Financial regulators crack down on bank overdraft fees

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Rohit Chopra, Director of the Consumer Financial Protection Bureau.

Alex Edelman/Bloomberg via Getty Images

The bureau announced on Wednesday that the Consumer Financial Protection Bureau is cracking down on banks charging fees for customers who overdraft checking accounts.

CFPB Director Rohit Chopra said at a press conference that financial regulators are planning to implement “a series of regulatory interventions” for companies that rely heavily on overdraft fees as a source of income.

When the customer’s account does not have enough funds to pay for the transaction, an overdraft occurs. The bank may allow the transaction to proceed, but will charge a fee to cover the fee.

Chopra said that charging for overdrafts and insufficient funds is a major means of making money for banks, and has been so during the Covid-19 pandemic. According to the bureau, banks profited more than US$15 billion from such fees in 2019, and this number has been rising steadily.

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Chopra said these costs are usually around $34 per overdraft, which largely affects the families that are least able to afford these costs.

“Banks, especially large banks, continue to rely on overdrafts and [non-sufficient funds] Expenses are the main source of income,” Chopra said. “Large financial institutions compete with transparent upfront pricing and are obsessed with exploitative garbage costs, which can quickly deplete households’ bank accounts. “

According to the announcement on Wednesday, the CFPB, a federal agency created by the Dodd-Frank Financial Reform Act after the Great Recession, will strengthen the supervision of banks that “heavily relied on” overdraft fees.

Officials did not quantify the reasons for their heavy reliance on overdraft fees. Chopra said the agency will tell companies how they measure their peers.

The market will not solve this problem on its own.

Rohit Chopra

Director of Consumer Financial Protection Bureau

The bureau stated that the agency’s supervision will be achieved through additional supervision and law enforcement reviews.

Chopra said the agency will take action against large banks that violate the law on overdrafts, and officials will prioritize inspections of banks that rely heavily on overdrafts.

Officials declined to say whether additional measures will be taken to curb this practice.

Chopra said that during the Covid-19 pandemic, banks continue to charge overdraft fees, and shareholders can get a predictable and stable source of income from them.

According to CFPB data, the three banks, JPMorgan Chase, Wells Fargo and Bank of America, accounted for approximately US$5 billion, or 44%, of the total overdraft fees collected in 2019.

Of course, not all banks charge customers overdraft fees. For example, online bank Ally Bank cancelled overdraft fees earlier this year. Other companies, including PNC Bank and Bank of America, make it more difficult for customers to overdraft accounts.

Capital One said on Wednesday that it will eliminate all overdraft fees for retail bank customers starting in 2022. It is the largest bank in the United States, but has not yet ended its practice in the industry. The bank is expected to lose 150 million US dollars in annual revenue.

Chopra said that he does not expect other banks to follow suit in the near future.

“The market will not solve this problem on its own,” Chopra said. He added: “We obviously have a market failure here.”

A small number of households account for most of the overdraft income. According to CFPB data, approximately 9% of consumer accounts pay 10 or more overdrafts per year, accounting for nearly 80% of all overdraft income.

Chopra said the bureau will also “use technology” to make it easier for customers to switch banks, which is a daunting task because of the need to update information, such as automatic debits from many sources. He advocated the establishment of an “open banking infrastructure” in the future to make this easier, but did not elaborate on how or when this will be achieved.


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