causing harm not just to individuals, but to the economic recovery nationwide.”
In addition to banks collection more than $11 billion in annual overdraft fees, the report—which analyzes the 2019 overdraft-related revenue of banks with assets of $1 billion or more and reviews the current overdraft practices of the ten largest banks in the U.S., as well as how they report handling overdraft fees during the COVID-19 crisis--also found the following:
- Banks Combine a Number of Unreasonable Practices to Deplete Families’ Funds through Overdraft Fees: Financial institutions typically charge an overdraft fee when a customer’s account lacks sufficient funds to cover a transaction, but the institution chooses to pay the transaction anyway. The typical overdraft fee is $35, but the cost to the bank of paying an overdraft transaction, particularly in today’s highly automated environment, is very low.
- Vulnerable Households are Hardest Hit by Banks’ Overdraft Practices: Nine percent of account holders pay 84% of the billions paid annually in these fees, and these consumers tend to carry low balances—averaging less than $350—and have relatively low monthly deposits. Many hit by relentless overdraft fees end up having their checking account closed, and reentry is difficult. African Americans and Latinos—already four-to-five times more likely to be unbanked than white Americans—are disproportionately harmed by ejection from the financial mainstream.
- Bank Overdraft Programs Fuel a Dysfunctional Checking Account Market: When consumers shop for a bank account, they likely consider factors such as fixed monthly and annual costs of the account. Thus, they may choose an account that appears “free”—with no upfront monthly fee—but be unaware that they will pay more for the account due to overdraft charges than they would have on an account with a modest monthly fee but more responsible overdraft fee practices.
- The COVID-19 Crisis Raises the Stakes and Calls for Long Overdue Regulatory Protections: Overdraft fees could balloon as a result of the COVID-19 crisis. Periods of under- and unemployment could cause unprecedented financial strain, potentially leading to unprecedented volumes of overdrafts. These fees will make many families’ already desperate financial situations only more dire.
Banks & Regulators Must Also Act
The results outlined above make clear why swift action addressing overdraft fees is needed. In addition to legislative action, regulators and banks should take steps to relieve households from overdraft fees during this crisis.
- Federal banking regulators should go beyond encouraging overdraft relief and instead order the depositories they supervise to stop charging overdraft fees during the crisis.
- The Consumer Financial Protection Bureau should issue a rulemaking deeming it an unfair and abusive practice to charge overdraft fees—or at least overdraft fees unlimited in number and amount—during a sweeping economic crisis.
- State regulators should order the state-chartered banks they supervise to stop charging overdraft fees during the crisis.
- Banks and credit unions should simply stop charging overdraft fees. The largest banks could level the playing field by agreeing among each other to stop overdraft fees.
Background on Overdraft Fees
A bank typically charges a fee, averaging $35 for each individual overdraft transaction it pays, even when the customer overdrafts by a very small amount. The large majority of these fees are shouldered by banks’ most vulnerable customers, often driving them out of the banking system altogether. Bank overdraft fees cause particular harm to low-income consumers and communities of color, who are already disproportionately excluded from the banking mainstream.
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