Review of overdraft fees and their effects on working families

Chairman Warnock, Tillis Ranking Fellow, thank you for holding this timely hearing examining the impacts of overdraft fees. Overdraft fees, developed as a convenience service for the occasional case when a consumer ran out of funds, grew into a cottage industry with estimates of total fees paid by consumers of up to over $30 billion per year.1 By definition, every overdraft fee is paid by someone who has run out of money trying to live their life. These fees, which are actually short-term loans, can be extremely expensive compared to the small amount of money received by the client, short-lived in the time borrowed, and carry low risk of default. As a result, overdraft fees result in almost pure profit for the bank or credit union. Not surprising CEO of the bank named his yacht “Overdraft.”2

After decades of racking up big profits from American families living paycheck to paycheck, many banks, including most of America’s largest banks, have announced sweeping changes to their overdraft policies. These changes will greatly reduce costs for their customers. The savings will go directly to people in a precarious financial situation and will come directly from the profits of the banks. The result will be a more equitable and just financial system and a significant reduction in the high costs of poverty. By my calculations, the combined savings to consumers from the overdraft changes already announced will be approximately $5 billion per year.3 Even by Washington standards, it’s real money.

The industry made these sweeping changes without any new legislation or regulations. I commend these banks for their actions. They do the right thing for their customers, which will also reduce income inequality and, over time, reduce the number of unbanked households in America.

However, as my testimony will show, the difference in the actions taken by the banks varies considerably, and the changes of some institutions are more significant than others. Critically, a handful of banks have become dependent on overdraft for the majority – and in some cases all – of their profits. These overdraft giants cannot structurally move away from the overdraft, and neither will they. Regulators have long been asleep at the switch allowing these institutions to operate like this. New regulation is still needed on the basis of safety and soundness to address any bank or credit union that depends on overdraft for the majority of its profits.

My testimony will focus on three main points:

  1. Understand overdrafts and why some institutions are making changes.
  2. Examine changes in overdraft policies to elucidate issues and possible solutions for families living paycheck to paycheque.
  3. Additional policy solutions to address both remaining overdraft issues and the broader root causes that have led America to be a nation where the less money you have, the more it costs you to manage your money.

Download the full testimonial here.

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