In the final weeks before a midterm election where voters are primarily concerned about the health of the economy and inflation’s impact on the cost of living, President Joe Biden’s financial regulators have pledged to crack down on how banks and other industries levy fees on customers — and Biden just reiterated the promise on Wednesday.
We’re cracking down on hidden "junk" fees like surprise overdraft and deposit fees, credit card late fees, hidden hotel booking fees.
Even those termination charges that stop you from switching cable and internet plans to get a better deal.
They add up. We're taking action.
— President Biden (@POTUS) October 26, 2022
But Republicans on the Senate Banking Committee — four of whom are up for reelection — are fighting to preserve overdraft charges and other “junk fees” that are generating tens of billions each year for their big bank donors at the expense of the country’s most desperate.
All Republican members of the Senate Banking Committee signed on to a letter sent to the Consumer Financial Protection Bureau (CFPB) last month that strongly objected to the agency’s stance that it should more tightly regulate overdraft fees — the practice where instead of declining a debit transaction, banks fine account holders for dipping into a negative balance. The conservative senators tasked with overseeing the banking industry also take issue with the term the Biden administration and the CFPB have used to describe overdraft fees: junk.
“The CFPB has launched a relentless smear campaign against banks that offer optional overdraft services to their customers,” the letter read. “Charging fees that customers chose to pay should not be disturbing or illegal, and yet, the CFPB appears to have developed a particular disdain for banks charging their customers for services, pejoratively calling overdraft protection ‘junk fees.’”
Republicans and industry groups have tried to spin junk fees as a flexible, convenient alternative to payday or short-term loans, and they allege any regulation to protect consumers would “stifle innovation.” But ultimately, these fees are revenue generators for banks, and that profiteering comes on the backs of banks’ most desperate customers. Annually, banks make around $30 billion off fees like overdraft charges, bounced-check penalties, and late fees from people who already lack sufficient funds. Since 2010, banks raked in over $460 billion, adjusted for inflation, in overdraft fees.
With the Biden administration and CFPB repeatedly pledging to rein in this profiteering, big banks and front groups have deployed an army of lobbyists and flooded Senate Banking Committee Republicans with campaign donations.
The dozen Republicans on the Senate Banking Committee have collectively received more than $3.3 million in campaign contributions from corporate PACs representing the banking and finance industry so far this election cycle. Of that total, more than $1.5 million has gone to the four Republican committee members up for reelection — Mike Crapo (Idaho), Tim Scott (South Carolina), John Kennedy (Louisiana), and Jerry Moran (Kansas).
The US Chamber of Commerce, the nation’s top business lobby, has spent $58 million on federal lobbying efforts this year, including on overdraft fees. The American Bankers Association and various other big banks and credit unions, all of which make money on overdraft fees, have collectively spent more than another $16 million on lobbying.
While the Chamber vehemently opposes changes to or regulations on overdraft charges, claiming they would “limit innovation and consumer choice,” in reality, such junk fees can prove to be even more toxic than other financial devices that prey on people with insufficient means, such as payday loans.
A study by Moebs Services found that payday loans, while predatory, offer a lower median price — $17.65 — compared to the median overdraft fee of $30. What’s more, the CFPB found in 2014 that a majority of debit card overdrafts are on purchases smaller than $24. If a $24 purchase was paid back within a few days with the median overdraft fee of $34, it would be the equivalent of a short-term loan with a 17,000 percent APR or annual percentage rate.
A 2021 CFPB report found that even with just under 9 percent of consumer accounts paying ten or more overdraft fees a year, they account for nearly 80 percent of all overdraft revenue. More than 92 percent of banks and 61 percent of credit unions have overdraft programs. Overdraft fees account for nearly two-thirds of fee revenue in the banking industry, according to the CFPB.
Junk fees tend to hit people on fixed incomes, like retirees, particularly hard, as an overdraft fee on even a small transaction can lead to a cascade of financial consequences. This has led the American Association of Retired Persons (AARP), the country’s top senior lobbying group, to call on the CFPB to enact stronger regulations on these fees.
“For too long, banks and credit unions have profited by charging excessive overdraft and non-sufficient fund (NSF) fees that can trap older Americans in a debt cycle or force them to leave the financial mainstream,” David Certner, legislative counsel and legislative policy director at AARP, wrote in a letter to the CFPB, adding that these fees “are among the most expensive and common fees charged by banks.”
With many seniors receiving Social Security checks on specific days relative to their birthdate, the timing of automatic payments for things like medical bills or unexpected yet common medical emergencies often leads to overdrafts for aging Americans. Other factors, like unfamiliarity with digital banking and cognitive decline, were found by the CFPB to be other common reasons for overdraft charges.
“I’m retired living in a rural county in Idaho. I paid a $30 NSF fee on a check for $4 that the bank bounced anyway,” Kathryn Anderson, a retiree in Idaho, told the CFPB via public comment. “Then the overdraft charges caused my checking account to become overdrawn, which in turn caused a new fee for every day my account was in the negative. The bank caused a negative loop which ended up costing me over $120 to fix.”
As consumer advocates wait for broader reforms, the Biden administration has begun taking targeted actions. Last month, Regions Bank, a nationwide chain with more than 1,400 branches, was ordered to refund more than $141 million in overdraft fees and pay a $50 million penalty for what the CFPB alleges were illegal and surprise overdraft fees.
To preemptively avoid punishment, some banks have begun to either reduce fees or eliminate them altogether. In Congress, New York representative Carolyn Maloney’s Overdraft Protection Act, which would prohibit deceptive practices by banks and restrict how and when customers could be charged overdraft fees, has languished since its introduction in June 2021.