House subcommittee discusses eliminating overdraft fees

Federal Issues House Financial Services Committee Overdraft Consumer Finance Fees CFPB

On March 31, the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing titled, The End of Overdraft Fees? Examining the Movement to Eliminate the Fees Costing Consumers Billions, to discuss efforts to reduce or eliminate overdraft fees. Subcommittee Chair Ed Perlmutter (D-CO) opened the hearing by noting that “consumers in the United States pay around $10 to $12 billion in overdraft fees and nonsufficient fund fees,” with just 9 percent of consumers representing up to 80 percent of these fees. He also noted that these “types of fees impact people of color at a disproportionate rate,” and that “[s]tudies have found banks with branches in predominantly black neighborhoods charge more for overdraft on average, and black customers are overrepresented in those who report paying more than $100 in fees in the past year.” Some subcommittee Democrats appeared supportive of measures to address the alleged growing reliance by banks and credit unions on revenues from overdraft fees to make up for interest lost in the current low-rate environment. In contrast, certain subcommittee Republicans appeared skeptical of government efforts to limit financial institutions’ ability to provide overdraft services, questioning the impact such efforts would have on smaller financial institutions like community banks and credit unions. The committee memorandum and hearing focused on the evolving trends related to overdraft programs and fees and their impact on consumers, including the following:

• Overdraft and Non-Sufficient Funds (NSF) Fee Data and Trends. The subcommittee quoted a study that found that “federal regulators have required banks and credit unions with more than $1 billion in assets to report revenue collected specifically from overdraft and NSF fees, totaling between $11 billion and $12 billion annually,” since 2015. According to the subcommittee, “the true fee total is likely higher since smaller depository institutions are exempt from the reporting requirement.”
• Impact on Consumers. The subcommittee quoted a report that said “consumers face challenges with unclear or confusing overdraft policies or are charged fees simply because of a delay in when their paycheck deposits are made available or when other transactions are settled in their account.” According to the report, consumers “incur overdraft fees despite carefully attempting to avoid them and often believing they have. One practice, in particular, has garnered increased attention recently: charging overdraft fees on debit card transactions that were authorized when the consumer had sufficient funds in the account but then settled, often a few days later, when the account no longer had sufficient funds.”
• Proposals and Challenges to Improving Consumer Protections when Consumers Overdraft. The subcommittee pointed out that initiatives to improve overdraft fees and NSF fees would “focus on enhancing disclosures and information about overdraft provided to consumers; capping the number of fees a consumer may be charged in a defined period of time; reducing the cost of each fee, or encouraging or incentivizing financial institutions to offer small-dollar loans with streamlined underwriting and affordable interest rates or repayment plans to provide an alternative for consumers who typically rely on overdraft.” The subcommittee also said another possible improvement in the market would result from adopting a faster payments network, such as the FedNow Service. As previously covered by InfoBytes, the Fed announced in August 2020 its intention to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024.

One witness, a senior policy analyst from a Latino civil rights and advocacy organization, expressed his support for reducing or eliminating overdraft fees, stating that “[o]verdraft fees, by their nature, impact consumers when they can least afford an additional [c]ost.” The witness quoted a study that found “[l]ow- to moderate-income households are nearly twice as likely as higher-income households to overdraw an account.” Calling overdrafts “a penalty for being poor or financially insecure,” another witness, a consumer policy counsel at a civil rights nonprofit, expressed that “overdraft fees are a penalty for being poor or financially insecure.” Quoting a study finding that approximately “80 percent of overdraft fee revenue to banks comes from 9 percent of accounts,” the witness stated that the “median account balance of this group is less than $350.” In contrast, another witness, a law professor at George Mason University, stated in the hearing that “exasperation is not a substitute for sound economic analysis," He stressed that “this is an area in which unintended consequences of bans on overdraft protection, substantive limits, price controls and the like could have some serious unintended consequences.” He further warned of possible negative consequences should policymakers eliminate overdraft programs, cautioning that new restrictions on overdrafts may have many negative implications for consumers, including “higher bank fees, higher minimum monthly deposits . . . and a loss of access to free checking.”

Additionally, some House Republicans were critical of recent efforts taken by the CFPB in this space and the elimination of overdrafts by several banks. During the hearing, Rep. Blaine Luetkemeyer (R-MO) criticized the CFPB’s inquiry into junk fees (covered by InfoBytes here), arguing that, “t[h]ere is no legal authority for the CFPB to define the term ‘junk fee’ . . . and even less authority for the CFPB to act as a price setter in the consumer financial market.” Luetkemeyer added that “the CFPB is manufacturing a crisis about hidden fees for financial products and services when they are the very people that made up the disclosure regime,” and called the effort “another attempt by the CFPB to denigrate legally operating businesses by any means possible.”