Democrats relaunch crackdown on bank overdraft fees

By Matt Egan, CNN Business

Democrats are once again taking aim at dreaded bank overdraft fees.

New York Congresswoman Carolyn Maloney reintroduced legislation on Wednesday that would crack down on overdraft fees, making it illegal for banks to charge more than one fee per month.

The bill, which is very similar to legislation Maloney sponsored in previous years, would also require that these fees are proportional to the amount of the overdraft and the cost to banks for providing coverage for the transaction.

The legislation adds to the pressure on overdraft charges, a key source of revenue for lenders that consumer advocates argue unfairly punish society’s most vulnerable.

“Overdraft fees disproportionately harm lower-income residents, often minorities,” Maloney, who represents parts of Manhattan, Brooklyn and Queens, told CNN Business in a phone interview. “If you want to address inequality, cutting out unfair, deceptive and abusive fees is a fair thing to do.”

Among other provisions, Maloney’s bill would prevent banks from charging more than six overdraft fees per year. It would also prohibit lenders from processing transactions in order to maximize overdraft and non-sufficient fund fees.

9% of accounts pay 79% of fees

Each year, banks rake in more than $11 billion worth of overdraft and related fees when consumer accounts go negative, according to FDIC stats on banks with more than $1 billion in assets.

A 2017 report published by the Consumer Financial Protection Bureau found that just 9% of all accounts pay a staggering 79% of all overdraft and non-sufficient fund fees.

The push by Democrats comes after a high-profile clash last month between Jamie Dimon and Senator Elizabeth Warren, who during a hearing called the JPMorgan Chase CEO the “star of the overdraft show.”

However, some observers are skeptical that a narrowly divided Congress will ultimately move on the issue — though regulators could.

“We see it unlikely that overdraft legislation is enacted into law, but its advancement will influence and pressure Biden-appointed regulators to act,” analysts at Raymond James wrote in a recent note to clients.

Unintended consequences

The Bank Policy Institute, a trade group that represents the biggest banks with US operations, declined to comment on the bill until the industry has a chance to review the legislation. However, a spokesperson said most banks offer no-overdraft, low-cost accounts and pointed to potential benefits from overdraft coverage.

“Many consumers want the option to overdraft to avoid a late fee, a negative credit report hit, or missing an important bill,” the trade group spokesperson said.

The Consumer Bankers Association, which represents leading retail banks, opposes the Maloney legislation.

“Restricting access to overdraft, as this legislation calls for, would only drive consumers to predatory payday lenders or pawn shops, neither of which provide the same safety and soundness as well-regulated and well-supervised banks,” CBA President and CEO Richard Hunt said in a statement.

Some warn that overdraft restrictions could backfire by causing unintended consequences. Researchers at the New York Federal Reserve wrote in a recent paper that a cap on overdraft fees would make banks less willing to open accounts from depositors with low debit scores, who get dinged when customers don’t pay overdraft fees.

“We find that fee caps limit fees as intended,” the researchers wrote, “but also constrain the supply of overdraft credit and reduce financial inclusion among lower income households.”

A better path, the NY Fed researchers wrote, would be promoting competition and transparency.

Still, with political pressure rising, some banks have decided to say goodbye to these fees altogether.

Ally Bank recently became one of the largest lenders to eliminate all overdraft fees. Jeffrey Brown, the CEO of Ally Financial, explained at that time that the fees are a “pain point for many consumers but are particularly onerous for some.” He added, “It is time to end them.”

Maloney, the New York Democrat, is hoping more lenders follow Ally’s lead.

“I would be very pleased if banks would just get rid of overdraft fees,” she said. “But it’s their decision.”

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