For years, overdraft fees, automatically triggered when a customer tries to take out more from their account than they have in the bank, have been a pure and often egregious profit machine for financial institutions. In 2020, amidst a global pandemic, three banks alone—JPMorgan Chase, Wells Fargo, and Bank of America—pulled in roughly $5 billion in overdraft fees, despite issuing press releases promising to act charitably toward Americans under financial duress.
Those 2020 figures, first reported by the Prospect, went on to inform a congressional hearing that featured Sen. Elizabeth Warren (D-MA) doing battle with JPMorgan CEO Jamie Dimon, who forwarded some implausible theories about his bank’s behavior. They also went into a Consumer Financial Protection Bureau (CFPB) report published in December, which estimated that overdraft fees churned out $15.5 billion in profits in 2019, and announced that the bureau would be ratcheting up scrutiny of the notoriously exploitative practice.
The consumer agency had issued some fines in the past over improper overdraft fees, like $122 million to TD Bank and $30 million to TCF Bank. The vow to take on companies whose business models relied on gouging their most vulnerable customers has, in just a few short months, led to a series of announcements by banks backing off the practice. Rohit Chopra, the CFPB’s new director, had achieved progress simply by signaling that his regulatory cops would patrol this beat.
Last Wednesday, that signal was met with condemnation by nearly the entire Republican delegation of the House Financial Services Committee. In a letter to Chopra, the GOP side of the committee, led by ranking member Patrick McHenry (R-NC), issued a stern warning about the CFPB’s “efforts to weaken the financial system” by curtailing banks’ ability to exploit low-income Americans with usurious rates. All Republican committee members except Frank Lucas (R-OK) signed their name to it.
It’s a curious strategy for a Republican Party that has loudly clamored about anything that might be perceived as “defunding the police.” But if the perpetrator of the crime wears a suit and works on Wall Street, Republicans seem ready to reverse themselves, in this case calling for law enforcement to stand down.
Overdraft fees are a natural and necessary component of a healthy financial services sector, the Republicans insisted, calling it “a short-term liquidity product that can aid consumers in making ends meet when a deposit account balance is low, particularly for those consumers who are unable to qualify for traditional credit products.” This is a typical argument used to justify all sorts of predatory financial products, from payday loans to check-cashing stores: Poor people need credit, this is for their benefit.
Yet the average overdraft fee, typically around $35 per incident, is effectively a payday loan delivered without negotiation at a usurious rate. Often that fee is levied on a charge much smaller than the penalty itself. Though the House Republicans use survey data to claim that “most consumers are well aware of the cost” of overdraft, as University of California, Irvine professor Mehrsa Baradaran writes in her book How the Other Half Banks, “If you consider the fee as a payment the customer makes for the extension of credit for the overdrawn amount, a 2008 Federal Deposit Insurance Corporation (FDIC) study showed that these fees carry an effective APR in excess of 3,500 percent!”
The average overdraft fee, typically around $35 per incident, is effectively a payday loan delivered without negotiation at a usurious rate.
Overdraft fees are also a major reason why Blacks and Latinos, who have disproportionately lower incomes, pay about twice as much in bank fees on average as do whites. One of the top reasons given by those racial groups for going without a bank account, or being “unbanked,” is that they are trying to avoid bank fees.
Overdraft fees also target low-income Americans especially. According to a 2020 study by Bankrate, the average reserve necessary to secure a fee waiver for an overdraft fee is $594. A famous 2017 report found that almost 6 in 10 Americans don’t have $500 saved up in case of an emergency.
The Republicans also tried to downplay the $15.5 billion earned through overdraft in 2019, calling it a small subset of overall commercial bank revenues. They do not contest the CFPB’s calculation, however, that overdraft makes up “the majority of account fee income for banks.”
House Republicans coming out of the woodwork to defend the sanctity of the exceptionally maligned tradition of banks ripping off the neediest Americans is tough to reconcile with the GOP’s new claim to be the party of the working class. No constituency is harder hit by bank overdraft fees than working-class and poor Americans, and yet Republicans have decided to take a stand on behalf of the banks.
Although the CFPB remains in the information-gathering stage of its investigation, banks have been backing away from overdraft, even before Chopra started his inquiry. In July 2021, Ally Bank announced that it would be ending overdraft fees altogether. PNC, TD Bank, Fifth Third, Huntington Bancshares, and Regions Financial all did the same last year. Capital One said it would continue overdraft protection but would no longer charge for it.
In January, Bank of America announced that it would eliminate “non-sufficient funds” (NSF) fees beginning in February, and cut overdraft fees from $35 to $10 starting in May. The company said it would also eliminate the transfer fee for overdraft protection service in May, which gives a sense of the many schemes banks have devised to make a profit center out of people not having enough money to begin with. Meanwhile, JPMorgan Chase announced that it would not impose a fee unless customers went more than $50 below their account balances. Later, JPMorgan added a one-day grace period, as did Wells Fargo. And in February, Citigroup ended overdraft fees.
Those moves have come as banks anticipate exactly the sort of regulation the CFPB might ultimately enact. It’s the kind of deterrent effect that Republicans typically laud in traditional policing, on the theory that the presence of cops will prevent crime. But when it comes to banks, they frown upon it.
The prospect of losing the dependable profit stream that overdraft affords may not ultimately prove very painful for the financial sector. As the Federal Deposit Insurance Corporation recently reported, insured banks earned $69.5 billion in the third quarter of 2021, up more than a third from the year prior. Like so many other corporations, banks have seen huge profits in recent months.
But Republicans seem more exercised about this prospect than the banks. They even invoked a Democratic official to try to create a wedge. “In December 2021,” they write, “Acting Comptroller [Michael] Hsu outlined potential reforms while cautioning that ‘limiting overdrafts may limit the financial capacity for those who need it most.’” Hsu, a former Federal Reserve official, has been somewhat hesitant about far-reaching bank regulation.
But in that very speech Republicans cited, Hsu stated that he was collaborating with the CFPB on regulatory action, and approvingly referenced consumer-friendly changes to overdraft at Capital One and PNC. “A race to the top for the most pro-consumer overdraft program could help make it less expensive to be poor and demonstrate to consumers that the banking system has their backs,” Hsu said.
The Republican letter ends with a phrase that would never be mistaken for a working-class refrain. “Any attempts by the CFPB or other financial regulators to stifle financial inclusion or consumer choice … would be imprudent.” If Republicans really want to prove themselves as the party of the working class, they’re going to have to do slightly better than sticking their neck out for a wildly unpopular banking practice reviled by working-class Americans everywhere, which even banks have stopped embracing.