Forthcoming Legislation Targets Predatory Overdraft and NSF Fees

November 4th, 2022

By Courtney Thomas, Senior Policy Analyst

Changes in consumer behavior, the effects of the Covid-19 pandemic and growing pressure from regulatory agencies & Congress have prompted new policies on overdraft and non-sufficient funds (NSF) fees for financial institutions. Financial institutions charge overdraft and NSF fees against customers when there are insufficient funds in an account to cover the cost of a transaction. Instead of declining the transaction, financial institutions may cover the cost and charge the customer a flat fee or overdraft charge for the service. In other cases, a financial institution does not cover the transaction, and charges an NSF fee when the transaction is returned to the payee for insufficient funds. Recently, the Consumer Financial Protection Bureau (CFPB) has increased scrutiny on overdraft and NSF practices as several studies show how institutions implement fee policies that are abusive, predatory, and particularly harmful for minority communities.

The CFPB found that, in 2019, banks and credit unions collected over $15.5 billion from customers annually through overdraft and NSF fees. Further analysis found that overdraft and NSF fees make up a significant portion of bank revenue; and in most cases, overdraft fees exceed over 50% of their total revenue. [1] In some instances, banks, implement aggressive and strategic overdraft policies to increase returns. Tactics include multiple overdraft transactions per day, high fees on small dollar transactions, and additional fees for the length of time the account holds a negative balance.

The sheer volume and magnitude of overdraft and NSF fees as a portion of an institution’s revenue is not shared equally among the population of consumers that incur such fees. According to an analysis from the Center for Responsible Lending, 8% of consumer accounts were responsible for approximately 85% percent of all overdraft fees among banks with over $1 million in assets.[1] Consumers that have higher rates of overdraft transactions and fees tend to have lower incomes, lower credit scores, lower median deposits than non-over drafters, and are younger than the median U.S. population. Additionally, when analyzing demographic differences, Black account holders were 1.9x more likely to overdraft their account, and Hispanic account holders were 1.4x more likely to overdraft than white account holders.[2]

While banks, and even some consumers contend overdraft programs are a necessary financial tool, individuals with lower levels of capital tend to rely heavily on overdraft to cover gaps in their finances. Banks, in turn, generate significant revenue from these programs. With that in mind, there is concern on whether banks impose these fees in a manner that is equitable and fair, or if they overwhelmingly increase their revenue at the expense of cash-strapped Americans.

Given the concern, there is a growing appetite for regulatory and policy reforms to enforce overdraft and non-sufficient fund (NSF) fee modifications on financial institutions. The CFPB has been paying close attention to banks with exploitative NSF and overdraft fees, and the Bureau is expected to issue guidance on overdraft policies soon. Banks and credit unions across the country have taken some steps, with several of the largest banks eliminating NSF fees in anticipation of forthcoming regulations. Others have reduced overdraft fees and incorporated a number of programmatic strategies including reducing/eliminating fees, extending time before fees are accrued, launching small dollar loan programs, and better educating clients on available bank services. Last summer, the House Financial Committee introduced HR Bill 4277 the Overdraft Protection Act, which aims to limit abusive and predatory overdraft practices. One of the key provisions of the bill includes limiting the cost and number of overdraft fees a bank can issue. Under the bill’s current version, a financial institution may not charge more than one overdraft coverage fee in any single calendar month and no more than six overdraft coverage fees in any single year. Other changes listed are the elimination of NSF fees on ATM transactions & debit card transactions, reasonable and proportional overdraft fees, and a call for banks to fully disclose overdraft policy and opt in procedures.

Overdraft fees are a barrier to financial stability for cash-strapped families in the Deep South. High and unpredictable fees consistently rank as one of the reasons why Americans avoid banks.[3] Negative banking experiences erode trust and drive the most vulnerable individuals out of financial institutions. Financial institutions, especially those with community development missions, need to rethink how to handle overdraft and NSF fees. HOPE will continue to monitor the regulatory and legislative landscape, as well as its own practices, to ensure there are equitable practices among financial institutions.

[1] Nagypal, E. (2021). “Overdraft/NSF Fee Reliance Since 2015 – Evidence from Bank Call Reports”. Consumer Financial Protection Bureau. https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf

[2] Smith, P., Babar, S., & Borne, R. (2020). “Overdraft Fees: Banks Must Stop Gouging Consumers During the Covid-19 Crisis”. Center for Responsible Lending. https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-overdraft-covid19-jun2019.pdf

[3] Federal Deposit Insurance Corporation. (2022). “2021 FDIC National Survey of Unbanked and Underbanked Households”. https://www.fdic.gov/analysis/household-survey/2021report.pdf