Should Banks’ Ability to Charge Overdraft Fees Be Limited? (S. 1595)

What is S. 1595?

(Updated February 25, 2020)

This bill — the Stop Overdraft Profiteering Act of 2019 — would prohibit a bank from charging overdraft fees on debit card transactions and ATM withdrawals, charging more than one overdraft fee a month, charging more than six overdraft fees in any single calendar year for check and recurring bill payment overdrafts, and more. 

This bill’s key provisions that reduce overdraft fees would:

• Prohibit overdraft fees on debit card transactions and ATM withdrawals; 
  
• Prohibit financial institutions from charging more than one overdraft fee per month and no more than six overdraft fees in any single calendar year for check and recurring bill payment overdrafts;
  
• Limit check and recurring bill payment overdrafts fees to an amount that is reasonable and proportional to the financial institution’s costs in providing the overdraft coverage; 
  
• Mandate a three-day waiting period between when an individual opens a new account and when a financial institution may offer overdraft protection; and
  
• Mandate that banks post transactions in a manner that minimizes overdraft and non-sufficient fund fees.

This bill would also require each bank that offers overdraft coverage to disclose overdraft coverage fees and certain related information. Additionally, banks would be required to provide certain other disclosures regarding their overdraft protection program, including prompt notification of the account's overdraft status.

Finally, this bill would prohibit banks from reporting negative information regarding consumer use of overdraft coverage to any consumer reporting agency when the overdraft amounts and coverage fees are paid under the terms of an overdraft coverage program.

Argument in favor

Overdraft fees are disproportionately shouldered by the consumers who can least afford them: workers living paycheck-to-paycheck. While these fees boost banks’ bottom lines, they hurt financially vulnerable consumers, make it harder for them to make ends meet, and can even push such customers into the unbanked population.

Argument opposed

Overdraft fees are an important revenue source for banks. This legislation goes a step too far on this issue and will put significant financial pressure on all banks, potentially leading them to stop offering overdrafts or end relationships with poorer customers once they can’t make revenue off charging overdraft fees.

Impact

Bank consumers; bank overdraft fees; banks; and regulation of overdraft fees.

Cost of S. 1595

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sen. Cory Booker (D-NJ) reintroduced this bill from the 115th Congress to crack down on exploitative overdraft fees that banks charge consumers when they make a purchase or pay a bill but don’t have sufficient funds in their account: 

“For millions of hardworking Americans, every day is a struggle – they find themselves one late check or unexpected expense away from financial free fall. I see this in my community in Newark on a daily basis. Wages aren’t going up but the cost of everything else is, from prescription drugs to housing costs to pocketbook pain points like the fees banks charge consumers for overdraft services. These fees generate enormous amounts of revenue for the banks while most customers don’t even know they’ve opted into such charges. Worse yet, overdraft fees fall on those least likely to be able to afford them – individuals for whom a $35 overdraft charge could push them over the brink into financial ruin. Our bill would end these unfair practices many banks use that leave some consumers – especially those that are the most vulnerable – trapped in a vicious cycle of poverty.”

Original cosponsor Sen. Sherrod Brown (D-OH) adds: 

“Overdraft fees are a tax on paychecks already stretched thin. This bill keeps hardworking Americans’ money in their pockets and stops big banks from slapping big fees on customers for small overdraft amounts.”

Michael Moebs, economist and CEO at Moebs $ervices, criticized this legislation when it was introduced in the 115th Congress. He argued that it would have two unintended consequences, namely causing banks to discontinue offering overdrafts and putting bank workers out of jobs by eliminating a key revenue stream for their employers: 

“Foremost those who will be hurt the most by this legislation are low-to-moderate income consumers, since the options of using banks, thrifts and credit unions for overdrafts could be taken away. This bill, too, could easily put tens of thousands of depository workers out of a job by eliminating a key revenue stream to depositories’ bottom lines.”

Moebs also noted that overdrafts have actually gone down in recent years thanks to better account management technologies and improved account access and that rules limiting their use would benefit loan sharks, not consumers: 

“This same data shows over 1.1 billion overdraft transactions for the year ending March 31, 2017. This is down 21% in the past 10 years due to greater technology to assist consumers with ODs and access to transaction account balances, and an increase in debit card use over paper check systems… [I]f overdrafts were eliminated or substantially reduced, consumers would go more to payday lenders for title loans on cars, or home equity loans on homes. The big winner would be loan sharks. The cost of making a loan for banks and credit unions is much higher than for payday lenders and Fintech firms.”

David Pommerehn, vice president of the Consumer Bankers Association, concurs with Moebs. He says that this proposal would limit a consumer’s ability to obtain short-term liquidity when they need it for everyday expenses such as gas for getting to work or food for their families. He also notes that many banks have already eliminated overdraft fees for accounts that are overdrawn by small amounts, such as $5 or $10. He concludes, “Overdraft is important to some people, and they need it. The premise of the bill is misguided, and I think it would do harm to consumers.”

