Center for Responsible Lending calls for end to overdraft fees during COVID-19

15th June 2020   ·   0 Comments

By Fritz Esker
Contributing Writer

The Center for Responsible Lending (CRL) issued a report on June 3 calling on Congress to adopt legislation prohibiting banks from issuing overdraft fees for the duration of the COVID-19 pandemic.

“Bank overdraft practices cause many families severe financial distress in the best of times. During the economic crisis caused by COVID-19, the devastating impact of overdraft fees are only more pronounced,” said CRL senior researcher and report co-author Peter Smith. “Overdraft fees are especially outrageous because banks are borrowing from the Federal Reserve at zero percent. Banks should not experience an unprecedented windfall as the direct result of their customers’ unprecedented distress.”

Senators Cory Booker (D-NJ) and Sherrod Brown (D-OH) proposed legislation that would prohibit financial institutions from assessing overdraft fees or non-sufficient fund fees for any transaction during the crisis.

“Millions of hardworking Americans have been thrown into financial insecurity because of this unprecedented global pandemic. For these individuals, and those vulnerable before the outbreak, one $35 overdraft charge can lead to financial free fall,” said Booker in a March 23 statement.

“At the height of this pandemic, hard-working Americans should be protecting their health and not worrying about big banks slapping them with fees for small overdraft counts. This bill would allow them to keep money in their pockets when they need it most,” said Brown in a March 23 statement. “We must do more to protect workers and American consumers from the fallout of this crisis.”

In the report, the CRL found that banks collected over $11.68 billion in overdraft-related fees in 2019. The report, authored by Smith, Shezal Babar and Rebecca Borne, stated that the large majority of these fees are shouldered by the banks’ most vulnerable customers. These people often end up leaving the banking system entirely. Nine percent of account holders pay 84 percent of these fees annually. Those consumers usually carry low balances, averaging under $350, and have relatively low deposits.

With the COVID-19 pandemic, many Americans find themselves in vulnerable financial positions. According to the Bureau of Labor Statistics, the country’s unemployment rate hit 14.7 percent in April, the highest level since they began keeping those stats in 1948. The numbers are worse for minority communities. The unemployment rate was 14.2 percent for white people, 16.7 percent for Black people, and 18.9 percent for Latino people.

Smith said the CRL’s previous research showed that the amount of customer’s overdrafts would often be minimal (just a few dollars). That amount would be dwarfed by the penalty imposed on the customer by the bank.

“The fee is so much greater than the actual service provided,” said Smith.

The report stated that the risk for banks in covering overdrafts is very low. The bank is always first in line for repayment. The funds are taken from the customer’s next incoming deposit, which occurs at an average of three days after the overdraft.

CRL also criticized specific unfair practices in its report. Many overdrafts occur on transactions where the customer had enough money in their account when they used their debit card, but the charge was not processed on the card until a later date when there was not enough funds in the account. The Federal Reserve recently declared this an unfair practice, but several banks continue to employ it.

Another unfair practice cited in the report was “extended” or “sustained” overdraft fees. If an account balance is not brought back to positive, additional fees are charged even if the customer has not made any more transactions since the initial overdraft. Some banks even charge multiple fees a day, which can add up to $100-200 for a customer in a single day. For people who are already struggling financially, these additional charges can create an intimidating obstacle.

In the past, debit card transactions were simply declined with no penalty if the user did not have sufficient funds, just like a credit card is declined once its owner passes the monthly credit limit. However, debit cards are now a common source of overdraft fees for banks.

When asked what customers could do when faced with overdraft fees, Smith said they should call the bank. Sometimes, banks will refund customers’ overdraft fees if the person calls and complains.

While the report recommends banks do away with overdraft fees, Smith said the least banks could do would be to make fees reasonable and proportional to the overdraft. For example, a $2 overdraft should merit a far smaller fine than $35.

“This is the perfect time for banks to make a decision to serve customers better,” said Smith.

This article originally published in the June 15, 2020 print edition of The Louisiana Weekly newspaper.