Van Hollen, Booker Lead a Dozen Colleagues in Urging CFPB to Finalize Rule Limiting Overdraft Fees

April 26, 2024

Van Hollen, Booker Lead a Dozen Colleagues in Urging CFPB to Finalize Rule Limiting Overdraft Fees

U.S. Senators Chris Van Hollen (D-Md.) and Cory Booker (D-N.J.) are leading a dozen colleagues in writing to the Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra urging the bureau to finalize their proposed rule to rein in excessive overdraft fees charged by the nation's largest financial institutions. Last December, the CFPB announced they would begin a crackdown on exploitative overdraft fees and take aim at financial institutions charging overdraft fees on debit card transactions and ATM withdrawals, methods which boost bank profits and whose burdens fall disproportionately on those already living on the financial brink.

"The largest financial institutions have been abusing overdraft fees for decades. The CFPB's increased enforcement of illegal overdraft collection and outright deceptive practices has resulted in $3.5 billion in annual savings on overdraft fees thus far. Even so, Americans still have paid an estimated $280 billion in overdraft fees since 2000, $15 billion in 2019 and $9 billion in 2022 alone," the lawmakers wrote.

The lawmakers detailed that 10 percent of Americans face overdraft fees annually, with a higher likelihood among young, low-income, Black or Latino individuals noting, "Black households are 84 percent more likely, and Latino households are 89 percent more likely, to be charged overdraft fees than White households. Of those charged, only half reported that they knew they opted in to overdraft coverage."

The proposed rule aims to eliminate the loophole that enables banks to exploit the flexible nature of checking accounts, which lack consumer credit protections, despite the Federal Reserve Board recognizing debit cards that access an overdraft line of credit function like credit cards. The rule would extend the consumer credit protections of the Truth in Lending Act (TILA) to debit cards drawing on credit for higher-cost overdraft fees.

The lawmakers continued, "These regulations bring transparency and consumer protections of similar credit offerings when overdraft fees exceed breakeven costs and become a profit center. The proposal is consistent with and helps to fulfill Congress's intent in passing TILA and amending it over the years to ensure that consumers have critical protections when they are offered credit."

"A number of banks have taken steps to roll back these practices, and we applaud those actions. However, without the efforts of the Biden Administration in this rulemaking, which will curtail large financial institutions' ability to exploit vulnerable families' bank accounts, Americans will continue to face charges of up to $111 a day for low account balances or up to $175 a day on overdraft fees," the lawmakers concluded.

Senators Van Hollen and Booker were joined in signing the letter by U.S. Senators Richard Blumenthal (D-Conn.), John Fetterman (D-Pa.), Robert Menendez (D-N.J.), Chris Murphy (D-Conn.), Bernie Sanders (I-Vt.), Brian Schatz (D-Hawaii), Tina Smith (D-Minn.), Elizabeth Warren (D-Mass.), Peter Welch (D-Vt.), Sheldon Whitehouse (D-R.I.), and Ron Wyden (D-Ore.), and U.S. Representative Valerie Foushee (D-N.C.-04).

Read the full letter here and below.

Dear Director Chopra,

We were pleased to see the recent announcement that the Consumer Financial Protection Bureau (CFPB) has proposed a rule to rein in excessive overdraft fees charged by the nation's largest financial institutions. We write to urge the CFPB to act with urgency to finalize this rule, ending the decades long exploitation of American families and offering sound protection from unexpected and undeserved bank charges.

The concept of overdraft fees evolved as a service provided when payments and billing occurred through hand-written checks sent through the U.S. Postal Service, which occasionally resulted in unpredictability about when people would receive checks. When an overdraft occurred, some banks cleared those checks for a modest fee, rather than letting large payments bounce. Banks today, continue to call overdraft fees a "service" in spite of the fact that large banks typically charge $35 for an overdraft loan, even though most consumers' debit card overdrafts are for less than $26 and are repaid within three days-translating to an annual percentage rate of roughly 16,000 percent. What is happening today is not a convenience nor a service, it's exploitation.

The largest financial institutions have been abusing overdraft fees for decades. The CFPB's increased enforcement of illegal overdraft collection and outright deceptive practices has resulted in $3.5 billion in annual savings on overdraft fees thus far. Even so, Americans still have paid an estimated $280 billion in overdraft fees since 2000, $15 billion in 2019 and $9 billion in 2022 alone.

It's estimated that 10 percent of Americans pay an overdraft fee each year, and they are more likely to be young, low-income and Black or Latino. While just 10 percent of households with over $175,000 in income were charged an overdraft or a non sufficient fund fee in the previous year, 34 percent of households making less than $65,000 were charged, making them three times as likely, with nearly one third of the income. Black households are 84 percent more likely, and Latino households are 89 percent more likely, to be charged overdraft fees than White households. Of those charged, only half reported that they knew they opted in to overdraft coverage.

The proposed rule would close the loophole that has allowed banks to charge exorbitant overdraft fees in exchange for the flexible use of a checking account, akin to a line of credit, yet without any of the protections governing consumer credit. The Federal Reserve Board has long acknowledged that debit cards that access an overdraft line of credit are credit cards. Therefore, it is consistent to grant debit cards the same consumer protections offered to credit cards under the Credit Card Act, an extension of the Truth in Lending Act (TILA).

While the proposed rule allows banks to continue to charge low-cost overdraft fees without complying with the TILA, it brings higher-cost overdraft credit under the protections of TILA, and appropriately requires compliance with existing credit card rules when debit cards become credit cards by drawing on credit. These regulations bring transparency and consumer protections of similar credit offerings when overdraft fees exceed breakeven costs and become a profit center. The proposal is consistent with and helps to fulfill Congress's intent in passing TILA and amending it over the years to ensure that consumers have critical protections when they are offered credit.

By requiring consumer credit to be offered transparently and with appropriate protections for credit, this proposal removes hidden obstacles impeding consumers' ability to evaluate the true cost of banking services and safely use them. Following pressure from both Congress and CFPB over the past several years, a number of banks have taken steps to roll back these practices, and we applaud those actions. However, without the efforts of the Biden Administration in this rulemaking, which will curtail large financial institutions ability to exploit vulnerable families' bank accounts, Americans will continue to face charges of up to $111 a day for low account balances or up to $175 a day on overdraft fees.

We appreciate the work that you've done to tailor this rule to the large financial institutions and to rein in this punitive and opportunistic practice that has allowed banks to enjoy billions of dollars in revenue on the backs of working families. We look forward to seeing this rule finalized.

Sincerely,

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