Overdraft fees are a moral stain on our nation’s banking system in the best of times. At a time of crisis like this, they should be criminal.
Many of us have been charged an overdraft fee here or there. We experience that “Oh, shoot!” moment. Perhaps we call our bank and have it waived. Or we mean to, but we forget, and life goes on. Thirty-five dollars once in a while doesn’t make or break many of us.
But “many of us” is not what drives overdraft fee programs in this country. They are driven by relatively few checking account holders, most of them financially vulnerable, shouldering massive fee burdens. Nine percent of account holders pay 84 percent of the roughly $12 billion banks collect annually in overdraft fees.
Stacy, a single mother of three from Connecticut, is among those hardest hit. She describes overdraft fees as “one of the most difficult and challenging parts of my life.” She recalls a time she was working at JC Penney’s, struggling to cover rent and groceries. She got hit with two overdraft fees, $60 or $70 in one week. Another time, it was three in one day. “So, the banks became who I worked for,” she describes. “At one point I ended up making cloth diapers for my children out of t-shirts and an old sweater for liners, not because I wanted to but because I had no choice. It felt like the banks legally stole my money.” She estimates she’s paid over $2,500 in overdraft fees. She has lost her checking account, has been reported to the checking account blacklist Chexsystems and suffered from depression she attributes to bank overdraft practices.
Stacy is not alone. In a 2017 study, the Consumer Financial Protection Bureau found that for one group of hard-hit consumers, the median number of overdraft fees was 37 in one year — nearly $1,300 annually.
Frequently, customers incur overdraft fees despite carefully attempting to avoid them, and often believing they have. Opaque bank practices around deposit clearing, debit holds and transaction posting order can make it impossible for those living paycheck to paycheck to know whether or not they’ve escaped the harsh blow of one — or many — overdraft fees.
Banks repay themselves the customer’s overdrawn amount, plus overdraft fees, from the customer’s next incoming deposit. Paychecks, Social Security, disability, unemployment, veterans benefits — or, soon, government stimulus checks — are all fair game.
How senseless — how wrong — that a massive portion of funds intended to directly support families will instead go to banks’ bottom lines in the form of overdraft fees.
Many hit by relentless overdraft fees end up having their checking accounts 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. Overdraft fees exacerbate mental health challenges as well.
If nothing is done soon, overdraft fees could balloon exponentially. 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.
There are steps that can and should be taken to relieve Americans from overdraft fees during this crisis. Depositories don’t have to reject transactions when they eliminate overdraft fees. They can cover overdrafts at no charge — so long as another deposit is incoming, the bank should recover the loan amount — or with reasonably priced lines of credit, as was customary before overdraft fees became the cash cow they are today.
The United Kingdom’s financial regulator has recently eliminated outsized overdraft fees, requiring that banks charge only periodic interest for overdrafts. During this time of crisis, the U.K. regulator has proposed requiring banks to provide up to £500 in overdraft funds, at no cost, over the next 90 days. We can take our own steps toward fairness in the United States:
Congress could include legislation in the next stimulus package prohibiting overdraft fees during the crisis, as proposed by Sens. Cory Booker and Sherrod Brown.
The federal banking regulators (OCC, FDIC, Federal Reserve) and the National Credit Union Administration could order depositories to stop charging overdraft fees during the crisis. Thus far, they have encouraged some overdraft relief but have fallen far short of making relief mandatory.
The Consumer Financial Protection Bureau could deem 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. The CFPB has conducted thorough research on overdraft practices and concluded that concerns that regulators have identified for years persist today. Yet under current leadership, the Bureau has done nothing to significantly address these concerns. To leave consumers wholly vulnerable to business-as-usual overdraft during this time is a gross betrayal of the agency’s mission.
State regulators could order their state-chartered banks to stop charging overdraft fees during the crisis, as the New York Department of Financial Services did in March.
Any of the above could impose more limited moratoria following distribution of stimulus checks — say, 30 or 60 days — to protect those funds from being siphoned off by banks.
Banks and credit unions could do the right thing. Some banks, like Ally and Prudential Bank of Philadelphia, have stopped overdraft fees during the crisis. Others have encouraged customers to seek waivers, but this is clearly inadequate. The largest banks could start by agreeing among each other to stop overdraft fees during the crisis. Many bank executives don’t like these fees but haven’t wanted to lead on eliminating them given the risk of displeasing investors; stopping together would mitigate that concern.
Banks are now able to borrow from the Federal Reserve at zero percent interest. Surely, today more than ever, they owe customers something better than one of the most expensive and punitive credit products known to humankind.
Rebecca Borné is a senior policy counsel at the Center for Responsible Lending.
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