Federal Watchdog Snarls at Banks’ Overdraft Fees

Regulatory warning comes as Capital One drops overdraft fees altogether

Masked woman using ATM
•••

F.J. Jimenez/Getty Images

If you’ve ever been dinged by your bank’s overdraft fees, you may be glad to hear that the government’s consumer watchdog has promised to scrutinize the practices of institutions that rely heavily on them.

Key Takeaways

  • The Consumer Financial Protection Bureau, a government watchdog, said Wednesday it would take a hard look at banks that rely heavily on overdraft fees. 
  • JPMorgan Chase, Bank of America, and Wells Fargo account for 44% of all the overdraft fees charged by big banks, according to the CFPB.
  • Overdraft fees penalize customers who incur transactions greater than their account balance. 
  • Capital One said Wednesday it was dropping all overdraft fees for its customers.

The Consumer Financial Protection Bureau said Wednesday that it was eyeing the practices of banks in light of new research showing they collected more than $15 billion in overdraft fees in 2019. Most of these fees are paid by lower-income customers, according to past research. 

The CFPB’s announcement came on the same day Capital One became the latest bank to beat the government to the punch, saying that it would abandon overdraft fees completely. Online bank Ally did the same thing in June.

Banking industry representatives, however, defended their policies, saying overdraft protection helps customers and that a majority of consumers appreciate having their transactions go through when their account balances are low even if they have to pay a fee for it. 

The CFPB is not impressed. “While many checking accounts are marketed as free, they are heavily offset by hidden opportunistic penalties that take advantage of complex and confusing rules around overdrafts,” CFPB director Rohit Chopra said during an online press conference. “Many American families end up paying large banks large fees for the privilege of holding their money.” 

While overdraft fees are legal if the consumer consents to overdraft protection on their account, the CFPB has taken action against banks that run afoul of laws regulating them. In 2020, for example, the CFPB ordered TD Bank to pay $122 million in penalties and customer restitution for engaging in deceptive practices related to overdraft fees.

Overdraft fees kick in when a customer enrolled in their bank’s overdraft protection program incurs a transaction that would take out more than their available balance. The overdraft protection allows the transaction to go through anyway, but a fee is charged, usually around $30.

Banks rely more on these and similar non-sufficient fund (NSF) fees than on account maintenance and ATM fees, the study found, with overdraft fees typically bringing in twice as much as the other two put together. Customers found some relief in 2020 when overdraft fees dropped 26.2%, the CFPB said, likely because pandemic relief payments gave them a cash cushion.

Bank of America, Wells Fargo, and JP Morgan Chase accounted for 44% of overdraft fees among banks with more than $1 billion in assets, the bureau said. (Those are also the largest banks, holding 35% of assets of U.S. banks with more than $300 million, according to Federal Reserve data.)

Capital One scuttling its fees is great news for consumers, according to Lauren Saunders, associate director of the National Consumer Law Center consumer advocacy group. 

“Overdraft fees are often used as a high-cost form of credit that can reach or exceed the cost of triple-digit payday loans. Overdraft and NSF fees are also primary factors pushing vulnerable people out of the banking system entirely,” she said in a statement.

Banks used to automatically sign up their customers for the service, but since 2010, new customers must choose to enroll. While most customers never pay overdraft fees, about 5% are “very frequent” overdrafters who incur 20 or more fees per year and pay an average of 63% of all such fees, according to a 2017 study by the bureau.

People who paid a lot of overdraft fees tended to have lower account balances, lower credit scores, and lower available credit balances than those who didn’t overdraft or did so once in a while, indicating that the people who wind up paying these fees are likely to be living on the financial edge to begin with, the study showed.

“The families that are getting hit hardest by these complicated charges are often the ones least able to afford them,” Chopra said. “It can drive them into involuntary account closures and deeper and deeper into debt,” 

The American Bankers Association, a trade group representing financial institutions, said overdraft protection benefited consumers, citing a poll by Morning Consult it commissioned that showed 90% of adults found overdraft protection valuable. (An unrelated poll conducted this summer by Morning Consult showed the public was divided pretty much evenly on whether overdraft fees were fair.)

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.