Center for Responsible Lending
A banking fee that averages $35 per transaction collectively costs America’s consumers nearly $14 billion each year. A new report from the Consumer Financial Protection Bureau focuses on overdraft fees and provides a profile of those hit hardest. These fees drain from the pockets of people who are already struggling to remain financially afloat.
Swift reactions to CFPB’s findings came from civil rights groups working on behalf of both Blacks and Latinos. Together, the NAACP, The Leadership Conference on Civil and Human Rights, UnidosUS, formerly NCLR, and the Center for Responsible Lending urged the CFPB to propose regulations that would protect consumers by reining in abusive overdraft fees.
“Overdraft fees may be explained as a ‘convenience,’” said Vanita Gupta, president and CEO of The Leadership Conference on Civil and Human Rights, “But as this study shows, they only make matters worse for the consumers who can afford them the least. … Both improved disclosures and additional policy reforms are necessary if we want more consumers to succeed in the banking system.”
Similarly, Hilary Shelton, director of the NAACP Washington Bureau and its senior vice president for Policy and Advocacy added, “Overdraft fees are charged largely to customers who can afford them the least – those Americans who live paycheck to paycheck struggling to make ends meet. These fees are unreasonable and hit vulnerable consumers the hardest, thrusting them into a cycle of debt and driving some from the banking system altogether.”
An overdraft occurs when available funds in a consumer’s checking account are not enough to cover a purchase, and the bank allows the sale to go through. In return, the institution charges a fee of typically $35 per transaction that is repaid along with any overdrawn amounts from the next deposit into the account. In addition to debit cards and ATM purchases, these fees can also be generated from purchases with electronic bill payments and paper checks.
For consumers with low and no balance cushions in their accounts, the fees can and do add up quickly, often reaching hundreds of dollars for a single negative balance transaction. With direct deductions from the forthcoming deposit, banks are the first in line for repayment, jumping ahead of other expenses. As paychecks become shortchanged, consumers then risk the chance of repeated negative balances in the next monthly billing cycle.
Consumers incurring the highest number of overdraft fees, according to CFPB, have less than $350 as an average end-of-day account balance and have median credit scores of 600 or less. CFPB also found that about 20 percent of consumers with frequent overdrafts do not have a credit score and are considered “credit invisible.” Earlier CFPB research found that young consumers, those ages 18-25, are hit hardest by overdraft fees. Among these young consumers, over 10 percent have more than 10 overdrafts per year.
Although banks could easily decline for account transactions that lack sufficient funds for no fee, CFPB’s research confirms that the practices of charging overdraft fees are a huge problem. For example, customers who frequently face overdraft fees due to debit card usage pay on average nearly $450 more in fees annually than those who do not.
Earlier independent research by the Center for Responsible Lending has long taken issue with overdraft fees. A 2016 report titled Broken Banking: How Overdraft Fees Harm Consumers and Discourage Responsible Bank Products found that many customers try desperately to avoid overdraft fees, yet still find themselves stuck with harshly disproportionate fees. The research report also noted that high overdraft fees are often triggered by nominal amounts.
“For debit card point-of-sale overdrafts, which trigger more overdraft fees than any other transaction type, the median overdraft is only $20, yet the fee is $35, a penalty approaching twice the size of the actual overdraft,” the report states.
It is important to note that some financial institutions do not charge fees on debit cards. Instead, transactions that exceed available account funds are simply declined at no cost to the consumer or the bank. However, many institutions continue to charge the fees that average $35 per debit card overdraft transaction. As an increasing number of consumers use debit cards and ATMs instead of currency, the costly risk of incurring overdraft fees has also risen.
“The thought of paying high overdraft fees leads many Latinos to believe that having a bank account is too costly for them,” said Eric Rodriguez, vice president of UnidosUS’s Office of Research, Advocacy and Legislation. “By eliminating these fees we can change that perception and make banking more affordable and accessible for everyone and safer for financially vulnerable populations like low-income working class Latinos.”
“This report confirms that disclosure-based rules have failed to protect vulnerable consumers from unfair practices, and that meaningful substantive reform is needed,” concluded Rebecca Borne, a CRL senior policy counsel and expert on overdraft.
Charlene Crowell is the Deputy Communications Director for the Center for Responsible Lending. She can be reached at email@example.com.