University of Kansas School of Business professor Robert DeYoung observes that this bill could prompt small, community banks to end relationships with poorer customers because they will lose money covering overdrafts without charging an overdraft fee. He argues that banks can’t be blamed for wanting to earn revenue:

“We can’t fault banks for wanting to earn revenue from their customers. Banks have bills to pay; they have to earn a profit. Some banks try to keep information less than complete so they can earn greater fees, that’s for sure. Others are very clear about it and want their customers to know what the rules are and have no mistakes about when you have to pay.”

As an alternative to this legislation, DeYoung suggests requiring banks to be very explicit about overdraft policies and fees so consumers perfectly understand the conditions of banking with a particular financial institution. He explains: 

“I think a much better approach would be for banks to say [to consumers], ‘There’s not enough money for this,’ or to say, ‘We’ll give you what you want for a $25 fee.’ This is not a large change, a few lines of code could be written to make this happen, and then customers can decide whether they want to pay the fee for this overdraft protection or not. Then everyone’s honest, rather than this very blunt legislation banning things. When you’re banning something, that means banks and consumers no longer have a choice.”

Rebecca Borné, senior policy counsel for the Center for Responsible Lending (CRL) and a contributor to this legislation believes it would force the market to adapt and treat consumers more fairly. She concedes that it may prompt banks to eliminate free checking account options, but would also make them more transparent about their fees: 

“What you see [now] is a lot of banks that offer free checking with no upfront monthly fees, but get all their revenue from checking accounts on overdraft fees. So if you had reasonable regulation, you’d start to see a shift in the pricing model of checking accounts, and maybe most banks would charge a monthly fee for checking accounts and get their revenue that way rather than through these backend ways. Without regulation of overdraft fees, it’s impossible for there to be a shift in the market, because no bank wants to be the one bank to say, ‘We charge $10 a month for checking accounts.'”

This legislation has one cosponsor, Sen. Sherrod Brown (D-OH). Last Congress, it was called the Stop Overdraft Profiteering Act of 2018 and had one cosponsor, Sen. Brown. It didn’t receive a committee vote last Congress. It has little chance of passing the Republican-controlled Senate.

Of Note: Overdraft fees were originally a penalty primarily associated with checks. If a customer submitted a rent check, for example, but didn’t have enough money in his or her account, the bank could still let the check go through and then hit the person with an overdraft fee. In this context, customers would incur the additional cost but also be spared the inconvenience and charges tied to the check bouncing. 

As debit cards gained popularity, banks initially rejected transactions if users didn’t have enough money in their accounts. However, around the late nineties, they found that allowing such transactions to go through and charging the customer a subsequent overdraft fee could be a handy source of income.

Now, banks offer overdraft services to allow account holders to make purchases or pay a bill even if they don't have sufficient funds in their account. The average charge for this service is $35. These fees disproportionately impact customers who are least able to afford them, particularly workers living paycheck-to-paycheck. This is evidenced by a Pew study showing that 18% of account holders pay more than 90% of overdraft and insufficient fund fees and the CFPB’s finding that the majority of frequent overdrafters have lower credit scores and daily balances and are broadly more financially vulnerable than those who don’t frequently overdraft their accounts. Finally, the Pew study also found that nearly seven in 10 heavy overdrafters make less than $50,000 per year. 

Lauren Saunders, an associate director at the National Consumer Law Center who worked on this legislation with Sens. Booker and Brown in 2018, says, “It’s been well-documented for many years that banks have used a variety of methods to push people into incurring overdraft fees to boost their income. They do a lot to push huge costs on the people least able to bear them.”

Overdraft fees have emerged as a major source of revenue for banks. In 2016, U.S. customers paid roughly $15 billion in overdraft and bounced check fees to all banks — nearly 10% of banks’ net income that year. In 2018, three of the largest banks in the country collected over $5 billion in overdraft fees. One former bank CEO even named his yacht “Overdraft” in an apparent nod to such fees’ importance to the bank’s bottom line. 

In 2010, the Federal Reserve implemented overdraft regulations that required consumers to affirmatively opt-in to overdraft services. However, survey data and anecdotal evidence suggest that the opt-in requirement is being sidestepped by financial institutions marketing overdraft coverage in a confusing and deceptive manner. In a 2014 study, Pew found that across all banks, more than half of the people who overdrew their checking accounts and paid a fee in the past year could not recall consenting to the overdraft service.

The Trump administration has questioned the overdraft rule’s importance. Although predatory overdraft fees had been a longstanding issue on the CFPB’s regulatory agenda, the agency dropped a prior rulemaking to further limit them in 2018. Now, as part of a broader push to reexamine how existing rules affect small businesses, the CFPB is considering rolling back the existing overdraft rule. 

Media:

• Sponsoring Sen. Cory Booker (D-NJ) Press Release
  
• Center for Responsible Lending (CRL) (In Favor, 115th Congress)
  
• Vox
  
• CU Today
  
• Whyy
  
• Inside Sources
  
• Pew Report - Heavy Overdrafters (Context)