'The End of Overdraft Fees?': Lawmakers, stakeholders examine impact on consumers during federal hearing

Democratic members of the U.S. House Committee on Financial Services and stakeholders called on Congress and President Joe Biden to bring a universal end to banks’ overdraft fees during a hearing last month.

The argument against the implementation of overdraft fees – charges that a bank's customer pays when their account has reached a negative balance – has grown over the past few months, during which a number of prominent financial institutions have reduced or completely eliminated such fees. The Consumer Financial Protection Bureau (CFPB) released a report in December 2021 on its own investigation of the fees as well, showing that banks have become increasingly reliant on them and non-sufficient funds fees (NSF) revenue

Jeremie Greer, co-founder and executive director of the economic group Liberation in a Generation, said during the hearing that overdraft fees are "an abusive form of high-cost credit."

"To put it in perspective, the CFPB found that a majority of overdraft fees were incurred on transactions of $24 or less, and were repaid within three days," Greer said. "Meaning that a $34 overdraft fee, if charged as a loan, would have an annual percentage rate of 17,000%. This is in no way representative of a fair and inclusive financial market. It is our recommendation that Congress and the Biden administration act to bring an end to junk fees such as overdraft and non-sufficient funds fees."

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EXPERTS SAY CFPB CUTTING OVERDRAFT FEES COULD HURT CONSUMERS

Overdraft fees disproportionately affect people of color, Democrats say

Democrats stressed the importance of investigating overdraft fees during the hearing, saying that they were disproportionately affecting Black communities. 

"The current scale and growth of overdraft and non-sufficient funds fees has caught the attention of consumer groups, this committee and the regulators," House Financial Services Committee Chair Ed Perlmutter (D-Co.) said. "In an average year, consumers in the United States pay around $10 to $12 billion in overdraft fees and non-sufficient funds fees. And just 9% of consumers make up 80% of those overdraft fees. 

"These types fees impact people of color at a disproportionate rate," Perlmutter continued. "Studies have found banks with branches in predominantly Black neighborhoods charged more for overdraft on average, and Black customers are overrepresented in those who have paid more than $100 in fees in the past year."

Other Democrats agreed, saying that banks have been charging "excessive overdraft fees" for too long. Rep. Maxine Waters, (D-Calif.) added that she is "very troubled that consumers of color pay twice as much in fees as White consumers."

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CAPITAL ONE ELIMINATES OVERDRAFT FEES, CFPB INVESTIGATES UNIVERSALLY ENDING THESE ‘ABUSIVE’ CHARGES

Republican representatives defend overdraft services

Contrastingly during the hearing, Republican lawmakers said the CFPB’s report on overdraft fees may not be what it seems, and that banks are providing valuable services to their customers through overdraft protection.

Ranking Member of the Subcommittee on Consumer Protection Blaine Luetkemeyer said that some of the CFPB’s data showing banks' reliance on overdraft fees is from 2014, and that the bureau's own data would suggest financial institutions are not overly dependent on overdraft fees. 

"The truth is overdraft is a legitimate short-term liquidity product that provides a vital service for consumers," he said. "At a time when 50% of Americans would have difficulty paying a $400 emergency expense, the actions of this committee and financial regulators aim to reduce consumers’ ability to access short-term liquidity financial products."

Many banks, including Bank of America, Capital One and Citibank, have either eliminated or reduced their overdraft and NSF fees. They have also implemented balance alerts for credit card and debit card transactions to let consumers know when their available balance falls below a certain amount. 

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