Cash-Strapped Consumers Face Billions in Junk Overdraft Fees Annually
WASHINGTON – Advocates praised today’s action by the Consumer Financial Protection Bureau (CFPB) proposing a rule to stop banks from extracting tens of billions of dollars from financially insecure account holders in the form of overdraft fees. The proposed rule would lower overdraft fees at big banks to a few dollars but would allow transparently priced overdraft lines of credit that consider the consumer’s ability to repay, among other requirements.
“We applaud the CFPB for working to stop big banks from profiting off overdraft fees that punish families for being financially insecure,” said Carla Sanchez-Adams, senior attorney at the National Consumer Law Center. “Overdraft fees are a hidden form of high-cost credit, a junk fee, far higher than banks’ cost of covering an overdraft.”
Even though some banks and credit unions have chosen to eliminate or reduce overdraft-related fees, consumers still pay about $9 billion a year in overdraft fees, costing an average of $150 a year for families that pay overdraft fees, according to the CFPB. More than a quarter of consumers told the CFPB that someone in their household was charged an overdraft fee within the past year.
Lower-wage workers, young people, people of color, and other financially strapped consumers pay a disproportionate share of overdraft fees. A 2017 CFPB data point report found that 80% of overdraft fees are paid by less than 10% of account holders, with a median account balance of just $350. Banks typically charge $35 for an overdraft loan, even though the majority of debit card overdrafts are less than $26 and are repaid within three days—translating to an annual percentage rate (APR) over 16,000%.
“Banks could cover overdrafts for free as a courtesy, which some do, or could offer and encourage their customers to choose lower cost overdraft coverage. Instead, too many large banks use manipulative practices to push extremely high-cost overdraft fees that disproportionately impact their most vulnerable customers,” Sanchez-Adams explained. “Overdraft fees arose in the check era, but have evolved into a way of extracting profits from those least able to bear those costs. The CFPB rule would save consumers $3.5 billion and eliminate outdated exemptions for exploitative fees.”
The proposed overdraft fee rule would cover large banks and credit unions with over $10 billion in assets and would:
- Limit fees for so-called “courtesy” overdraft services, which are exempt from credit rules and disclosures, to an amount needed to cover the financial institution’s costs, generally pegged to a benchmark that the CFPB will set between $3 and $14.
- Allow flexibility for honest and transparent overdraft lines of credit, which would have to comply with the rules for credit cards, including disclosure of the APR, underwriting for the ability to pay, reasonable penalty fees, and fee limits in the first year.
“Junk overdraft fees can cost consumers their bank accounts,” Sanchez-Adams added. “The CFPB’s rule to limit overdraft fees is critical. When consumers with low balances face exorbitant fees, they run the risk of becoming unbanked and losing access to mainstream financial products.”
- CFPB, Fact Sheet: The CFPB’s Proposed Rule to Curb Excessive Fees On Overdraft Loans By Very Large Banks and Close a Decades-Old Loophole, Jan. 17, 2024
- CFPB Issues Report Showing Many Americans Are Surprised by Overdraft Fees, Dec. 19, 2023
- CFPB: Overdraft/NSF revenue down nearly 50% versus pre-pandemic levels, May 24, 2023
- NCLC, Statement Before Senate Banking Committee on Overdraft Fees and Their Effects on Working Families, May 4, 2022
- NCLC, Press Release, Consumer Advocates Urge CFPB to Protect Consumers From “Junk Fees,” May 2, 2022
- NCLC et al., Group Letter Supporting HR 4277, the Overdraft Protection Act of 2021, March 20, 2022