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Overdraft fees are a menace

The Consumer Financial Protection Bureau needs to safeguard vulnerable bank customers susceptible to abusive practices

Capital One said Dec. 1 that will get rid of all overdraft fees. (Mark Lennihan/AP)

I know the damage bank overdraft fees can do to a person’s finances and self-worth.

For all his adult life, I helped my brother Mitchell manage his money, although he insisted that he handle his own banking. Mitchell, who died at 32, suffered severe seizures because of his epilepsy. As a result, his only source of income was Social Security disability.

My brother, who barely had enough income to cover his necessities, did his best to live within his means. But a few times, he overdrew his bank account. When he did, he would berate himself.

In one incident, a single debit card swipe resulted in multiple overdraft fees totaling a few hundred dollars.

“I’m so sorry,” Mitchell said when he showed me his bank statement. He cried as he fretted about how he would make do that month. He wasn’t being reckless. He just didn’t have any cushion for any money mistake.

Overdraft charges and non-sufficient-fund fees are a menace to the most financially vulnerable, like my brother.

So, it’s worth noting that Capital One, one of the nation’s largest banks, says it’s eliminating all overdraft fees and non-sufficient-fund fees for its consumer banking customers.

Could this be a trendsetting move for other big banks, which rake in the most money in overdraft fees?

I certainly hope so, but if it isn’t, the Consumer Financial Protection Bureau (CFPB) ought to step in.

A few other financial institutions have already eliminated overdraft fees, but as Capital One pointed out, it’s the nation’s sixth-largest retail bank and stands alone among the top 10 banks in getting rid of the fees. Capital One customers enrolled in overdraft protection will automatically be converted to its no-fee policy early next year. For bank customers not enrolled, transactions that would overdraw their account will be declined, with no fees assessed, the company said.

“The bank account is a cornerstone of a person’s financial life,” Capital One’s founder and chief executive, Richard Fairbank, said in a statement. “Eliminating overdraft fees is another step in our effort to bring ingenuity, simplicity, and humanity to banking.”

Capital One to end overdraft penalties as CFPB takes aim at ‘exploitative junk fees’

I was struck by Fairbank’s use of the word “humanity.”

For years, consumer advocates have been critical of the abusive nature of such fees. They are menacing and inhumane.

“Bank overdraft fees cause particular harm to low-income consumers and communities of color, who are already disproportionately excluded from the banking mainstream,” said a 2020 report from the Center for Responsible Lending. While the typical overdraft fee is $35, the report said, “the cost to the bank of processing an overdraft transaction, particularly in today’s highly automated environment, is very low.”

Think about this.

The most common transactions that generate an overdraft fee involve the use of a debit card. And those transactions are only $20 on average, according to the center’s report.

The report also pointed out the tricks of this trade that can trigger overdraft fees even when people are trying to be careful to avoid them.

One practice is imposing overdraft fees on debit card transactions that were authorized when consumers had enough money in their accounts. But by the time the bank settles the transaction, sometimes a few days later, the customer might not have sufficient funds.

Or this fee-generating strategy cited in the report: “Banks have notoriously re-ordered transactions to drive up the number of overdraft fees incurred; if larger balances are posted first, the account is depleted more quickly, resulting in more transactions for which the bank charges overdraft fees.”

The financial services industry has long defended overdraft fees as a way to help customers manage their money better. The fees, they argue, are a deterrent. But there’s nothing instructive about overdraft fees. The truth is, this stream of income is irresistibly lucrative for the banking industry despite how harmful it is to people struggling to get by paycheck to paycheck.

I bought my kids dinner — and saw firsthand how overdraft fees punish the poor

Overdraft fees or the fear of them are keeping millions of Americans outside the banking system, leaving many to be preyed upon by payday loan companies or rent-to-own establishments. Or, they end up paying unnecessary fees to cash checks. This is what my brother did before I persuaded him to open a bank account.

In the United States, an estimated 7.1 million households, or 5.4 percent, were “unbanked” in 2019, meaning that no one in the household had a checking or savings account at a bank or credit union, according to a report by the Federal Deposit Insurance Corp. Lower-income and minority populations are disproportionately represented among unbanked households. Nearly 14 percent of Black and 12 percent of Hispanic households are unbanked, compared with 2.5 percent of White households, according to the FDIC.

The CFPB released a report in 2017 that found many consumers who get hit with overdraft fees tend to carry low balances and have relatively low monthly deposits. After looking at the study results, the CFPB promised to escalate the examination of the fees, a move that could have led to stronger consumer protections.

But under the Trump administration, the CFPB, then led by former congressman Mick Mulvaney, a conservative who was fiercely critical of the mere existence of the watchdog agency, backed away from a rulemaking plan to address bank overdraft-fee abuses.

Banks greedily count on overdrafts and non-sufficient-fund fees. Revenue from the fees reached an estimated $15.47 billion in 2019, according to recent research by the CFPB. Overdraft and non-sufficient-fund fees made up nearly two-thirds of reported fee revenue, the agency said.

A former bank CEO named his boat ‘Overdraft’

“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” Rohit Chopra, the new CFPB director, said in a statement about the agency’s findings.

Chopra indicated that the CFPB will be stepping up its scrutiny of banks that are heavily dependent on overdraft fees.

The CFPB should prioritize rule changes for predatory overdraft fees. The Biden administration can’t leave it up to the banking industry as a whole to do what Capital One did, because the money is too good for them to do the right thing.