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New Consumer Agency Eyes Bank Overdraft Fees

Customers use Bank of America ATMs in New York. The head of the Consumer Financial Protection Bureau says it is looking into ways to help consumers limit their exposure to banks' overdraft fees.
Mark Lennihan
Customers use Bank of America ATMs in New York. The head of the Consumer Financial Protection Bureau says it is looking into ways to help consumers limit their exposure to banks' overdraft fees.

The Consumer Financial Protection Bureau says it's looking to overhaul rules on overdraft fees. The new agency will be seeking data from banks about how they handle overdrawn accounts, and how they assess fees. The agency plans to use this information to help consumers limit their exposure to these costly charges.

The CFPB estimates that last year, banks made between $15 billion and $22 billion from overdraft fees.

Richard Cordray, the director of the CFPB, says the overdraft cash cow is being fed by a relatively small handful of checking account users.

"The numbers are pretty stark," he says. "Nine percent of the people incur about 84 percent of the overdraft fees."

And, he says, the fees tend to affect a narrow demographic. "They have a massively disproportionate impact on younger consumers, those who are newer to the banking system," Cordray says, "and consumers who are low-income who often are least able to afford the kind of bounced-check fees we're talking about."

A $4 Billion Bite

Overdraft fees have already come under attack. Last year a new Federal Reserve rule took effect requiring banks to get customers to sign up for programs allowing them to overdraft their accounts on debit card and ATM transactions. Without customer approval, a transaction might be denied, but the customer wouldn't have to pay the fee, which typically runs $35 per overdraft.

By some estimates, that rule took a $4 billion bite out of the banking industry's overdraft revenues.

"Overdrafts are down about 20 percent," says Nancy Bush, banking analyst and contributing editor to SNL Financial, a financial news publication. "So yeah, it's been significant."

She says smaller community banks don't have the diversity of revenue streams to make up the loss. "Companies like Bank of America have had other revenue streams to get around it," Bush says. "That's not true of ... ABC Community Bank."

Bush says with increasing scrutiny of fees, banks are likely to continue what they have been doing: increase other fees.

'Piling On Fees'

"If you talk to any bank customer, they can cite you every fee that has gone up for them. And they are considerable," Bush says. "The banks have certainly not been able to recover that overdraft change. But they are piling on fees or adding fees where it's legal and where they're applicable."

But banks are finding even that avenue is one that's fraught with risk. Last year, Bank of America scrapped plans to charge customers for using their debit cards, bowing to customer outrage. Other banks, including SunTrust and Wells Fargo, also abandoned similar plans.

The CFPB's Cordray, who is scheduled to announce the agency's initiative Wednesday in New York, says this is one of many moves by the agency to research and design measures to protect consumers. And he says he expects the banking industry will support him.

"Here's the reaction I've had from the industry thus far," Cordray says. "They understand that we have a job to do. We are required by Congress to protect consumers in the financial marketplace. Many of the players in the industry seem to recognize what I preach constantly, which is that protecting consumers is good for responsible financial providers in the marketplace."

While many banks support that principle, it's not clear how much enthusiasm they will have if doing so means giving up more of their fee income.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

Yuki Noguchi is a correspondent on the Science Desk based out of NPR's headquarters in Washington, D.C. She started covering consumer health in the midst of the pandemic, reporting on everything from vaccination and racial inequities in access to health, to cancer care, obesity and mental health.