The Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Financial Institutions held hearings to discuss and garner testimony from expert witnesses on overdraft and nonsufficient funds fees.
As many financial institutions are shifting away from charging overdraft and nonsufficient funds fees, Democrats in Congress continue to push those remaining institutions to follow this growing trend, arguing these fees harm those who are already the most vulnerable.
“We know these types of fees affect people of color at a disproportionate rate,” said Sen. Raphael Warnock, D-GA., who chaired the hearing of the subcommittee on financial institutions and consumer protection. “Studies have found that on average, banks with branches in predominantly Black neighborhoods charge more for overdraft services. In addition, customers who overdraft the most throughout the year tend to have lower income, poor credit scores, and are disproportionately Black or Hispanic.”
Research from the Consumer Financial Protection Bureau showed 9 percent of the banked population accounts for approximately 80 percent of overdraft and nonsufficient fund fees.
“The data shows that greater than 60 percent of all overdrafts occur when consumers intentionally utilize the service,” Sen. Thom Tillis, R-N.C., said. “Comments by some insinuating that financial institutions trap unaware customers in these products, when consumers are presented with opt-in provisions from the start and subsequent notifications explaining they can terminate the services at any time, seem to be unfounded.”
Consumer Bankers Association General Counsel David Pommerehn supported the sentiments of Republicans on the subcommittee.
“In recent years, various groups have examined how consumers use overdraft services,” Pommerehn said. “Some have concluded overdraft services are inherently bad for consumers. These studies have largely assumed a reasonable consumer would avoid overdraft and institutions providing overdraft services must therefore be “tricking” consumers. These assumptions are fundamentally flawed. The overdraft product is based on clear disclosures and personal experience. The decision to proactively opt-in and utilize the overdraft product is solely up to the customer.”
Pommerehn also pointed to the influence of consumer demands on the role of overdraft fees. According to Pommerehn, the recent decisions by banks to do away with overdraft and nonsufficient fund fees was because of consumer demand, not threats of impending regulatory changes.
“Banks have proactively implemented new overdraft polices that benefited consumers use of the product that include: the elimination of overdraft fees, the elimination of account transfer fees to coverage overages, de minimums exceptions to cover small overages (i.e. avoiding an overdraft trigger after purchasing a cup of coffee), grace periods for customers to make accounts whole before overdraft fees are ever assessed, access to small dollar loans (discussed more fully below), eliminating extended overdraft fees, eliminating returned items fees, real-time account updates and low balance notices,” Pommerehn said. “We believe these and other changes, in conjunction with clear disclosures, add continued benefit to consumers who rely on overdraft services to cover short-term gaps in finances by continuing to provide a viable service at minimal or no cost.”
Prior to the hearing, Sen. Elizabeth Warren (D-Mass.), along with Sen. Cory Booker (D-N.J.) and Rep. Carolyn Maloney (D-N.Y.), sent a letter to JPMorgan CEO Jamie Dimon, who Warren called “the star of the overdraft show” in another hearing last May. The letter asked Dimon how much the bank had charged in overdraft fees since announcing changes to its overdraft fees. She also asked about how information about opt-outs were conveyed to customers, and if there is a waiting period for overdraft protection.
The three lawmakers sent similar letters of inquiry to Bank of America and Wells Fargo.
“If Citibank and Capital One can eliminate overdraft fees, so can Chase and BofA and Wells,” Warren said during the hearing.
Warren asked witness Aaron Klein, a senior fellow at the Brookings Institution, how much money these three banks were making in fee revenue annually.
“They’re making billions,” Klein said. “In 2019, before the pandemic, JPMorgan Chase earned over $2 billion in overdraft fees, Wells Fargo about 1.7, and Bank of America a bit over 1.5.”